Monthly Archives: September 2011

Should Congress Raise the Payroll Tax When the Economy Recovers?

By Stephanie Kelton

Dean Baker has just written another piece on Social Security. Dean and I have always disagreed at some fundamental level on the best way to run opposition against those that are committed to weakening and ultimately destroying this vital program. Thus, while Dean and the MMTers are on the same philosophical team (we all want to preserve the program), we run our offence using very different strategical play books.

When it comes to Social Security, MMTers have taken many pages out of Robert Eisner’s play book. To my mind, no economist has been a more honest and forceful defender of the program. (Eisner was Professor Emeritus at Northwestern University and one of Bill Clinton’s friends and former teachers. He passed away in 2010.)  In my favourite piece on the subject, Eisner said:

The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities….

…Our payroll taxes or “contributions” go directly to the United States Treasury. Our benefit checks come from the Treasury-and those receiving them can verify on those checks that the payer is the Treasury of the United States, and not any trust fund. Social Security payments are an obligation under law of the U.S. government. Our government and its Treasury will not,indeed cannot, go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, “[A] government cannot become insolvent with respect to obligations in its own currency.”

Baker’s latest piece is interesting because it shows that he has at least one foot in the Eisner door. He says:

While there is nothing in prin­ci­ple wrong with fi­nanc­ing So­cial Se­cu­rity in part out of gen­eral rev­enue for two or three years in the mid­dle of a se­vere eco­nomic down­turn, the ques­tion is what will hap­pen when the economy recovers enough that we no longer need this tax cut as stim­u­lus. In prin­ci­ple the tax should sim­ply re­vert to its nor­mal level.

When the economy recovers, Baker is worried that Congress will lack the political will to raise payroll tax rates, leaving the program vulnerable. He says:

If the Social Security tax were not re­stored to its for­mer level, then we could in prin­ci­ple con­tinue to make up the dif­fer­ence from gen­eral rev­enue. How­ever, there cer­tainly is no agree­ment that this will be done. Since its in­cep­tion, So­cial Se­cu­rity has been fi­nanced from the des­ig­nated pay­roll tax. This tax has been used to sus­tain the trust fund, which is in prin­ci­ple sep­a­rate from the rest of the bud­get.

Okay, there is a bit of MMT in here — the government could always make up the difference from general revenue — but the rest of the argument breaks sharply from Eisner, who explained that the perceived funding of Social Security through a dedicated payroll tax is nothing more than a useful myth.

Baker accepts that myth, arguing that as long as Congress has the guts to return the payroll tax to its original rate after the recovery takes hold, then the Trust Fund “would be suf­fi­cient to keep the pro­gram fully funded through the year 2038 and more than 80 per­cent funded through the rest of the century.”

To ensure that this happens, Baker proposes:

[A] very sim­ple way around this po­ten­tial prob­lem. If we want to give a tax cut to work­ers equal to 3.1 per­cent of wages, as Pres­i­dent Obama has pro­posed, along with a sim­i­lar cut to some em­ploy­ers, we can just write that into the law with­out any ref­er­ence to So­cial Se­cu­rity.

In other words, the tax cut would take the form of a tax credit that is paid out to work­ers and firms in ex­actly the amounts that Pres­i­dent Obama pro­posed. How­ever this credit would have no con­nec­tion what­so­ever to the So­cial Se­cu­rity tax, which con­tin­ues to get col­lected at its nor­mal rate.

MMTers would argue against this. Indeed, we have argued in favour of a more generous payroll tax cut — i.e. reducing FICA withholdings to zero for employees and the employers — and we would prefer to keep it that way so that the entire program is overtly, and permanently, funded out of general revenue.  Baker has vehemently opposed our policy recommendation, arguing that it would make the program vulnerable to attack if it lacked a dedicated source of funding.  So Baker wants to make sure the Trust Fund is “there” in order to protect Social Security from attack.

Here’s how Eisner dealt with the same problem:

Expenditures alleged to be related to trust funds are often less than their income-witness the highway and airport  funds as well Social Security. There is no particular  reason they cannot be more. The accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law. The Treasury  can pay out all that Social Security provides while the accountants declare the funds more and more in the red. 

For those concerned, nevertheless, about the “solvency” of the trust funds, there are simple, painless remedies for this accounting problem….why not award balances in the Trust Funds, instead of the current 5.9 percent interest rate on long-term government bonds, [a] higher return… [for] it was not God but Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances.”

So Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire “problem” go away. At 100 percent interest, even the most pessimistic CBO official would have to give the fund a clean bill of health, and future retirees could get 100 percent of the benefits they have been promised.

Which solution should progressives advocate?  Baker’s tit-for-tat replacement tax that promises to preserve Social Security in its current state — able to pay just 80 percent of promised benefits to future retirees?  Eisner’s tongue-in-cheek remedy that artificially pumps up the size of the Trust Fund to astronomical proportions in order to placate the accountants?  Or the MMT solution that advocates a straightforward payment of promised benefits to all future retirees?


By L. Randall Wray

Sorry, got to be brief—for an explanation go here:
I’ll have to punt a bit on some of the techie details onoperations within the Euroland. Maybe we can come back to them later.
Q1 Anon: Weren’t the design flaws of the euro intentional,that is, what neolibs wanted?
A: Yes, probably true. I’m not an expert on Europeanpolitics. But let me say that there is no evidence that they thought it wouldcome to this—with a likely default by Greece that will escalate into a possibledestruction of the whole project. By contrast, MMTers did!
Q2 Roberta: We’re all artists.
A: ??? I guess so!
Q3 Philip: How do governments borrow from the ECB?
A: Well, technically that is prohibited—the ECB was not tobuy government debt. That was the beauty of the system—governments had to sellto markets, therefore they would be subject to market discipline and would notrun up excessive deficits.
Hey, how’s that working for them so far? Not so good. Youall know the stories. Goldman helped them hide the debts. Markets did notunderstand that these are not sovereign nations—until it was too late. AndFrench and German banks loaded up on high risk Greek debt. The rest is history;or at least will soon be. Market discipline does not work. Ever. Never.
Q4 James: Aren’t euro nations much like US states?
A: First prize! By Jove he’s got it. That’s the problem.They are like US states with no Washington backing them.
Q5: Rvaucbns: What is the endgame for the euro?
A: I urge you to read Dimitri Papadimitriou’s piece over atHuffPost:
I’m planning to write something up soon.
Q6: Neil: what about lender of last resort in the EMU?
A: By design there was not supposed to be one. Marketdiscipline was supposed to work. Each individual country was supposed to beresponsible for its own banks—but since they were not sovereign they could notdo a Timmy-Benny $29 trillion bail-out. The ECB lends to individual CBs againstcollateral; they’ve had to widen what was acceptable. But it won’t be enough.
Q7: What is SGP
A: Yes it is stability and growth pact
Q8 Joe and Hugo: Are there net financial assets in Euroland?
A: Yes; first there are dollars. In Euros, yes individualnational governments create them but as discussed in the blog they’ve got toworry about clearing across borders since ultimately those are convertible ondemand to ECB euro reserves and the ECB is not supposed to buy government debt.
Q9 Dario: why do markets only “partially” recognize thatdowngrades of sovereign debt do not matter?
A: They do not fully understand, so there is usually a bitof uncertainty surrounding a downgrade. Then they realize the sky did not fall,markets for sovereign debt recover, and rates go back where they were. Unlike adowngrade of Greek debt.
NEXT WEEK: We might take a bit of a diversion because we gota long and interesting comment on the differences between real and financial. Ithink it will be worthwhile to get all that clear.

Ben Kenobi Launches Operation Twist: Will it Save the Republic?

By Stephanie Kelton

The Federal Open Market Committee (FOMC) just announced that it’s going to begin another round of asset buying, this time offsetting its purchases of longer-dated securities with sales of shorter term holdings. The goal? Flatten the yield curve. The hope? Engineer a recovery by helping homeowners refinance at lower rates and making broader financial conditions more attractive to would-be-borrowers.  

At this point, it looks like Obi-Ben Kenobi realizes that Congress isn’t going to lend a hand with the recovery. Indeed, as a scholar of the Great Depression, he’s probably deeply concerned by the “Go Big” 
mantra that is now drawing support from people like Alice Rivlin, former Vice Chair of the Federal Reserve.  And so it is Ben, and Ben alone, who must fight to prevent the double-dip. It is as if he’s responding to the public’s desperate cry, “Help me Obi-Ben Kenobi. You’re my only hope.” Will it work?  Not a chance, but that conversation is taking place over at Pragmatic Capitalism, so drop in and find out why.  Below is a description, taken from the full FRB press release, that describes just what the Fed is going to do.  May the force be with us all.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”

Don’t forget that beginning this Friday, NEP will kick off a new series called “Say W-h-a-a-a-h-t?” We’re keeping track of the craziest, boldest, and most surprising statements, stories, and videos we run across each week and we’ll share them with you every Friday. 

Keep sending us your favorites and watch for ours beginning next Friday. Tweet your recommendations to @deficitowl, submit them through Facebook at New Economic Perspectives, or e-mail them to us at [email protected]

Why it’s So Hard to Sign Progressive Petitions

By Stephanie Kelton

Every day or so, someone sends me a petition via e-mail. Today, I got this one from a group called CredoAction. They’re urging people to tell the Super Committee to keep their hands off Social Security, Medicare and Medicaid, and they wanted my support. I read the petition, but I could not, in good faith, sign it. And so I did what I often do — I took the time to draft an explanation and send it to the anonymous “contact” behind the petition. Here’s what I said:

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Why do Banking Regulators bother to Conduct Faux Stress Tests?

By William K. Black
(Cross-posted from

One of the many proofs that banking regulators do not believe that financial markets are even remotely efficient is their continued use of faux stress tests to reassure markets. But why do markets need reassurance? If markets do need reassurance that banks can survive stressful conditions, why are they reassured by government-designed stress tests designed to be non-stressful?

Stress tests were first mandated for Fannie and Freddie by statute. Fannie and Freddie’s managers referred to them as “nuclear winter” scenarios – impossibly unlikely and stark disasters. The managers used the ability of Fannie and Freddie to pass the stress tests as proof that the institutions were safe and so well capitalized that they could survive even a lengthy depression. In reality, Fannie and Freddie had exceptionally low capital levels. Fannie and Freddie met their capital requirements under a newly toughened version of the statutory stress test weeks before they collapsed and were revealed to be massively insolvent.

AIG passed its stress test immediately before it failed. The three big Icelandic banks passed their stress tests shortly before they were revealed to be massively insolvent. Lehman passed its stress tests. The stress tests ignored the actual primary causes of losses and failures – extreme losses on fraudulent liar’s loans and CDOs.

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Upcoming Appearances

Catch our bloggers live and in person.  Bill Black speaks tonight at UMKC and Marshall Auerback will speak at an event in Amsterdam on Wednesday, Sept 21st, and he will speak in Dublin on Thursday, Sept. 22nd.  Visit our Upcoming Appearances page for more details.
And here is the rest of it.[[ NOTE: If this is a Primer posting, it must have ‘MMP’ as the last label or it will not be removed from the NEP homepage ]]

Why David Brooks Misses the Real Source of Moral Decay: Thirty Years of Class Warfare Against the Working Class

By June Carbone*

The New York Times told two separate stories earlier this week, with no apparent recognition that they might be related. On September 12, David Brooks published a column decrying the moral “relativism and nonjudgmentalism” of the young. On September 13, a front page story announced that “Soaring Poverty Casts Spotlight on ‘Lost Decade,’” explaining how the economic decline of the bottom half of the population over the past decade has grown worse during the financial crisis.

What do the two stories have to do with each other? Brooks writes as though the country has – or should have – a set of shared values. Yet, he ignores class and cultural differences in the way values are formed and expressed. In doing so, he fails to address the most critical question the country faces: how can we maintain a sense of shared values when the institutions that support one part of the country flourish at the expense of those critical to the part of the country in decline. In short, the decline of the middle class and the soaring poverty rates the second story describes are far more significant issues than anything in Brooks’ column.

Brooks misses the connection between the two because he conflates a centuries-long phenomenon – the development of modernism — with more recent changes that are appropriately a source of concern: the decline of community. Studies of the difference in values between modernists and traditionalists emphasize, as does Brooks, the importance of community. These researchers find that traditionalist communities, whether they consist of specific church groups, developing world nations or working class neighborhoods, tend to be characterized by close kin networks, while modernist communities have networks more likely to be defined by something other than blood ties.  These differences mean that the source and content of moral transmission varies: modernists tend to rely on individualized internalized values transmitted within private networks while traditionalists depend more on the health of institutions that articulate and reinforce pubic values.

In the United States, the differences between kin based traditionalist networks and individualistic, modernist ones tend to be strongly associated with class. In the Italian-American community of my youth, for example, my father simply moved in with my mother and grandfather when they married. We lived next door to an aunt and uncle. Another aunt and uncle and three of their four grown children lived on the next block. My mother spoke to her sisters every day. I never had a babysitter to whom I was not closely related. And we all attended the same church. I realized only as an adult that while we all identified as Catholics, our views ranged from deep devotion to profound skepticism. Yet, we were imbedded in close-knit family networks that tended to reinforce Catholic teachings about acceptable behavior.

All that changed when my cousins and I attended college far from home. We have each made individual decisions about what church to attend and what identities to embrace. I have had far more intense discussions about my moral and philosophical views with my college-educated colleagues than I ever did with the family members or co-religionists of my youth. The discussions occur in part because we do not share the same assumptions about the source of values.

This selection, articulation, and promotion of individual values takes more effort than my home community’s allegiance to a particular religion or ethnicity. It also requires respect for the views of others. The ability to combine strong individual values with tolerance in a diverse society is what education for democracy means. It is a critical legacy of the Enlightenment and the foundation of modernist societies.

In contrast, traditionalist approaches, which rest on morality that is “revealed, inherited and shared,” require strong institutions. Institutional leadership, rather than individual virtue, is necessary to combine group allegiances with public tolerance and to mediate the tensions between group interests and membership in a broader society.

What Brooks doesn’t tell you is that the real crisis in contemporary American society is the weakening of the institutions that serve those on the losing end of the American economic ladder. One of the startling observations in the Moynihan Report of the mid-sixties was his finding that as jobs disappeared from rustbelt inner cities so, too, did church attendance. A half century later, Brad Wilcox has found the same thing among the working class more generally. With economic decline that has disproportionately affected traditionalist America, the institutions that produced cohesive communities, including churches, schools, families and civic organizations, are in decay. Modernity with all its faults, however, is not the principal source of the problem. And the risk Brooks does not acknowledge is that attacks on modernity in the name of morality often become attacks on tolerance. Let’s address the real sources of institutional decay and stop conflating the challenges of the last few years with the cultural changes a millennia in the making.

* The author is Edward A. Smith/Missouri Chair of the Constitution Law and Society University of Missouri-Kansas City

Today’s Modern Money Primer

In the next series of blogs we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. Read more…

MMP Blog #16: The Unusual Case of Euroland: The Non-Sovereign Nature of the Euro and the Problems Raised by the Global Financial Crisis

By L. Randall Wray

In the next series of blogs we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. Let me say that we will not address the unfolding crisis across Euroland in detail. The reason is that events are moving too quickly and we do not know where they will lead. This primer in some sense needs to be “timeless”—anything specific that we discuss will quickly become outdated. The fundamental point to be made here is that the Euro arrangement was flawed from the beginning. Crisis was inevitable—as I have been writing since the mid 1990s. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. We could not say for sure how the resolution would turn-out, but a fundamental change would be required.

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