Trigger Mechanisms To Avoid the Fiscal Cliff? You’re Kidding, Right?

By Joe Firestone

Robert Reich has been writing a series on “the Grand Bargain” and the “fiscal cliff.” In this post, I’ll do a commentary on his “The President’s Opening Bid on a Grand Bargain (II): Put a Trigger Mechanism in the Legislation”, because I think it’s a good example of self-defeating progressivism or “loser liberalism”. Take your choice of epithet.

Reich begins:

When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming “fiscal cliff,” the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want – that’s what it means to be rich.)

So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn’t there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it’s a problem? Let’s go on and see if we get a hint of what the explanation for Reich’s concern with “the deficit problem” comes from.

But before we do that, let’s briefly note that Reich’s easy comment that taxing the rich more won’t harm the economy, isn’t quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there’s no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.

Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?

If we do too much deficit reduction too soon, we’re in trouble. That’s why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That’s the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don’t want to go there.

We certainly don’t want to go where Europe has been going lately. They’re a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there’s no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That’s not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it’s now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we’re still not out of the woods. So in the foreseeable future — the next six months to a year, at least — the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.

Of course, that’s true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely  to involve a good bit of those kinds of cuts, if there’s any compromise at all with the deficit hawks on the budget.

But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.

Now we’re getting an inkling of what Reich’s problem is. He’s afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that’s true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there’s nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody’s is follish enough to downgrade US debt to below Japan’s rating.

This is why any “grand bargain” to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I’d make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.

Triggers are a really bad idea, and I’d hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren’t ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there’s no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich’s is a proposal for Obama’s opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It’s just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn’t become a means of avoiding deficit reduction altogether, that trigger should be built right into any “grand bargain” legislation – irrevocable unless two-thirds of the House and Senate agree, and the President signs on.

Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can’t take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how’s that working for Congress and the rest of us? It’s made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won’t hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we’ve got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we’re serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence – getting the economy back on track, and then getting the budget deficit under control. It’s sensible and do-able. But will Congress and the President do it?

If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let’s stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment’s thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

51 responses to “Trigger Mechanisms To Avoid the Fiscal Cliff? You’re Kidding, Right?

  1. Ouch, how disappointing from Robert Reich. Have you tried to contact him, Joe?

    Robert certainly is an influential voice from American progressives. And he’s written a recent post on not obsessing about the deficit. I certain wouldn’t regard him as his own worst enemy.

    Let’s try to point out that bond vigilantes won’t attack – I think it’ll be something he wants to believe as it would compliment his political positions. What can I say – change will have to come from outside Washington, and that means informing the public, including established economists.

    • Heck, he even has a dig at Pete Peterson. Hardly any progressives outside our (admittedly) close circle does that. It’s usually aimed at the Koch brothers or Sheldon Adelson.

    • That’s not the point! The point is that the bond vigilantes don’t matter, because they have no real power. Who cares if they attack or not? They’re a joke against the US. Google “MMT”+”bond vigilantes”. There are many posts on this!

      As for contacting, I just did! If he wants to contact me, he can comment on this post!

  2. Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses!

    It’s made Congress look really, really stupid,

    Yeah, that’s what the democratically elected bozos that run the country are best at, foolishness and looking stupid. So you want them to be in control of the monetary system that’s the financial life blood of over 300 million hard-working souls? And even if the congressional incompetents delegated their fiscal and monetary authority, to whom would that go? Maybe you, and some buddies, have sufficient knowledge input to determine the wants and capabilities of those same 300 million plus. Do you?

    • I don’t understand your point. Congress now has the Constitutional authority to control the monetary system, and it has delegated far too much of its authority to the Fed and the private banks. Of course, I’m against that and favor reforms by Congress to make the Fed and the banking system more responsible to the interests of the people.

      • Because Congress now has the constitutional authority to control the money system doesn’t necessarily mean that it should do so. It has the wherewithal to allow alternative forms of the medium of exchange but of course it never would since that would lessen the power it wields, which, in turn, attracts the largesse of those most interested in how that power can be directed to their own benefit. Consider ethanol as a motor fuel component. That legislative and economic disaster will without a doubt be a millstone around the neck of the US public far into the future, now that interest groups and rent seekers have become part of the program.

        • It has the wherewithal to allow alternative forms of the medium of exchange but of course it never would since that would lessen the power it wields, Just plain factually false. And “Medium of exchange” is not really what money is. Congress most certainly does allow alternative monies. It’s a free country. But they just aren’t very important, or usually very long-lived with the exception of bank money (state-backed) and shadow banking denominated in US dollars.

          which, in turn, attracts the largesse of those most interested in how that power can be directed to their own benefit. True, which is why money should be further simplified and better understood, as MMT emphasizes. The main benefit of simplification is the end of the current dark age of academic macroeconomics and popular understanding of economics.

        • Look, this is an old debate going back to Plato and before. When it comes to Government I don’t do the philosopher king BS. Especially when the philosopher kings want to manage the economy in such a way that they’ll have freedom to speculate and to crash the economy every few years to satisfy their own greed and penchant for looting. I think I’d rather go with a system where Congress has the authority and Congress is accountable to the people. Insofar as that system isn’t working today that is due to the corruption of democracy by the very elites who want everyone to leave them alone. My view is that they should be subject to investigations, prosecutions, and very long jail terms for their control frauds. And the sooner the better!

    • So you want them to be in control of the monetary system that’s the financial life blood of over 300 million hard-working souls?

      Well, they’ve been in control for over 200 years. That’s the way it works. That’s the way it has always worked. MMT is not about proposing some new monetary or economic scheme, but about understanding the one we have and really have always had. It does not demand impossible knowledge on the part of those running it.

      • It does not demand impossible knowledge on the part of those running it.

        That’s exactly the point, it indeed does. And the credo of the statists has always been that if there’s just enough accurate information “we”, the masters, can make the decisions that direct the lives of others. The advent of computers and their ability to amass information has given a boost to statist thinking but can’t achieve the optimum for the individual, whose own wants and needs are submerged in a sea of irrelevant statistics.

        • Have you been sleeping for the past 40 years? The problem right now isn’t statism it’s the corps and the rich subverting the State. That’s what’s got to stop!

        • Funny how the whole world has been running monetary economies, which “demand impossible knowledge” – for millennia. Guess nobody told them. The point is that you don’t understand what money is. You’re still thinking of money as a commodity, a thing, which is a crazy acid-trip-hallucination category error.

          Monetary economies without exception have always had someone doing this “impossible” task of “running them”, by creating the basic money, the most desirable liabilities. Everyone in a monetary economy does part of the “running”, by participation in it – that’s “the miracle of the market” – but “the market” cannot and never has existed without some kind of “government intervention”.

          Sure, doing it “perfectly”, or even defining what this means, is im possible. But doing it better, doing it sanely, doing it with the same level of self-understanding, the same level of common sense, as premonetary, kinship, gift-exchange etc economies is very, very easy. It amounts to getting a big fat free lunch – by not systematically destroying the lunch you already have. Not attempting perfect organization, just practicable non-insane organization, which can be incrementally improved.

          It is not at all “statist” or anti-individual -but about providing individuals with more choices, more autonomy, more decisions to make. You just don’t notice the enormous, immoral, criminal, destruction and damage that states, that monetary authorities do to individuals if they do not follow common sense = MMT policies = above all, the JG.

  3. Reich or Krugman do not fear bond vigilantes.
    They fear of political fear of bond vigilantes, they said it so many many times, the fear that is preventing correct decision making.
    It is a political will and exuse not to do the right thing.
    Both of them acctually are trying to persued politicians not to fear bond vigilantes even tough i would say they are not really doing it the right way, they are reinforcing it instead educating as we try to.
    Educating is much, much harder and time consuming then trciking them into doing the right thing by using the “trigger” as they did themselves with fiscal cliff trigger.
    Reich is trying to trick politicians to do better thing, not really right thing, with trickery of calming the politicians and pointing to relevant thing.
    Besides if you kick the can of deficit reduction down the road it is very easilly to cancel it legislatively if it gives us some more time to educate and do the right thing.

    • I’m reading what Reich is saying not trying to divine what kind of 11-dimensional chess he’s playing. He said we have, in reality, to fear the reactions of our creditors. I think that’s ridiculous; we don’t have to fear them at all. I want Reich to say that; to acknowledge it and start advocating for jailing the bond vigilantes for corruption and fraud.

  4. Chuck Martel. Who are you proposing should be in charge of the monetary system?

    • Obviously, no one. There should be no government monopoly on money. Private monies should compete in the marketplace just like any other commodity. Let people pick the money with which they’re comfortable and confident.

      According to a WSJ article in the weekend edition:
      In 1937, he sold MGM the film rights to his “Thin Man” characters, in perpetuity, for $40,000 (the equivalent, in today’s money, of almost $2 million)
      So if Dashiell Hammett had given the $40 Gs to his five year old grandson and told him to save it, today, at age 80, the kid would have seen his fortune drop in value by 98%. There’s nothing normal or desirable or economically good about the destruction of savings, especially the savings of those that earned them by the sweat of their brow. The US government has proven that it can’t handle the job of managing money. Yet MMT theorists insist that even more state interference in voluntary contractual relations is somehow necessary and a cure for what ails the economy. The idea that any person or group should be able, under the auspices of the state, to direct buying and selling, hiring and firing, through manipulation of the medium of exchange ignores the continuing failure of those efforts throughout history. A priori reasoning would indicate that future efforts will also be doomed.

      • As Gustave de Molinari said:

        But how is this contradiction to be reconciled – that the protectionists and socialists, who call for intellectual liberty and political liberty, intend to make use of it to impose economic servitude?
        They affirm the fitness of every individual to influence the general direction of the country, to criticise, to judge every question, and at the same time, they deny his fitness to regulate his own affairs; the protectionists subject him to a fine if he wishes to buy this or that product or to devote himself to this or that industry, this or that trade, which does not suit them; the socialists of all descriptions intend, by means of so-called social laws and labour legislation, to substitute, for the individual’s will, his initiative, his judgment, his responsibility, the decisions of a government composed of individuals, as if power conferred infallibility on those who govern, and as if the governed were nothing but incompetents.

      • Chuck, MMT does not suggest “more state interference in voluntary contractual relations”. MMT does not at all forbid “private monies”. MMT does not suggest that the state “direct buying and selling, hiring and firing” or that it engage in “manipulation of the medium of exchange”. MMT does not dictate a “government monopoly on money” and would be happy to “Let people pick the money with which they’re confident.”

        MMT has nothing to do with the size of the government: “MMT is consistent with any size of government.”
        Towards a Libertarian/Austrian Modern Money Theory And policies that MMT recommends have a very successful historical record. MMTers are filled with Keynes’s “Babylonian Madness”, obsessed with history, compared to the mainstream, which has fantastically eliminated history from curricula – necessary, because it would show that their BS is just very old wine, long gone bad, in new bottles.

        MMT just recognizes that this idea of money as some “medium of exchange” which was not created by human hands is entirely bogus, and describes no money, no society, ever. Money, always and everywhere and originally has been a creature of the state, of society. Money is not a thing, but a relationship. Thinking it can be or ever was a commodity is a category error. There’s always somebody who is enpixelating the basic money into existence. There’s always somebody who settles his payments in terms of his own liabilities. If you have a better, more plausible candidate than a democratically elected government, we’re listening. There isn’t really any other choice. And even a laissez-faire night watchman government is going to naturally be the creator of the basic money. That’s how it works everywhere, outside of anarchic war-torn conditions, like some in Medieval Europe.

        So if Dashiell Hammett had given the $40 Gs to his five year old grandson and told him to save it, today, at age 80, the kid would have seen his fortune drop in value by 98%. First, the WSJ is off by a factor of 3, according to the Bureau of Labor Statistics Inflation Calculator. Second, that would only be true if Hammett had said – put it in a mattress. (And even then, the old notes might have numismatic value.) Placed in US government bonds – and it would turn out to be worth about the same amount now as then. Basically, nobody’s savings really destroyed, even in nominally risk-free assets. Relatively high inflation periods had relatively high bond rates. That’s a major reason why in spite of such stories, the US is and will continue to be the world’s reserve currency.

        • Money, always and everywhere and originally has been a creature of the state, of society.

          Repeating that canard over and over doesn’t make it anymore truthful. Aside from that, the state and society are not synonymous. Practically every human is a member of a society, many are not subjects of a state. We were lucky to have the example of new stone age man available for study recently. Native Americans, stateless but members of societies, managed to carry on trade without state issued money. Even when trading with Europeans, they had no use for minted coins, much less scraps of paper engraved with pictures of inbred royalty. That commerce was carried on with beaver skins, the value of which was correlated with other items. Beaver skins were money. Trade items were specified as being worth so many beaver skins and traded according to those terms. Rifles, ammunition and knives also served as mediums of exchange, in that an individual that traded furs for a rifle could easily trade that rifle for something else.

          More familiar forms of money like coins were minted in Europe by gang leaders we refer to as princes or dukes but if you wish to consider their predatory regimes as states then the Crips and Bloods would correspond to Bavaria and Savoy.

          • Repeating that canard over and over doesn’t make it anymore truthful. True, ethnographical, historical etc research is what makes it true. The only people who fantasize commodity money are economists who made it up from their armchairs. All other disciplines are on the opposite side of the issue.

            Peoples may have engaged in reciprocal gift exchange, but that was not yet money. As I have said before, nobody had the concept of quantity A of good X being equivalent to quantity B of good Y. But primates have the idea of exchanging favors. Money is “a favor”. It is not “a thing”, ” a beaver pelt” Was just reading an 18th or 19th century account of an American Indian who ridiculed this concept of equating dissimilar goods. The origin of money is in debt, a relationship, not a thing, and this can be seen as developing out of gift exchange.

            Everyone has heard the stories of commodity money. Studying the actual history is much more interesting. Why not actually consider that you might not understand what money is, that it might not be a thing, that it could not be a real thing, and never was, anymore than nephewhood was ever a rock. The descent of the money of today can be traced to the ancient Near East, and it very clearly had nothing to do with commodity money, with spontaneous exchange of commodities leading to the most exchangeable commodity becoming money, and barter economies, which nobody has ever seen. It had everything to do with the state, the society, with social institutions. I am using these words rather loosely – because money is a social phenomenon, a debt between two economic agents which is recognized in a larger society. Coins have nothing to do with the origin of money.

  5. Joe, I think you’ve found the answer: The “Grand Trigger” — a trigger for all triggers.

    However, until we get unanimous agreement on what the “Grand Trigger” is, we need a another trigger: a “Precursor Trigger” to implement the “Grand Trigger.”

  6. It’s a very good question: *why* are sincere progressives – with PhDs in economics – unable to see what mere mortals and MMT bloggers see? Is the economics curriculum so corrosive to intelligent thought that it simply melts these particular centers of brain activity? I watch Robert Reich and Paul Krugman when they go on T.V., and their voice patterns and body language reveal no hint of doubt or discomfort as they endorse most of the standard neoliberal premisses about deficits. Krugman, I think, is a little better because he rejects the bond-vigilante thing outright. But this renders him even more incoherent about what he does fear from deficits. It is something like – a sudden and uncontrollable surge in inflation. Why and from whence I can’t make out from his writings.

    It’s probably moot anyway. The idea that Barack Obama has an inner FDR that can be coaxed out into the open by the right kind of progressive posturing is, I fear, just another illusion. We’ll know soon.

    Does anyone know how things are going for Bill Black down in Ecuador? Left-leaning regions of Latin America are on my short list of places where the MMT breakout will begin in earnest.

  7. Joe concludes:

    I say let’s stop issuing debt and get the bond markets out of the Treasuries business entirely

    Joe, what planet are you living on?

    • According to Professor Bill Mitchell, the debt of a monetary sovereign is “corporate welfare.” Alexander Hamiliton as much as admitted that a major purpose of the USA National Debt was to bribe the rich into supporting the US Government.

      • Frank:
        Debt is merely the counterpart of equity.
        Those are 2 sides of a coin that cannot be altered due to the natural law of economics.
        Just as you cannot have a buyer witthout a seller, you cannot have equity without debt. Unless, of course, one is debt free to begin with!
        Don Levit

    • The distance between sane and crazy ideas is often very small and frequently depends on where the observers are standing.

    • Same one as you, Bruce! I just don’t want people to think it’s the best of all possible planets.

  8. Of course, too much deficit spending can cause demand-pull inflation. Joe Firestone

    Then why not raise reserve requirements at the same time to compensate? And forbid the Fed from creating more reserves for the banks so that all new reserves must come from Federal deficit spending? Why should the banks be allowed to limit the amount the Federal Government can deficit spend without causing demand-pull inflation?

    • I just finished Soft Currency Economics (Mosler). It says the Fed has no option about reserves except to set the price. They cannot limit the amount, or the banking system implodes. You could raise reserve requirements, but (under our current system) the Fed must then supply the newly required amount of reserves. If the Treasury were able to deficit spend without issuing T-bills, then it could be possible for the reserves to come from Treasury rather than the Fed, but the mechanism is way too slow for the 2-week lagged reserve requirement. But, under current law, deficit spending that adds to reserves comes hand in hand with T-bill sales that drain them. It is up to the Fed to maintain the balance.

      Raising taxes (nobody said anything about spending, just deficits) is totally equivalent to raising interest rates in terms of limiting private sector spending. Unaffordable loans curb private sector spending just as well as would raising taxes (even though higher rates also add to net interest income).

      • Unaffordable loans curb private sector spending just as well as would raising taxes (even though higher rates also add to net interest income). Golfer1john

        Good point but the plan should be that the rise in reserve requirements should match the new reserves so that interest rates don’t rise (or fall).

        Also, using higher interest rates rather than higher reserve requirements to control price inflation might be ineffective since: 1) Interest is a cost of pruduction so higher interest rates mean higher costs. 2) High interest rates would not discourage speculation if prices were rising faster than interest rates.

        • Yes, I’ve seen the arguments that higher interest rates during an economic expansion are pro-cyclical. I very much respect the expertise of the people saying it, but I don’t buy it, because I think that a lot of business expansion (and therefore employment) depends on getting financing at a rate that does not exceed the expected return. The evidence is murky at best. Speculators will speculate, whatever the conditions. Clearly the interest rate must exceed the inflation rate if it is to be counter-cyclical in an expansion, else the real interest rate is negative and expansion will continue.

          • If the banks knew in advance that the amount of desposits they could create were limited (by reserve requirements, for example) then they would also know that their ability to blow a bubble would be limited and so they would tend to avoid speculative loans and focus on making the safest loans to get the most out of their limited ability to create deposits?

            • Ignoring for the moment the incentive system that fostered the bubble of liars loans, etc., the bank does a process called underwriting, where they try to figure the probability that each loan would be repaid. Then they can offer different interest rates to different borrowers, attempting to equalize their profit expectation on each loan, no matter that they differ in safety. It could be more profitable to offer loans to marginal borrowers at 12% than to buy Treasuries, for instance, at 1.5%. That system works fine with either limited or unlimited ability to make loans. Borrows do a similar process. If they expect to make 10% on the money, they may borrow at 6% but not at 12%.

    • Hell, why not nationalize those banks? Sweden did, and they have no more problem with their banks. What does Warren Mosler say? “The financial sector is more trouble than its worth”?

      • The problem with credit creation is that it is inherently discriminatory since it transfers purchasing power from the entire population, including and especially from the poor, to the so-called “creditworthy.” Sweden is compatible with state-owned banks since it is overtly socialist and has no problem with redistributing the wealth generated with the people’s purchasing power. But the US does have a problem with wealth redistribution so our approach should be to prevent unjust wealth accumulation in the first place.

        • Why not do both? Btw, Sweden’s economy is a mixed capitalist economy in wich the Government accounts for a good deal less that 50% of GDP. One can throw around the epithet “socialist” all one wants. But I think it’s necessary to look at the distribution of economic activity in any nation before one labels it “socialist.”

          • Why not do both? Joe Firestone (LetsGetitDone)

            Indeed we should. Reform should include restitution for the victims (almost the entire population, including non-debtors) of the current money system both as a matter of justice and because new reserves will be needed for honest (100% reserve) lending. We should at least create and handout new money till all deposits are 100% backed by reserves since that can safely be done without significant price inflation risk IF further credit creation is banned and IF the new money is metered out appropriately.

            And since restitution for theft is commanded in the Bible, the Religious Right should not be able to oppose it. And since the restitution can be done without significant price inflation risk and would benefit non-debtors equally then who else can legitimately oppose it?

  9. If the US won’t ditch the bond markets alone, could they be persuaded to do it along with UK, AUS, CAN, JPN, CHN and any other countries that would take simultaneous concerted action? Leave them with no country to play off against those who want to stop the fear.

  10. I like the idea of a trigger as part of a political compromise. But the unemployment trigger should be lower, perhaps 4% or 3%, and the other trigger should not be GDP growth but inflation. No tax hikes unless inflation is over 3.5% for two consecutive quarters. I’d like to include a caveat about price shocks such as oil embargoes, but that may be too much of a complication. After a few years of good GDP growth without significant increases in inflation, maybe the MMT message will gain some more general credibility, and a serious bilateral discussion of JG can begin.

    Anyway, triggers or not, no Congress can bind any future Congress. They can always act to repeal the trigger law, and do whatever they can get the President to sign into law.

    • Yea I was thinking along the same lines, not so much a problem with the trigger idea per se, just the numbers Reich chose to focus on. Of course, the problem lies with your second point. What’s the point if they are just going to be repealed anyways.. really speaks to the state of our politics when we can’t even tie our politicians hands behind their backs to prevent them from ruining something.

      • Well, I think it’s good not to be able to tie any hands. If hands were to be tied today, you wouldn’t like the results. The only discussion on the fiscal cliff problem is how steep a fiscal slope to throw ourselves down. No mention of avoiding the descent altogether.

    • Of course, they can. That’s why triggers are silly. Best to advocate for the JG now so we get the benefit of the JG as a price anchor!

      • Good luck with that. They’re arguing about how much of the wrong things to do, and you want the moon.

    • Thanks for supporting my view and saying it much more eloquently.
      It is more about expediency of preventing disaster then doing the right thing right away since that is close to impossible given the media preference and the power of MSM.
      I just can not see MMT to be a part of national debate in next year.
      As Churchill said, Americans will do the right thing after all other options are tried.
      That is when MMT will become the norm.

  11. I can’t tell whether the problem is just that the “progressive mainstream economists” (Krugman, Baker, Reich, etc.) are unaware of MMT or are willfully disregarding it because they think it poses some threat to their established reputation and orthodoxy. It seems almost impossible that a professional economist could be unaware of these things, I’m just a part-time, arm chair internet warrior and I’ve found these things, how hard can it be? I’m guessing that they are reluctant for one reason or another to embrace this paradigm shift in economics and are sticking to their guns for the time being. Shows us how much work remains to be done in getting the MMT message across. The Modern Money and Public Purpose seminars at Columbia are awesome though, please post the latest one with Yanis and Marshall!

    • Yeah, me too, another part-time armchair internet warrior who “gets it”. I think they’re reluctant to admit they’ve been wrong. They are aware, at least Krugman is because he rants against MMT from time to time. Reich is more of a political animal than an economist, though, as far as I can see. Both are more interested in pushing a social agenda than in developing economic understanding and policy. They are more interested in redistributing the pie than growing it. Maybe they think they can make better progress at that by ignoring MMT than by embracing it.

    • Krugman and MMT have had a number of encounters following an attempt by Dr. K to caricature MMT on his blog. He as met with a ferocious defense and critique in his own comments section, and with quite a few blog posts offering counter-narratives. This has happened on at least three occasions. Since then his Posts have asserted views that are much closer to MMT, without his admitting that he’s coming closer. A major sticking points remains his adherence to a version of the IS-LM model, which MMT writers are very critical of.

      Dean Baker frequently seems very close to MMT in his views, and I think he views himself as sharing much with MMT; but he still maintains the view that continuous deficits can’t be run. I’m not sure why. I haven’t seen a coherent explanation from him on the point.

      As for Reich, I’ve never seen him mention MMT. But he reads Krugman; so he must be fully aware of the previous exchanges.

    • I believe that the real reason behind “progressive mainstream economists” reluctance to embrace MMT fully is twofold; They would be rediculed and abandoned by power circles as capable advisors they are now, and
      They feel jealousy about not being the originator of MMT but only followers.
      Combination of those two imperatives is powerfull force and excuse for them.
      They will turn and embrace MMT as soon as they see that they can benefit from doing so, as soon as there is a mass acceptance visible and they wont wanna be last to accept it, close to criticall mass.
      We can work around that and against these motives if we can combine ridicule and embrace of them while showing that there is mass following. If they were on our side it would be a powerfull force for education.
      The example of recent confrontation of DrK and Steve Keen with mass comments did the job of slight change of mind of DrK toward MMT.
      Now he is in a safe spot trying to think of ways on how to resolve conflicts of his mistakes and what came out to be correct. He is avoiding confrontations now, knowing that he will loose again.