The Wrong Debate

Everyone is arguing about the economic recovery in terms of what the debt-to-GDP ratio should be. The right question is: how do we get a stronger recovery going NOW? Stephanie Kelton appeared on HuffPost Live Tuesday (2/5/13) taking part in this discussion.

52 responses to “The Wrong Debate

  1. Dr. Kelton was brilliant. I have hope for the MMT message being heard and becoming a part of the public debate. //cheers

  2. The very most key idea of MMT got only a mention in passing, the idea that the US government cannot run out of US dollars. I’d like to see a discussion about that idea, that includes both sides of the issue. This was a gabfest of mostly people who want more government for its own sake, and showed little or no grasp of the real issues. Much like their audience, I guess. Buffett said something that seemed relevant only by pure luck and skillful editing. He doesn’t get it either. And the entire discussion, except for Stephanie, seemed to accept the importance of the debt-to-GDP ratio. That mindset has to go away, else no progress will be made. I expected more from a captive media outlet.

    • I agree that Stephanie was excellent. I didn’t pick up on Robert Kuttner agreeing that the debt/gdp ratio was important in his segments however. In fact I was surprised that he didn’t make the usual obeisance to it; but seemed to rail against the idea of using it as the focus of policy. I almost had the feeling he was coming around to MMT. And also that Menendez seemed much more friendly to “the wrong debate” idea than I expected hew to be.

      The impact of the whole panel discussion was far more unfriendly to the feasibility and wisdom of implementing austerity than anything I’ve seen previously from a major MSM outlet. Hopefully we can use this to campaign for Stephanie to get on RMS.

      • The good guys are starting to win. You can feel it. The mainstream story is starting to evaporate. Obama’s statement today is the beginning of the unraveling of the Fix the Debt crowd. But Kimball and Gross are still too much in the soft deficit dove camp.

        • Also the Democratic pundits over the past few days are in denial about GDP. We have a quarter of negative GDP, and now suddenly Democrats have decided GDP doesn’t mean anything. Wrong, it does. GDP went down because the government adopted an austerity stance.

          Kimball with his supply-side semi-monetarist solutions isn’t a help. We need a more active government sector.

          • “Democratic pundits over the past few days are in denial about GDP”


            Apparently you don’t understand the art of spin. Whatever bad happens, the Democratic pundits will dismiss it or blame it on Bush. Anything good is, of course, the result of our beloved President and his wise policies.

            Do not assume that what pundits say as an indication of what they believe. Pundits have no standing and no credibility to make a serious statement regarding economics.

        • “Obama’s statement today is the beginning of the unraveling of the Fix the Debt crowd”

          What part of it did you think was anti-austerity? It’s the same old bipolar nonsense that they all have been spouting: “Tax increases and spending cuts are bad, so let’s just do smaller ones.” He promised $4T of deficit reduction “that economists and elected officials from both parties believe is required to stabilize our debt”.

  3. Scott Fullwiler

    Who let Miles Kimball on the show? He was ridiculous.

  4. Keynes: “Look after unemployment and the budget will look after itself”. That sums it up. Unfortunately the Neanderthals that rule the world cannot see it.

  5. Yes, this went very well. It was great that this host let Stephanie do the sum-up – and the sum-up itself was very strong. You can’t stop producers from “balancing” shows by including deficit dodos like that Kimball guy. We’re lucky he was the only one. Wow, talk about having nothing to say…

    • I think HuffPo may have more leeway than some of the other outlets when it comes to avoiding false balance. Ariana knows all that herself. In any event, I think Alicia could have gotten away with having Jamie Galbraith on rather than Kimball.

  6. I think argument about private savings as a result of public deficits was a great one. That line of argument has potential to go very far.

    Support for austerity relies on two foundations. One is private money delusion, misunderstanding nature of our monetary system. But the other is misunderstanding nature of public debt and deficits, because even (sensible) mainstream economists and commentators could not support austerity if they understood role that public debt plays in our economy. They would have to argue for even more exotic things, like monetary reform.

    Btw, if they are afraid of sudden explosion of lending because of excess reserves (“money printing”) then surely, rather than crippling austerity better alternative would be setting binding lending limits to banks?

  7. Debt/GDP is 100% meaningless. Debt is the total of outstanding T-securities purchased in the past 30 years. GDP is the one year total of production. T-securities purchased years ago, and still outstanding, affect this year’s Debt/GDP.

    It’s absolutely ludicrous. Even more ludicrous. No one laughs at it.

    Rodger Malcolm Mitchell

    • I do!!!! I get yuks every time I see it, after first gnashing my teeth at the stupidity of it all!

    • I still have trouble understanding why we call it “debt”. Grandma purchases a T-bill (a piece of paper issued by the government) with dollar bills (a piece of paper issued by the government). The dollar bills that paid for the T-bill were created through government spending some time ago. The only difference I can see is that the T-bill loses less value over time.

      • RobertM

        Actually, T-bills and dollar bills both are evidence of debt, except it’s not the kind of debt the public understands. When the private sector has debt, it’s a burden. T-bills and dollar bills are no burden, because the government has the unlimited ability to create them.

        Also, T-bills and dollar bills lose value similarly, because T-bills are valued in dollars. The difference is T-bills pay interest (barely).

    • Rodger, will you clear something up, then, because I have been over at the local high school talking to kids and you just screwed up what I’ve been telling them.

      OK. Mosler and Kelton said at the 2010 MMT conference in the DC that the National Debt, the amount on the sign in NYC, is the record of all currency created since 1792 MINUS all the currency destroyed (taxes). (Well, they didn’t proffer it, someone said it first and they confirmed. And Mosler has confirmed since then too.)

      Now you write that “Debt is the total of outstanding T-securities purchased in the past 30 years.”

      Which is it? And if I’ve got it wrong, then what is magic about 30 years?

      Thanks in advance for taking the time to answer this.

      • MRW,

        The federal government creates dollars by spending and it destroys dollars by taxing. Annually, the difference between the two is called the “deficit” or the “surplus,” depending on whether spending or taxing is higher.

        ” . . . the record of all currency created since 1792 MINUS all the currency destroyed (taxes)” actually should read, “. . . the record of all currency created by the federal government since 1792 MINUS all the currency destroyed (taxes). It is a description of the federal debt.

        The total of outstanding T-securities is the federal debt. The 1792 figure literally is correct, but I used the “30 year” figure because 30 years is the typical longest term Treasury Bond.

      • To pick nits, the Kelton-Mosler statement might need a wee bit of fiddling with. I think the first US do-re-mi were the Spanish dollars and coins based on them. But there were also the continental bonds that Hamilton decided to honor at 1% of face value at maturity IIRC. So there were bonds out there from the beginning, no? Which makes the Kelton-Mosler statement not exactly right to the penny in 1792. But with a few nits like that picked out, it should be right to the penny.

  8. And what is missing from the discussion is motive. Why are billionaires supporting the “cut-the-deficit” lie. Unless we address the motive, we will continue to shout into a hurricane. And the motive is this: The upper 1% want the gap between them and the 99% to widen.

    The 1% is not concerned about absolute income. They are concerned about relative income. The gap is what makes the 1% rich. Without the gap, no one would be rich. The wider the gap, the more power the rich have. It’s that simple, but unfortunately, no one mentions it.

    Talk about motive, and the public will begin to listen.

  9. Has anyone responded to this “critique” of MMT by Thomas Palley?

  10. Just WOW Kimball !!!
    He sounds like a stoner at a collage party. ” I got this idea maaan. The regional visa , but dude they’re forced to buy a house and work in their region. ” Ya Kimball lets create a second tier citizen confined to certain regions. Ever heard of Saipan “The FED is afraid to lower short term rates” Really?

    Kelton great as usual. Very professional considering she didn’t laugh when Kimball talked.

    • “The regional visa , but dude they’re forced to buy a house and work in their region.”

      Yes, that struck me, too. It would solve all our immigration problems, if we only let in people who can afford to buy a house. I wonder if they can have a mortgage, or do they need to bring cash?

    • OK, so some of “us” can be just as mean-spirited as some of “them”.

      Is there any possibility of Palley getting together with, say, Stephanie Kelton, to discuss their views of each others’ theories in a civilized way? Or maybe Kelton, Wray, and Mosler vs. Palley and whoever else he wants to bring (Krugman?). Maybe with a moderator in the mold of William F. Buckley, Jr. to enforce the “civilized” rule, make sense of the math for the benefit of lay people (I can do lots of math, and I found Palley confusing because he used variables without defining them), and contain the discussion to one point at a time. I think much of the disagreement is simple misunderstanding. Since it is MMT that is misunderstood, I think such a meeting of minds could benefit the “movement”.

      • Ben Johannson

        It’s not simple misunderstanding, it’s willfull ignorance and petty behavior. Palley’s critique was ludicrous in its unfamiliarity with the subject he claimed was “primitive” and “inferior” to his beloved ISLM.

        • OK, so if we hold this conference and remove his ignorance and make him familiar, would you not be able to have an intelligent discussion of economic theory instead of insulting each other? And if you did, would he not then see the error of his ways and become an advocate of MMT? (Clearly no unbiased economist would disagree with MMT, would he?) Wouldn’t that be a better situation than this juvenile bickering?

          • Palley is well acquainted with MMT; since he’s attended conferences for years where he’s heard MMT presentations. His view won’t be changed by further exchanges with MMTers. He’s a “political” opponent within the economics profession. That’s the way it is!

            • Joe,

              And that is exactly why the MMT folks should be talking about motive. The 1% bribes the politicians et al via political contributions and promises of lucrative employment. The 1% also owns the media.

              The 1% wants to grow the income gap, because it is the gap, not their own wealth, that makes them rich and gives them power. If there were no gap, no one would be rich. But the wider the gap, the richer and more powerful are the rich.

              Without talking about motive, we simply will not convince the public. The politicians are paid not to understand.

            • That doesn’t make sense. He says, twice, that MMT’s advocacy of higher deficits now is helpful and correct. He wants the same policy, at least for now, as you do (which will close the gap, Rodger, not widen it.) If he knows MMT better than he shows in his writing, what can he gain by deliberately misrepresenting it in a way that is so clearly a misrepresentation as to be totally unconvincing? Is he invested in his current beliefs, like Krugman, and therefore unable to change? If that’s the case, won’t it help to at least get him on the stage at these conferences he’s attended for years, and show him to be a buffoon?

    • Couldn’t resist my own, hopefully not too mean-spirited comment. An abstract for an imaginary paper on Palley’s “Keynesians”. I’ll post some imaginary content later as penance:

      This paper excavates a set of ideas oddly known as “Keynesian” economics. The principal conclusion is that “Keynesian” economics is an inadequate attempt at restatement of elementary macroeconomics well-understood by Keynes, Lerner, Schumpeter and his student Minsky, Commons, Dillard and other Institutionalists etc but now forgotten outside MMT & allied Post-Keynesian sects. An inadequate attempt, of the type criticized by Keynes, to disguise confused thought by (inappropriate and now rather antiquated) pseudomathematics that embeds false assumptions into the “mathematical” setup. There is nothing new in the “Keynesians” construction of monetary macroeconomics that warrants the distinct (and very improper) nomenclature of “Keynesian”. Moreover, the “Keynesians” overcomplicate the challenges of attaining non-inflationary full employment through autohypnosis by Phillips curves epicycles ; exaggerate dilemmas associated with maintaining real and financial sector stability while not perceiving how they are treated by genuine Keynesian economics – MMT ; and invent entirely imaginary dilemmas confronting open economies out of whole cloth. “Keynesian” policy recommendations also rest on overcomplex and frequently incorrect analysis that in itself creates political economy difficulties, while “Keynesian” recommendations of frequently manipulated, unstable and high interest rates have generated destructive instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, “Keynesian” polemics on behalf of expansionary fiscal policy are useful. However, that does not justify turning a blind eye to some “Keynesians” pointless obscurantism of macroeconomic theory and policy.

  11. Stanley Mulaik

    The Trillion dollar coin solution wasn’t possible, because I believe the national debt had already been redeemed by the Fed’s very act of buying the securities. It is a government agency buying them with government money (created and issued out of thin air). The Fed has no more claim to be paid by the United States (We the people, taxpayers) for the full value of the securities it possesses than does a bank clerk who claims to be paid the value of the securities it buys from bank customers for the bank with bank money. Treasury cannot buy a redeemed debt of the United States for a second redemption. There is no Congressional authorization for it. And it wouldn’t be a good idea to take away all the securities the Fed has because these are needed for controlling inflation by selling them to banks to drain money from the banking system.
    The Debt Ceiling Act still needs to be repealed. Beowulf tells me that the ceiling is defined by the accumulated value of the securities at various locations, including the Social Security and other Trust Funds of the government. It doesn’t matter, he says, whether they have been redeemed or not, it’s how many and how much they are worth. But once we can clearly show that the securities held by the Fed are redeemed by its very act of buying them, and it cannot claim being paid for them, since it is acting as an agent of the United States. Perhaps the Fed could arrange with the Treasury to swap some mature securities for new at the Fed, and physically send them to the Treasury, which takes its time returning the new securities. In the meantime some serious deficit spending takes place because the “debt” as defined has been reduced at the Fed. (I don’t know if this actually would work. Comments?)

    • The Fed owns very little of the outstanding Treasury securities. They buy a lot, because until very recently they have only bought short-term ones, and have to roll them over every 3 months or so. I saw recently that they own about $1.6T, and they buy about $6T a year, which is about $1.5T per quarter just to stay even, if they are all 3-month bills.

      Treasury pays the Fed interest on them, and gives them back the principal at maturity, and at the end of the year the Fed gives its profits back to the Treasury. So the only cost to the Treasury of the debt owned by the Fed is the Fed’s operating expenses, not the entire interest payment. I think the Fed just gave back about $90B, their profits for 2012.

      In principle, debt owed by one government agency to another is a wash. It’s kept track of for accounting only. If you’ve ever seen government agencies negotiating over budgets, you’d think they were the Israelis and Palestinians. It’s a mindset.

      As for using some sort of “float” to get around the debt ceiling, I don’t think Fed and Treasury actually exchange pieces of paper. The Fed is the Treasury’s banker, so the sales and redemptions (and interest payments) are electronic and instantaneous. Good try, though. Turbo-Tax Timmy is using enough accounting tricks to get another 2 months out of it, so probably everything possible is already being done.

  12. Stanley Mulaik

    Do the 1% actually believe they will gain more by forcing the United States into austerity? Wouldn’t they gain more if the economy was back to full production, full employment. Or are they simply economic ignoramuses? If so, can they be enlightened?

    • Stanley,

      Good question, and here is the answer. The 1% are not worried about their absolute income. They are concerned by comparative income, i.e. the GAP.

      If you earn $100,000 a year are you rich? No, if everyone else makes $100,000. But yes, if everyone else makes $1,000. It’s the gap that makes people rich, and the bigger the gap, the richer they are. The 1% wants to widen the gap. That is their sole motivation.

      The easiest way for the 1% to widen the gap is to crush the income classes below them. Cutting Social Security widens the gap. So does cutting Medicare. Increasing FICA does, too. In short, because most federal spending benefits the 99%, spending cuts widen the gap. Austerity is a proven gap widener, as Europe has discovered.

      When you wonder why the politicians vote as they do, ask yourself this: Did this vote widen the gap. If you say,”Yes,” you have your answer. The gap is everything. It is what gives the 1% power over the 99%.

    • In contrast to Rodger, I think they are mostly economically ignorant. (Some are economically astute, but in economic theory that is wrong or outdated.) They believe government austerity is good for the public, deficits are bad and unsustainable, and spending must be offset by taxes, in government just like in a household. They would gain more if the economy were better, and they know that. They think austerity is the path to higher employment and wealth, both for themselves and the entire population. They look at the Clinton surpluses and the low unemployment then, and the Obama deficits and high unemployment now, and they draw erroneous causal relationships. Some of the 1% who are very generous with their own money, like Gates and Buffett, advocate austerity. If they were only interested in the gap, they would not be giving away so much of their wealth. The banksters are another matter.

      People can become enlightened if they are open-minded, and are approached the right way. Many conservatives are turned off by the Progressive rhetoric that often accompanies the MMT “pitch”. I think people generally view economics as separate from politics and morality, so if you wrap your economics in a political/moral view that they have rejected, they will not listen. Some here see no separation between politics, economics, and morality. You can use logic to change someone’s mind about economics, but logic will not change their views of the more emotional issues of morality or politics.

      • Golfer,

        Everyone is ignorant — the President, all his advisers, the Secretary of the Treasury and all his advisers, the Chairman of the Fed and all the Fed presidents and their advisers, the Counsel of Economic Advisers and their 400+ economists — all ignorant except you and me.

        Aren’t we special?

        • The question was about the 1%, not the politicians. Someone wrote in another blog post that FDR once said “I can’t do anything. You have to make me.” Meaning a majority of the people have to favor it before the politicians can vote for it. The people are not economists, maybe had 1 class in High School and that was based on the theories of another era.

          Many readers of this blog are no longer ignorant. And even I was ignorant just a short time ago. Progress is possible. What would happen if Stephanie or Warren were able to debate on CBS or Fox with one of those malicious advisers who get all the air time?

      • Call ’em out of paradigm. That’s the best imo. E.g., Bobby Jindal’s belief that the govt and the private sector compete for –wait, hold it, …– friggin’ dollars to spend and invest for growth. So every dollar of govt spending is a dollar stolen from the private sector. He said as much to NBC’s Brian Williams yesterday after Rubio’s petty whining of a response to the SOTU address.

        • Out of paradigm, for sure. The question is why. Are they evil, or just misinformed?

          The irony is that if we were at full employment, many of their policy rules would become policy rules for MMT as well. Additional spending by government should be accompanied by additional taxes, so as not to cause inflation. Purchases by government would compete for scarce real resources with private sector purchasers. It would matter which one would make the best use of those resources.

          “Rules” that apply only sometimes require a higher level of understanding than those that apply all the time. That’s why a little knowledge can be dangerous. We have to get the voters past that “little” threshold.

          • I don’t know, John. I feel that –we may not like it, but– a system without an active currency issuer is conceivable. The current arrangements re: the Fed-Tsy interface, the ambiguities therein, work to perpetuate the government-is-like-a-household viewpoint. I am not entirely sure if it’s a matter of simple misinformation, or of some primal predisposition.

            • Not only conceivable, but it exists: US State governments, Euro nations. It is a predisposition, but not primal. Under the gold standard, the US was very much like a household. They mainly don’t realize that things have changed. I mean, they know the gold standard is gone, but they don’t appreciate the implications of it. Haven’t thought it through like MMT has. This is why I have some optimism for wider acceptance of MMT, if it is more widely publicized. Like taking a deliberate safety on 4th and 10 from your own 2-yard line with a 5-point lead and 12 seconds to go. Once the idea is considered, it seems much more obviously the correct choice.

              • Amen to that, brother, with one small caveat. The politicians have been bribed by the 1% (via political contributions and promises of lucrative employment later), not to “understand” the significance of Monetary Sovereignty. And when you’re paid not to understand, you simply can’t understand. Period.

                The public resists Monetary Sovereignty, because being unlike personal finances, it is counter to intuition.

                The first step would be to tell the public why the politicians vote to widen the income gap.

          • “Additional spending by government should be accompanied by additional taxes, so as not to cause inflation. Purchases by government would compete for scarce real resources with private sector purchasers.”

            We are so far from inflation, I hope you live long enough to see an inflation we can’t correct with interest rates. That’s the same as wishing you a nice, long life.

            The deficit has been over a trillion dollars a year, short term interest rates are zero; long term rates are almost zero; unemployment is stubbornly high, GDP growth is minimal and we are closer to deflation than inflation — and people are worried about federal spending causing inflation?? Yikes!

            And as for purchases by the government competing for scarce resources, exactly which “scarce resources” should the government stop buying? And what does the government does with those “scarce resources” (other than pay for them by pumping dollars into the private sector — dollars the private sector desperately needs).

            Those two arguments — inflation and scarce resources — would be humorous if innocent people were not taken in by them.

            • You’re not disagreeing with me. Are you familiar with the word “IF”?

              And I didn’t say the government should stop buying anything. I said that if they wanted to start buying something more, they would need (at full employment) to also tax more, so as to maintain aggregate demand at (not above) the full employment level. Government should buy what it needs in order to operate, no more and no less. It should then adjust taxation as necessary to properly manage aggregate demand. Right now, for instance, government doesn’t particularly need to buy anything more, it’s buying about $1.4T more than it did just a few years ago, when spending was quite adequate. It needs to cut taxes, which are rising about $160B each year, despite the feeble economy.

              • Thanks for offering to explain the word “IF.” Waiting.

                And by the way, in what century do you think we will have full employment, and what will cause it?

                As for your statement, “Right now, for instance, government doesn’t particularly need to buy anything more . . .” how about free Medicare for every man, woman and child in America? How about Social Security with a living benefit that begins, not at 67, but say at 65? How about free education for all those who want it, through college and beyond.

                How about fixing our decaying infrastructure? How about better oversight of food, drugs, banks and investments? How about more for research and development? How about better anti-poverty initiatives? How about narrowing the income gap? How about more financial help for the monetarily non-sovereign states, or take over some of their expenses (education, road building et al)?

                However, I do agree federal taxes should be cut.

                • I apologize for making you wait.

                  My statement was

                  “The irony is that IF we were at full employment, many of their policy rules would become policy rules for MMT as well. Additional spending by government should be accompanied by additional taxes, so as not to cause inflation. Purchases by government would compete for scarce real resources with private sector purchasers. It would matter which one would make the best use of those resources.”

                  IF indicates that the statement is true only under certain conditions, which are specified in the IF clause. I did not say we ARE at full employment or even that we ever will be. IF MMT becomes the guiding force for policy, then the chances are much better.

                  What you would LIKE government to do is not the same as what government NEEDS to do. Others are allowed to have different opinions about what they would like government to do. I know you will be surprised to hear that, but it is true. I agree with you that it would be good to have better oversight of banks and investments. I don’t agree that it would take additional spending to do that. It was done better in earlier times with less money. (Thank you, Bill Black) What is required is more integrity in the regulators.

                  I hope I got all the html right!

                • If the US Treasury became the sole creator of the money supply, there would be no need for any taxation to raise money. The only functions of taxation would then be to control the money supply by destroying it upon receipt and to create a more optimum private income distribution.

                  • ” . . . there would be no need for any taxation to raise money.”

                    For a Monetarily Sovereign government (the U.S., UK, Canada, China, Australia et al), there never is a need for taxation to raise money. By contrast, monetarily non-sovereign governments (euro nations, cities, counties et al), do need to tax.

                    Those who do not understand the difference, between Monetary Sovereignty and monetary non-sovereignty, do not understand basic economics.