The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability

By Joe Firestone

One of the most irritating things about the deficit hawk/austerity literature, is that it uses the ideas of “fiscal sustainability” and “fiscal responsibility” in an ideological way, without ever really analyzing or explaining these labels. It’s almost as if the austerians know that if they clearly and directly stated what they meant by these terms, and how their meanings were actually related to the ideas of “sustainability” and “responsibility”, then flaws in their whole ideological and policy framework would be very clear to everyone else.

Of course, if you read any of the austerian literature you soon learn that they think fiscal sustainability and responsibility both relate to the impact of government spending on the federal deficit, the public debt subject to the limit, and the debt-to-GDP ratio, and to no other impacts of fiscal policy.” But the austerians never really explain why these three numbers are relevant for fiscal sustainability and responsibility. Instead, they take the relationship as obvious to all, and start evaluating fiscal policies on the basis of past and projected deficit, debt, and debt-to-GDP ratios. Invariably, regardless of the nation in which you find them, they end up advocating for lower taxes for the wealthy, less regulation for corporations, and sacrifices of Government programs and the social safety net; all this based on the ideas of fiscal sustainability and fiscal responsibility that they’ve never even explained to an incurious and uncritical media, but very bought media, or to the public.

Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

Bill Mitchell is one of the three thinkers most responsible for the development of Modern Monetary Theory (MMT) and its approach to Fiscal Sustainability. Bill’s a prolific writer and blogger whose career has been devoted to Macroeconomics and to public policy intended to achieve Full Employment and price Stability. He’s watched and lived through the growing dominance of neoliberal ideology and the developing economic inequality that belief in it has created, and he has fought it every step of the way. His presentation was a distillation of his views on fiscal sustainability fueled by his search for a new economic paradigm transcending neoliberalism. Here are his main points, supplemented by a few comments of my own.

— The last 25 years of neoliberal dominance in Australia and elsewhere was a period in which the major western governments abandoned the goal of full employment they had previously embraced in the post WWII period, in favor of the goal of “full employability.” As a result, unemployment rates have been trending upwards over the neoliberal period but also are very high now. This is how people are affected by neoliberalism, and it’s real.

— “Fiscal policy has saved the world from a Great Depression, yet, two years later. . . ” (now four), “. . . after the handouts have been gratefully received by the top end of town, after we’ve put some sort of floor into the downward spiral, we’ve now seen this mass hysteria, . . . We’ve completely lost track of what’s happened, and we’re basically setting ourselves up again for the next crash. . . .”

— All the talk now is about “financial ratios divorced from any context or what else is happening or what other goals you might have . . . .all applying the logic that related moralists to a monetary system that ended in 1971.”

— But this ratio fever isn’t just restricted to the hawks/austerians: “. . . the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. . . . You just impose these fiscal rules out of context and with no comprehension of what it means. . . . “

— “You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments. . . . “ Those analogies are flawed because: “The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that. . . .”

LetsGetItDone Comment: This is a key point which will come up again and again in these posts on the counter-narrative. Neither the austerian/deficit hawks nor, generally the deficit doves, make the distinction between Governments with non-convertible fiat currencies with freely floating exchange rates and no appreciable debts in foreign currencies (nations sovereign in their own currencies); and other nations that are either currency users, have pegged their currencies to those of other nations, or owe significant debts in foreign currencies. This distinction is of fundamental importance because all the instances of insolvency or hyperinflation we’ve seen have occurred in systems with non-fiat currencies, currencies pegged to the currencies of other nations, or appreciable quantities of external debt in currencies not their own.

The historical evidence suggests that nations sovereign in their own currencies cannot have solvency problems and are also more resistant to inflation than nations in other categories. To discuss fiscal sustainability without making this critical distinction between currency issuers and currency users ignores an issue that is central to fiscal sustainability and guarantees that good policy cannot result from such an analysis and related policy approaches. Austerity/deficit hawk analyses almost always ignore this distinction and blithely compare currency sovereign nations with others. That’s why their analyses often involve predictions that nearly always turn out to wrong, and that’s why austerity policies in currency sovereign nations like the US, Australia, Japan, Canada, and the UK only work to prolong recessions, unless the private sector blows huge debt bubbles to compensate for the failure of government to deficit spend to close output gaps caused by demand leakage, as they did during the 1990s. Back to Bill!

— “You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant.” . . . You won’t find a definition of fiscal sustainability in any invariant fiscal rule.”

— “So where should we start in trying to come up with a concept of fiscal sustainability? . . . ask yourself the question “Why do we bother to have a government in the first place? . . . The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually. . . . And we might call that the public purpose of government.”

— “So what are the dimensions of that? . . . the sustainable goal of the economy should be the zero waste of the people in the economy. . . . as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.”

— “And then from my point of view, that means, we – the state – should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.”

— “Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions . . . then the role of government advancing public purpose . . . is to ensure that its policy intervention is consistent with those private decisions such that you get full employment. . . . That seems to me to be a basic element of what we mean by fiscal sustainability.“

— “And so if it’s typical that the non-government sector will want to save, then there will be spending gaps . . . the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating.”

— There are bad and good deficits. The bad ones come from Government not maintaining aggregate demand through deficit spending and are produced by the automatic stabilizers. They leave a bad, depressed economy with high unemployment. Good deficits result from a government deficit spending strategy that produces high employment, high income growth, falling poverty rates, and smiling faces.

— “You can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing.. . . .” Government spending ”. . . constraints are voluntary. . . . And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught – a pure concept of it – can’t be caught up and tied in with any of these voluntary constraints.”

— “And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending . . . . The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government. . . . “

— “What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They’re largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose.”

LetsgetItDone’s Comment: Bill’s bottom line is that fiscal sustainability has nothing to do with deficit and debt numbers including debt-to GDP ratios, but everything to do with whether the Government spends to achieve the economic public purpose of “the zero waste of the people in the economy.” He defines a clear line from “public purpose” to “zero waste of the people in the economy” to Government spending to enable full employment at a living wage with price stability. But why is that “fiscal sustainability”? Well, to see why, consider this alternative definition:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

This one is more explicit in tying patterns of spending to maintaining the capability to spend to achieve public purposes. But it turns out that these notions are closely connected by considering what happens if Governments don’t spend to enable full employment with a living wage and price stability, but instead rely on an employment buffer stock to control inflation. I think what happens is the growth of economic inequality due to the growth of an increasing number of “wasted” people, followed by increasing political inequality in the long run.

What also happens is the degradation of skills of working people and along with it the decay of real wealth like housing stock, neighborhoods, educational systems, communities and other essential aspects of a civilized and free society. This, in turn, causes a decline in productive capacity over time, which in its turn, limits the capacity of the Government to freely spend in the short run without causing demand-pull inflation. So, austerity in its effects on productive capacity degrades fiscal sustainability, not through insolvency, but by creating additional inflation constraints on government so that it is restricted in its ability to spend to achieve for the public purpose.

Further, political inequality, in its turn, reinforces the economic inequality still further, and as the years go by, the relatively few increasingly wealthy institutions and people continually increase their control over the political process and use government spending for their own purposes rather than for the public purpose. So, it turns out that the failure to spend to achieve full employment, in the absence of aggressive policy to redistribute nominal wealth, undermines the Government’s capability to continue to spend for the public purpose, and is therefore fiscally irresponsible. I’ll have more to say about fiscal responsibility and fiscal irresponsibility later on in this series.

Bill Mitchell’s presentation was followed by a panel discussion and then a Q and A session. Both were incredibly rich and added great depth to Bill’s already excellent presentation. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the Bill’s presentation. Bill’s written prolifically of fiscal sustainability. More than a hundred of his posts deal with it in some way. Here’s the link to the last page of his links. For the rest just follow the links at the bottom of each page. I’ve written a bit about fiscal sustainability too: here, here, here, here, here, here, and here are a good sampling of my posts.

Session 1 – Panel Discussion

Professor L. Randall Wray, another of MMT’s three major developers, led off the panel discussion with a comment on the claim that even though “the government can always afford to buy or hire any resources that are not being used”, it will be “less efficient than the private sector. . . . Until you get to full employment, the efficiency issue is completely irrelevant. Because if you put them to work, and you get any production whatsoever, it’s an improvement. You only need to raise the efficiency issue once you’re at full employment, and now the government is actually taking resources that the private sector is already using.”

Marshall Auerback: emphasized that he approached this “as someone who has been in the markets for almost thirty years” because MMT was “an operational reality, because debiting and crediting bank accounts electronically is what I see on the screen every single day.”

Warren Mosler,, the third of MMT’s major developers, commented on the austerian idea that “it’s wrong for the government to be out there spending and hiring people when the private sector is pulling back, . . . everybody’s hurting except the government, so it’s time the government needs to cut back also” . . . . He said that he just wanted to add that to Bill’s list of absurdities.

He also said that “The idea that there is a solvency issue, that the government has run out of money, there is nobody out there that’s got it right, I don’t know, does anybody here see anyone, anywhere? If there was, it wouldn’t exist, the problem would go away immediately. We don’t have a whole lot of work to do, we only need to get one person who has the national media attention to understand this, and I think the whole thing changes very, very quickly. Because government checks don’t bounce, and we’ll get into some of our other things, so, thank you, go ahead.”

Stephanie Kelton pointed out that Jamie Galbraith might be that person. She also pointed out that, like Bill Mitchell, she raises the deficit issue with her students because they think it’s an important issue. She says: “And they have this in their mind, they think the responsible thing to do is to have the government run a federal budget surplus. And I say “OK, you realize what this means for you?” And they don’t.”

So Stephanie pointed out that we need to teach them that there are are two sides to the ledger; that is, the Government is in surplus then the non-government will be in deficit, as a matter of accounting logic. “. . . So, ask someone the next time they talk to you about fiscal responsibility, if you want the government to be in a surplus position, that’s going to push you in the deficit position.”

Pavlina Tcherneva: pointed out that this also applies to that debt. If the government debt is a liability, that’s an asset for someone else in the non-government. So, if government is “responsible” and pays down its debt, just like a household, then that means that “. . . every single private sector portfolio is going to lose a very valuable default-risk-free asset.” In return for that asset, the private sector will be getting cash, also a government liability. “So, you just take your pick. How would you like to save? In the form of reserves – dollar reserves – or in the form of bonds? With or without interest?”

LetsGetItDone Comment: This analysis of Pavlina’s is correct; but only if the Government pays down its debt, without collecting additional tax revenues. If it follows the deficit hawk recipe and pays down debt while taxing an equivalent amount, it pays off and destroys the debt instrument, collects and destroys the taxes, and delivers reserves equal to the amount of debt instruments. So, the private sector is not only out the debt instruments; it’s also out the tax money, and all it gets back is the reserves.

Stephanie Kelton: Randy wrote a blog post about “seeing the national debt clock, and we are hearing, “your share of the national debt, this is the amount that each of you owes.” And he said, “Owes? It’s not o-w-e, it’s o-w-n.” It is the assets that each of us, if we were to divide it equally, right, by population, it is the amount that we own. We don’t owe. It’s not our liability. We aren’t responsible for paying back the national debt. It is our asset. It is what we own.”

Warren Mosler: told a story about his being at Citibank for a private client meeting with Bob Rubin who said: “this economy could be in trouble because of the low savings rate.” So, Warren relays the dialogue and then makes the point: “There’s no understanding now that the large deficits. . . . are responsible for the increase in savings. And you can read that savings are too high, people aren’t spending enough, it’s the highest it’s been since 1993. What was 1993? That was the last time we had a deficit that large.”

Session 1 – Q&A

Q: Darrell Delamaide, Marketwatch: What about inflation, is that an issue, and how do you handle it, and what difference does USD as a reserve currency make?

A: Warren Mosler said: “you don’t get inflation until you’ve used up the resources,” and also asks about what’s meant by “inflation” as opposed to just price increases, looking at the CPI. He then referred to the inflation of the 1970s caused by OPEC which was unrelated to fiscal or monetary policy. He points out that the inflation was broken by the deregulation of natural gas in 1978 which led to huge increases in supply, conversion of electric utilities to natural gas, and OPEC’s failure to maintain high prices even after cutting supply by 15 million barrels per day in the early 80s, ending the inflation. He also pointed out that he’s never seen demand-pull inflation caused by “the monetary system” in his 40 years in business. He thinks it’s possible and has occurred in some countries, but he thinks we have to get to full employment, run out of resources, and have the government still spend. With our huge output gap that’s not the problem.

A: Bill Mitchell makes the point that “You’ve got to understand what inflation is, first of all. A continuous price… a price bubble within a specific asset class, which is… that’s not inflation. That’s an issue, so a real estate bubble is an issue, but it’s not inflation, and the public debate tends to conflate housing booms with inflation. It’s a wrong conflation.” Bill continues by differentiating cost push from demand-pull inflation and points out that oil-dependent economies did not distribute the real income loss from the cost shocks throughout the economy. But instead, for political reasons delayed the dissipation of the cost shock causing demand-side and supply side factors to interact and make things worse.

A: Warren Mosler: “Through indexation.”

A: Bill Mitchell: ”Yeah, because you don’t want to take the crunch, you don’t have a distributional consensus in your country, whereby the workers will take a bit of the real wage cut, the bosses will take a bit of the margin cut, and it’ll go out of the system fairly quickly.”

A: Warren Mosler: “Your decline in the real terms of trade.”

A: Bill Mitchell: “That’s what I’m saying. So you can get an inflation then feeding on itself if the workers and the bosses have a slug-out fest in a distributional struggle where each of them has price-setting power and they can defend their own margin, the real wage and the profit margin, and the government ratifies that through indexation. But that’s got nothing to do with using budget deficits to achieve full employment, nothing at all. All that means is that occasionally if you import a raw material, for example, you’ll be subject to price shock and you have to work out how to distribute that real income loss, that terms of trade shock, you have to work out how to do that. It’s got nothing to do with the fears that are out there in the public domain now about these deficits generating runaway inflation.

A: Warren Mosler: “The other thing is, the mainstream model has an assumption that you need low and stable inflation or a conclusion for optimal long-term growth in employment, and if you can’t get the inflation right then market forces will work in that direction. But the model’s a relative value model. It doesn’t include the currency as a public monopoly because it doesn’t include taxation as a coercive force. So, they’re right, or they may be right, within the context of the model but the assumptions of the model are not the real world conditions, which is that we do have a state currency, we do have the coercion of taxation, which leads to the unemployment and the counter-cyclical policies we’re talking about.”

A: L. Randall Wray: Randy points out that “we’re not saying that the government should spend without limit. . . We’re saying the affordability is not a question, the government can always afford to buy anything for sale in terms of dollars in the United States. That doesn’t mean that how much the government spends, or what it spends on, doesn’t matter for prices. That’s a completely different question, . . . what form should the government spending take, and can that make a difference to help hold down price pressures?”

He also says that if you’re the reserve currency and countries want to “accumulate dollar assets, the it “. . . enhances your ability to run current account deficits, but it makes no difference to affordability within your country. Your government can always afford to buy anything for sale in terms of your own currency whether you’re a reserve currency or not. It doesn’t impact your ability to spend domestically, even if the rest of the world has no desire to add your assets to their portfolios.”

Q: Lynn Parramore, Roosevelt Institute: points out that this is kind of a “Copernican revolution” because “the average person on the street” thinks that their taxes go to pay for many things, and that the Government needs those revenues, not that taxing is about regulating demand. So she’s not sure of the narrative being offered, ‘from a messaging point of view.” She wonders about “the psychological impact” of thinking in this new way.

A: Warren Mosler answers saying the government takes away our money to make room for them to spend without creating inflation and then uses a department store shopping analogy and the ideas of balance and trade-offs to show that “the government has to take away some of our spending power, so that we have the right amount of spending power between the two of us to go into that store and shop so that everything gets sold, but not too much so we drive up prices fighting over the goods with each other, and things don’t go unsold and we have unemployment.”

A: Bill Mitchell says “The narrative that I use is I ask people, “Look, do you want to get into your car in the morning and drive down to the corner and negotiate a contract with the private owner of that road; and then turn the corner into the next road and negotiate another contract to access their road; and then on and on until you get to work? Or do you want to take those road resources off the private provider and have the government providing the roads, where you just drive, except for toll roads, you mostly just drive?” It’s very easy, I think, to understand the difference between public use of resources for public benefit and private use of that, which could be the same resources and same infrastructure provision in the private hands.” Bill ends with an example from Australia about the importance of public roads.

Q: Joe Bongiovanni, of Kettle Pond Institute, raised the issue of voluntary constraints and asks whether there’s “. . . enough of an explanation as to how voluntary constraints manifest themselves in real economies. I guess I would say, “Are we a monopoly issuer of currency in our country, when Goldman Sachs is creating things that serve as money?” And why can’t we have a list of the voluntary that exist, and that need to be undone, in order for us to move into a place where Modern Monetary Theory becomes Modern Monetary Reality?”

A: Warren Mosler: “Let me just start with the first one, which is the President of the United States has said more than once we’ve run out of money; now there’s a voluntary constraint. That’s not true. Number two, we see our Administration, Secretary of State, Treasury, flying over to China to negotiate with out bankers to make sure we can fund Afghanistan and health care; those are voluntary constraints. That’s completely not necessary either; that’s a mistake. . . . “

A: Stephanie Kelton: ”The debt ceiling is a voluntary constraint, and when you want to get through that constraint, you put a bunch of guys and gals in a room, and they raise their hand, and they vote to raise the debt ceiling, and you avoid that constraint as well. I do have some discussion of this in my presentation coming up, and a list of the voluntary constraints, and what we can do. . . . “

A: L. Randall Wray: “Let me add one that is really important, because sometimes, when you finally get through to somebody, and they understand what we’re saying, “The government can always afford to buy anything for sale,” they say, “Uh oh, we gotta constrain those guys!” Well, yes, you do, but the way you constrain the government is by budgeting. They’ve got to go through the process. They say, “OK, we need this program, we’re going to budget for it.” Not because we couldn’t afford to spend more, but because we want to hold them accountable. We want to make sure that the funds aren’t just disappearing into the pockets of somebody. . . .”

A: Warren Mosler: “Also, inflation is a big constraint, . . . . Because people are against inflation, rightly or wrongly, the American population would rather see unemployment than inflation. So we’ve got that built-in constraint in our psychology.”

A: Bill Mitchell: “To put a finer point on that, Australia now boasts that we’ve got thirteen and a half percent labor under-utilization, either unemployment or underemployment. Thirteen and a half percent. Under-24s: twenty-six percent of them are unemployed or underemployed. And we boasted that we were the first to put up interest rates in the current crisis. Our central bank’s now put them up three times, next month it’ll put them up for the fourth time. We’re boasting about that, yet inflation’s at the bottom of their so-called “target range.”

Q: Roger Erickson: “. . . I’m an operations person, and what I see here is an operational problem. To make a state change in a complex system like a national policy, you always only need to get the key information to the key people in the key institutions. . . . , when there is a compelling reason, people change their minds very quickly. The other point about what’s plausible is, if we had people in the audience here that were cultural anthropologists, for example, studying tribes, nations, and history of cultures, or biologists that studied ant nests and termite nests, or cellular biologists, just to name a few, my point is, there are wide ranges of people that understand this intuitively, and would say, “Duh! What are we talking about here?” The point is, I’ve looked into that, and I’ve made it a habit, the last six months, of contacting people outside economics and asking these questions, and the almost-universal response is, “We thought people in economics knew what they were doing, so we cede the territory to them” . . . . . so my point is, operationally, one of the things we have to plan for is you can’t win by pushing this upstream as a fight totally within the economics profession. If you go outside, to other areas, I think you’ll find much faster responses, and if you get the information to the right people, even if it does have to be grassroots, that will cause a state change faster than carrying this argument within economics.”

A: Bill Mitchell: “. . . I made the decision a few years ago that I would commit myself to writing this blog I wrote. It was an explicit decision, it’s not easy to do every day, and something had to give. . . . About thirteen and a half thousand are currently reading my blog, and I don’t believe that many have ever read my academic work in the last 30 years.”

Q: Edward Harrison: “I’m a finance blogger at Credit Writedowns. “. . . I do think a lot of this is ideological. I come from a different ideological perspective than probably most of you here. I have an ideological predisposition against government intervention, against government, big government, if you would call it that, so I think a lot of people are probably like that. So when you start making arguments of the government doing X or the government doing Y, I think . . . that that’s something that’s not going to go over with a large population within the United States. I think that’s just a given, and I can tell you from my perspective how I feel about that. Now, with regard to the economics of the idea, there are two compelling arguments that you are making, that I think could get your points across that has to do with the accounting. Number one, my deficit is your surplus, if you look at the government, the government having a net deficit is the equivalent of the private sector having a net surplus. If you hammer that point home, over and over again, I think people will understand, in times like these, what is necessary. Second point is, with regard to the government deficit, in terms of how much debt is out there, that the fact that we owe or that we own the debt is a key selling point, I think, to people who want to logically understand we’re not passing this on to our children, this debt we actually own, because the debt is the government’s debt, if you look at it again from an accounting perspective: my debt is your asset. I think those two pieces of information are very important.”

A: L. Randall Wray: “. . . The main point we’re trying to make is affordability is not the question. So now we have to have a public discussion, free of the deficit hysteria, about what we want the government to do. And so, what we are arguing is consistent with a small government, it’s consistent with a big government. And I think that that is a political question, for the most part. I agree with you, it’s an ideological, political question: Do we want the government to do more, or to do less?”

Q: Edward Harrison: ‘That’s what I’m saying, you should frame it those terms: Let’s get out of the ideology of big or small government and let’s go to the facts in terms of the two accounting principles. And let’s get away from the deficit hysteria because it’s not factual.”

A: L. Randall Wray: ‘I agree with that.”

A: Warren Mosler: “I’ll be doing that in my presentation. The difference between a federal government and a state and local government, and the mistake we’ve been making, is that we tend to look at the revenues to decide what government can afford to do. For a state, or a local [government], or a business, that’s actually correct. But for the federal government, it doesn’t get the revenues, it’s just changing numbers down in an account, so it gives you no information. Once you understand that, now you have to drive the model the other way around. Now you say, “Alright, what’s the size government we want and then what’s the appropriate level of taxation?” Once we know what the government we want is, that’s a political decision, then the level of taxation, more often than not, as Bill was saying, is going to be lower than that to provide for the savings so that the private sector will fully employ the resources that the government is not employing. So at the moment, if you look at my proposals, they’ve been a full payroll tax holiday, for example, to restore the private sector to employing the resources it had been employing in the last few years. Someone else might disagree and want an enormous public sector, or expansion, but those are political decisions.”

A: Bill Mitchell: “, , , the private sector determines the size of government, not the other way around. The discretionary impact of government policy is relatively smaller than the cyclical impacts. And so, if you don’t like the size of government, then do something about it, or accept the fact the government will do something about it, and limit its own size, and you’ll get chronic unemployment and wasted resources. If the private sector thinks the government’s too big, then they just have to invest more.”

Q: Edward Harrison: “The second part of what you just said, about the government [inaudible] I would argue that it’s not endogenous at all. That in fact these are political decisions that are not necessarily made by individuals outside of government, but by the government itself. So, it’s not endogenous, it’s not the private sector that’s directing that at all.’

A: Pavlina Tcherneva: “To carry forward this point, the budget is endogenous in one particular sense. You do have exogenous decisions made in Congress. We sit together, we pass a budget, we decide how much we are going to appropriate for different programs. That is an exogenous decision. But you don’t know how many people are going to retire today, or how many people will need to tap into Medicare, so those are endogenous expenditures. You don’t know how much you might need today to dedicate to unemployment insurance, because that depends on the cycle. Taxation, however, it’s very easy to make the argument that you can set the tax rate exogenously, but the revenue that you get depends on the underlying economy, and how well it is doing. So, it’s pretty much misguided for us to be fidgeting with this accounting difference. You need to be looking at the size of the deficit with respect to what is happening to underlying conditions. Trying to hit a particular numerical target is probably not going to be possible anyhow.”

A: Warren Mosler: “The way I frame that is: the way we do things now is endogenous, because we don’t take proactive fiscal policy for the most part. We could. In August of 2008 we could have had a major tax cut so that car sales didn’t have to drop from seventeen million to nine million, and we could have sustained demand in the private sector, but we didn’t. So, in the absence of policy, the budget deficit was going up, endogenously.”

Q: Raicho Markov: “. . . Do you really believe that nobody among the mainstream economists and politicians in the world, both in opposition and in the governments, understand how a monetary system based on fiat money and flexible exchange rate works? And what about the Japanese government, do they do this by accident, or some of you guys gave them some advice, or …?”

A: Stephanie Kelton: “. . . Japan has learned from some of their mistakes of the past, so that when their budget became very expansionary following the bursting of their housing bubble more than a decade ago, they began to recover, and then they made a political decision to try to rein in the deficits. And they began another downward spiral. And so they began another attempt at recovery: they allowed things to expand, and in many ways they expanded endogenously, yet the deficit increased n response to the worsening domestic conditions, and there was another political decision to try to rein in the deficits, and they went down again. So they… I think they’re getting it right this time, so far, and I think, to some extent, it’s probably that they’ve learned from some of the mistakes of their own past.”

Stephanie also answered the question of whether the politicians know how the monetary works by telling a story that Robert Eisner, a professor of economics for decades at Northwestern University, also Bill Clinton’s professor for a time told at a Conference. “When Bill Clinton was elected President, he invited Bob to the White House, and so Eisner makes the trip to DC, and visits his former student, and President Clinton says, “Well, Bob, what do you think of my economic policies?” And Eisner told him, “On the whole, pretty good, but you’ve got to know: you’re dead wrong on Social Security.” And Clinton’s response to him was, and I quote, “I know, Bob, but you’ve got to understand, this is politics. . . . ”

A: Marshall Auerback: “. . . . sometimes the truth does slip out. I don’t know if any of you saw the 60 Minutes interview with Ben Bernanke, last year, when he was interviewed by Scott Pelley and the question arose, “Where did all this money come from? Isn’t this money that’s going to be taken away from the people that you have to tax later?” And Bernanke basically spilled the beans, “No, this is just electronic debiting and crediting on bank accounts.” He actually, literally, did say that. . . . But I see now that he’s gone back to the Dark Side, and he’s talking about fiscal sustainability again, I think he said that again yesterday.

“It’s amusing to me because we were at the Levy Conference last week, and Dick Fisher from the Dallas Fed made a speech, and the first part of the speech was very much restricted to levels of their competencies. He says, “I don’t really want to speak about political matters. I just want to speak about monetary policy.” And then Social Security came up, and of course then he started going on about wasteful government spending, and his grandchildren, what they’re going to have to pay for. So I thought, “Here we go, spreading into his non-competence in fiscal policy.”

“On Japan . . . . I don’t think many of them really get it. Richard Koo’s account of this period is very good. He’s not a Modern Monetary Theorist, . . . . but he does, on the factual points, get it right. I’ve met a number of people at the Bank of Japan and in the Ministry of Finance and about three months ago, someone from the monetary policy… the governing committee of the Bank of Japan actually said, “You know, If we’re not careful, we’re going to end up like Greece as well.” So clearly there are people within the Japanese government, or policy makers, that don’t really understand the difference between various currency systems. And I can tell you that the Ministry of Finance itself is full of these deficit hawks, they just hate the notion of government spending. It’s still a very large minority view there.”


So, that ends the panel discussion and Q & A dialogues after Bill’s talk. The panel discussion and dialogue didn’t devote much attention to Bill Mitchell’s analysis of solvency, which everyone seemed easily to accept. But a number of issues were highlighted as the focus of debate. The first issue was inflation. People seemed to realize very quickly that with solvency out of the way, fiscal sustainability issues were critically connected to whether excessive spending could cause inflation. Other major issues were issues of messaging and persuasion in getting the MMT point of view into the mainstream so it could affect policy. The other major issues were the issues of “voluntary constraints” on spending, big government vs. small government policies and their relationship to MMT-related policy; and the extent to which people in authority really didn’t understand how the fiat monetary system works, or were just being dishonest in their public statements. All of these issues will arise again in the remaining four conference sessions to be reviewed.

Since the Teach-In, the austerian neoliberals have kept up a steady drumbeat of fiscal sustainability policy propaganda, without seeming to know what fiscal sustainability means. The latest of their efforts came just yesterday when Pete Peterson’s Fiscal summit was held in Washington. At that Conference, the austerians again outlined their Sherriff of Nottingham program of robbing from everyone else to give more to the rich, while accusing everyone else of fiscal irresponsibility and claiming that proposed government deficit spending to bring full employment, maintain the social safety net, and solve our very serious national problems is fiscally unsustainable. They’re not in the least ashamed of crashing the world economy anymore, and they never cease talking about the profligate poor and middle class while they do everything they can to insist on their entitlement to do business as they please, free of all regulation, and in doing it, and even, and perhaps especially, when they lose big, to loot the public treasuries of all the nations of the world.

Since, the Fiscal Sustainability Teach-In, reality has been unkind to the austerians. Everywhere, austerity is being tried it is failing, and every economy which has pursued less of it is performing better than every economy which is implementing it. That should tell the austerians something. But, sadly, ideology is blind to reality, and the issue of austerity vs. growth is coming to a crisis both in the Eurozone and the United States.

The issue of austerity is coming to a crisis in the EZ right now as the austerians lose public support in election after election. There is more wisdom about fiscal sustainability in this one presentation by Bill Mitchell and in the discussion thereafter than there has been in the three lavish “Fiscal Summits” held by Pete Peterson since 2010. And far more than there was in yesterday’s summit, doubling down on austerity in the face of facts from all over the world showing that austerity both fails and kills!

In the US, another debt ceiling crisis is shaping up for this Fall, probably after the election. It’s critical that we keep pushing the MMT counter-narrative out there. We are starting to break through to mainstream bloggers and media. MMT economists have been increasingly active in briefing European audiences, and MMT ideas are beginning to spread more rapidly.

Here in the United States, the impatience with unemployment is spreading, as more and more people are thrown off unemployment benefits, and some of the MMT perspectives are being echoed by mainstream bloggers and writers here in the US. If we can accelerate our efforts this summer and get a few more mainstream bloggers writing MMT, then we may start getting the attention we need to awaken the progressive community out of its deficit dove slumber, and get it to realize that deficits, debts, debt-to-GDP ratios, and long-term deficit reduction plans are all distractions from the business at hand which is to end unemployment, give people a future again, and break the spell of neoliberalism over fiscal policy for good.

Part Three will cover Professor Stephanie Kelton’s presentation “Are There Spending Constraints on Governments Sovereign in Their Currency?” and the ensuing Q & A period. It will provide more answers to the Peterson narrative.

(Cross-posted from

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