By Dan Kervick
A dogma can be a very powerful thing. When dogma is sufficiently powerful, the people in its grip can lose sight of who they are, where they have come from, and how they got from the place where they started to the place they now occupy. Americans during the past few decades have been in the grip of an especially strong dogma, the dogma of Market Fundamentalism. Falling in with the preachers and zealots of this charismatic sect, they have convinced themselves that their once lofty economic place in the world was primarily due to an American preference for miniscule government coupled with the visionary leadership of free-wheeling entrepreneurial heroes, latter-day secular saints who were able to set the economic agenda and pursue it unencumbered by regulatory ties. For some Americans, this mythic free enterprise utopia, bestridden by business titans, represents the very essence of American freedom. And so the free market faithful have pursued a neoliberal political agenda in order to see to it that the tablets of this magnificent ancestral wisdom are carried down unbroken into the present all-too-errant age.
But the creed is bunk. It is a fictive concoction filled with tales of an imagined past that never existed. And yet, the more enthusiastically the apostles of Market Fundamentalism have attempted to put the spurious creed into practice, the further they have taken us away from historical truth and the real-world sources of our actual prosperity. We need to drop the totemic legends and look that real history squarely in the face, so we can remember who we really are.
Here is a graph of annual real gross domestic product for the United States during the period starting in 1929 and ending in 1959:
The most noteworthy portion of the graph is the highlighted period running from 1939 to 1944, and closely lining up with the years of the Second World War. We see that during that short time period, the US economy roughly doubled in size. The economic performance of Americans during those years was truly extraordinary. Emerging from a decade during which the country experienced a severe depression that slashed the size of the economy by one quarter, followed by a period of recovery that accomplished no more than returning the economy to its previous size before stalling out once again, Americans worked together during the war years to engineer a vast industrial machine and make a staggering economic surge forward. Following the war, we then see a sharp one-year drop as the country partially demobilized, followed by a three-year period of stagnation. But then followed a decade of steady economic progress during which time the economy grew by another 50%. And although it is not shown on this graph, the 60s were a similarly strong period as the US economy increased in size by about another 1/3rd from 1959 to 1969. So altogether, the US economy roughly quadrupled in size during the 30-year period lasting from Great Britain’s entry into WWII until Neil Armstrong’s first steps on the moon. This period in US history constitutes a modern economic miracle.
What drove that growth? Solidarity and organized national purpose. Americans worked together as a team during the war, and that solidarity contined into the postwar decades, behind an engaged and economically pro-active government. Here is another chart, showing federal government consumption and gross investment (CGI) as a percentage of GDP from 1929 to the present day:
The term “consumption and gross investment” refers to government purchases, whether of consumption goods or capital goods. It excludes transfer payments: direct cash disbursements that are not purchases of goods or services. So government consumption and gross investment as a share of GDP measures the government’s direct role in the economy as an employer of people and a purchaser of our national output.
What we see in the above chart, then, is that the great wartime economic surge was produced by a gigantic increase in the federal government’s role in the US economy. At its peak in 1943 and 1944, the government’s role as either a direct producer of our national output or customer for that output reached about 45%. The US was indeed close to a planned economy during the war years. Notice what happened next: Government CGI fell to about 10% of GDP and stayed there during the period of postwar stagnation, and then surged in the early 50s up to levels between 15% and 20%. Throughout the 50’s and 60’s, and continuing into the early 70’s, the US consistently maintained CGI levels well above 10%. What followed afterward was a period during which CGI held steady for the most part at around the 10% level until the end of the Reagan administration.
Interestingly, a period of recession and stagnation set in following the end of the Vietnam War, as CGI fell to between 9% and 10%. It was Ronald Reagan, despite his ostensible claims that government was the problem, not the solution, who was responsible for boosting the government’s consumption and investment expenditures solidly back up over 10%. Perhaps not surprisingly, the economy performed well during that period. Since 1988, however, we have seen a sharp secular reduction in the role of government.
What has this decline in the economic role of the federal government meant for US growth? I think the pattern is quite evident. Here is a graph of year-over-year changes in real gross domestic product from the time of the Great Depression to the present day:
Just as we have seen a long secular decline in the role of the Federal government, we have seen a similar downward trend in growth. The years since 2000, with federal government CGI as a percentage of GDP averaging only 7.4%, have had anemic average real GDP growth of only around 2%.
I believe the message is clear: The planned economy of WWII was the economic rocket that finally launched the United States out of the depression era and into the prosperous future decades that followed. That period, you might say, was America’s “great leap forward.” Americans in the postwar period, justifiably impressed with the power and success of activist government, kept up very strong levels of government economic participation and agenda-setting. We know the litany: highway programs, educational investment, a space program, and all of the many components of military-industrial complex.
And yet, this is the picture we see only when we look at government CGI. If we look at the total volume of federal spending, we read a somewhat murkier story. Here are annual federal government current expenditures as a share of GDP, again from 1929 to the present day:
We see a consistent upward trend until the early 80’s, a decline during the Reagan adminsitration, and an even more powerful decline during the Clinton adminsitration. The government peaked in size as a portion of GDP around 1983, and has been roughly declining in size since then, but interrupted significantly by the war spending of the two Bushes, and by the countercyclical stimulus package that was enacted in 2009 under Obama following the onset of the Great Recession.
Federal debt has continued to climb despite the fall in the size of government, driven perhaps by the dramatic tax cuts under Reagan and Bush II. We see this if we look at either gross Federal debt, or Federal debt to the public. (The latter is gross debt minus that portion of the debt that consists only in the obligations of one part of the Federal government to another):
Despite contemporary bouts of public debt hysteria to the contrary, the current Federal debt and level of debt service seem sustainable, even on very conventional understandings of “sustainable.” And the total size of the Federal government is actually quite modest by the standards of the rest of the developed world. But it is worth thinking about the contrast between the clear long term decline in the government CGI share of GDP and the murkier trend in the overall size of government.
Sustained government spending despite falls in CGI is the result of safety net spending. We began building those safety net systems in the 40’s, 50’s and 60’s, and they are a glory of enlightened social thinking and activism. But we have begun to rely on them more as inequality has grown. My contention is this is the outcome of a deliberate, elite-driven process I have called “charity-state liberalism”. Political and economic elites have increased the distributions of remedial income support to the bottom of the income structure while at the same time hollowing out the middle class, building a plutocracy and creating staggering new levels of inequality and predatory exploitation powered by the financial system and other well-connected stakeholder systems. US inequality is now, by far, the worst in the developed world. Increasingly the US looks like a neo-feudal society in which the role of government has been shifted away from productive investment, and toward the administration of Poor Laws which do nothing but stabilize the status quo to the benefit of the very rich, and insure the latter against social conflict and redistributive politics. Instead of broad prosperity, with the fruits of strong growth distributed widely and fairly across the whole spectrum of society, we now have a horrific and dysfunctional plutocratic Versailles economy buying itself more time with its politically fraught social insurance programs. One of the benefits of charity state liberalism, from an elite standpoint, is that it creates resentment among the stressed, working middle class, and prevents the development of effective political solidarity among the non-elite strata of society.
So what is to be done? We need to expand the active role of government in our economy once again, and shift spending back from the “safety net” to mission-driven public investment and government consumption expenditures on public goods. By no means should this shift be accomplished by Tea Party-style destruction of social insurance programs and abandonment of the needy and vulnerable to the kind of “tough love” Social Darwinism favored by the right. Such a program is as cruelly barbarous as it is economically destructive. Rather, we need a new government commitment to full employment and the provision of socially important and economically needed jobs to every person who is willing and able to work but who is not employed by the private sector. A dramatic expansion of public enterprise will lead to a natural and socially healthy reduction in the role of the government safety net, and will also help in the process of restoring solidarity among Americans. And public enterprise employment is the natural accompaniment of the type of mobilization for progress that is now needed.
This is not a pitch for re-militarization and a re-commitment to the US war machine. The point of the above historical lesson is that the United States and its people were mobilized by the war, and by the Cold War imperatives that followed. And the result was stunningly rapid economic development and progress in the areas of life that people of that time regarded as most important to the nation’s mission and ambitions. Those years were full of teamwork, can-do spirit and powerful government engagement. But they were also terrible times of global war, fear, the growth of secrecy and the security state, and the omnipresent threat of nuclear annihilation. But why must national mobilization take a military shape? Progress in the 21st century will not look like progress in the 20th century, and the most urgent imperatives of our time are not the imperatives of a past world doing battle with Nazi expansion and then entering into Cold War struggle. In the 21st century our mission is to transform the ways in which we obtain energy resources and utilize them to live on the Earth in a sustainable way, and to reform our society, material infrastructure and politics in ways that allow us to live harmoniously and sustainably as equals.
It may even be that standard GDP-based metrics for progress as “growth” are outmoded, and that new measures are needed. But whether we quantify our progress under the traditional rubric of growth or not, we know progress must be made. And the kinds of progress we need are so far-reaching that we cannot expect them to emerge haphazardly from the scatter-shot entrepreneurial hubbub. We are going to need new infrastructures for social living and transportation; new education systems; new forms of energy technology, health technology, financial technology and information technology; and all must be executed and organized thoughtfully and in optimally efficient and rational ways. This is going to take an enormous amount of work and intelligent strategic planning, as well as a lot of discussion, debate and experimentation. It is thus also going to require innovative new forms of democratic participation, deliberation and consensus building. And it is vital that as new infrastructure is created, the public retains ownership of the key systemic elements of that infrastructure instead of letting them fall into the hands of monopolists and oligopolists. Dismantling the plutocracy is itself part of the generational challenge.
Young people living today – the people with the most energy, tenacity, creativity and optimism – are desperately ready to engage in this project, and need to be liberated from the gloomy, dystopian pessimism and unimaginative indolence of our current crop of leaders and elders. But instead they are being crushed under unemployment and debt, and held prisoner by a generation that seems to have talked itself into a cowardly worldview of pre-fated decline and failure.
Our political culture awaits the great mobilization that is both needed and inevitable. Young people must be feeling intense frustration at the fetid and useless stew of confusion, cowardice and corruption that has been mixed up for them so far by the generations who still cling to political power, and by the lame proffers from the economically comfortable of mere market-based band-aids for massive systemic injuries and diseases. But they should at least know that Americans have in the past risen above stupidity, and mobilized themselves to accomplish amazing things. They did these things together, without waiting for some sequined and white-hatted entrepreneurial cowboy to leap off the glossy covers of the business magazines to save them.
Cross-posted from Rugged Egalitarianism
“One of the benefits of charity state liberalism, from an elite standpoint, is that it creates resentment among the stressed, working middle class, and prevents the development of effective political solidarity among the non-elite strata of society.”
Absolutely dead-on, this is perhaps the biggest obstacle we need to overcome politically. Time and time again I’m confronted with that argument from people – complaining about the welfare queens with iphones and “Obamabucks”. It is about as brilliant a political tactic as one can imagine, and very difficult to overcome. Middle class people are working their asses off just to scrape by, and they see people with free healthcare and social security/unemployment payouts walking around – not that their lives are a cake walk by any means, but the jealousy and resentment is understandable. Those kinds of emotions are so easily manipulated politically, and of course the alternative vision that you are promoting here simply does not exist in Washington today, so voila, you get the Tea Party!
The status quo relies on division and anger, and you sum up what is needed very well: “solidarity and organized national purpose”. I offer my humble support to whatever cause can help promote such an end, but that is the whole problem isn’t it? Lack of organization and political representation.. MMT needs lobbyists!
Mr. Kervick:
You so lack confidence in your own position that you have to distort your opponent’s position? The Great Depression was caused by price distortions induced by the crony capitalist Federal Reserve banking system which cannot be blamed upon “the market”. Your great increase in GDP during the war occurred after 12 or 13 years of government-induced hell reflects only a bunch of war materiel being manufactured to murder other people in a war that probably would not have occurred but for the earlier WWI having been funded by your beloved non-market funny money central banks.
http://consultingbyrpm.com/blog/2013/04/war-and-the-fed.html#comment-60655
The government didn’t induce the Great Depression. Free market capitalism did. Capitalism has been producing one financial crisis after another for 300 years. The permanent potential for such crises is built into the fundamental structure of free market debt-driven finance.
You speak for me, Professor Kervick. We need to restore hope for young people today mired in inexplicable unemployment. We need to remind them, as you do, that ways of doing things were different back then, and that voodoo (neoliberal) economics have taken over and clouded their future through no fault of their own. Your graphs tell the story — times were better for all when government spending was strong.
Thanks for shining a light on that part of the history.
“Federal debt has continued to climb despite the fall in the size of government, driven perhaps by the dramatic tax cuts under Reagan and Bush II.”
Huh? I thought this was an MMT blog. Did I miss something? The USA has no federal debt. It borrows from no one. It creates its money from thin air, simply by crediting bank accounts.
The only “borrowing” is the money that investors use to buy T-securities, which is strictly a Fed matter, and has no effect whatsoever on the US government’s ability to create and spend money. Furthermore the Fed’s “debt” is also the Fed’s asset.
Once again we see that the lies continue because everyone uses the lies for his own ends. Right, left, conservative, progressive — they all use the same lie that the US government is “in debt.” The above post apparently uses the lie to vilify tax cuts under Reagan and W. Bush.
Next the post includes a chart of “gross federal debt as a percentage of GDP.” This chart is meaningless. It cannot apply to the USA, since the USA has monetary sovereignty. The US government can create as much money as it wishes. The term “debt” is not applicable. It’s the same kind of chart used by the Pete Petersons out there.
Some readers may object to me, saying, “Your semantic quibbles do not discredit the post’s basic points.”
Semantics are important. If we don’t use the correct terminology, then we help no one. If we don’t stop using misnomers such as “federal debt,” then MMT will never find an audience.
The USA has no federal debt. It borrows from no one.
I guess I don’t see the sense in which that is accurate. If you own a US government bond, the government owes you coupon and interest payments. It has a debt. It is a debt that a monetarily sovereign government can always pay, but it is a debt nonetheless. If a payment comes due and the government stiffs you, it has defaulted on its debt.
You are incorrect. For the purpose of spending, the US government borrows from no one.
The Federal Reserve “borrows” when it sells T-securities, just as a regular bank borrows the money of its depositors. However this “debt” is also an asset for the Fed and for regular banks.
My point is that this so-called “debt” (i.e. the selling of T-securities) is trivial, since it has no bearing on the US government’s ability to create and spend dollars. The US government sells T-securities by choice, not by necessity. It does not use that borrowed money, any more than it uses federal tax revenue. It has no shortage of money. It does not need to borrow, and – for the purpose of spending – does not borrow from anyone. Yes I am repeating myself. Evidently it is necessary.
Words like “debt,” “bills,” “expenses,” etc have one meaning for currency users, and a different meaning for currency issuers. Your insistence on confusing the meanings is a service for liars like Pete Peterson. And why speak of debt-to-GDP ratios, when this is meaningless for the US government?
Please reconsider the terms you use.
Apologies for my earlier lack of clarity, Dan.
You are incorrect. For the purpose of spending, the US government borrows from no one.
It seems to me that while the government clearly doesn’t have to borrow, it in fact chooses to do so. People give the Treasury department some dollars; the Treasury department gives them a bond – i.e. a promise to repay that money plus interest. That’s borrowing, and is one of the policy choices the government makes in executing its monetary policies.
A debt is a legal obligation to make some payment, convey some property or perform some service. The government makes legally binding promises of this kind. Therefore it has debts. The fact that the government has monetary powers that enable it to pay its debts without acquiring funds from an external source doesn’t mean it doesn’t have debts.
The Federal Reserve “borrows” when it sells T-securities, just as a regular bank borrows the money of its depositors. However this “debt” is also an asset for the Fed and for regular banks.
If the Fed is actually selling those securities outright, rather than just “renting” them in the repo market, then it is not borrowing, it is just selling. Also, the Fed is the part of the government that actually issues dollars: non-interest-bearing, non-maturing government liabilities. The Treasury issues t-bills, notes and bonds which it swaps for these dollars.
If you go around telling people, “There is no federal debt”, you will just sound like an ignoramus and nobody will listen to anything you say. It’s obvious that treasuries are debt instruments and that they are legal obligations on the part of the government to make dollar payments to whomever has purchased these debt instruments.
The various ratios are not absolutely meaningless. If the government began selling medium term debt that carried crazy yields of – for example – 75%, then while it could certainly pay off those debts by relying on its monetary powers, doing so would likely blow up the currency. If the government makes promises to its creditors and seniors to make payments in certain nominal dollar amounts, I doubt people would think it had fulfilled its obligations if it destroyed the value of the currency in the process and thus paid people off in devalued dollars. There is a legitimate reason for tracking and managing the rate of government interest payments to the non-government sector vis-a-vis the rate of economic growth.
Your falling into “free lunch MMT” – the idea that the existence of a fiat monetary system corresponds to the existence of a magical fiat wealth machine. That’s not the MMT perspective as I understand it.
I would agree with Mr. Robertson’s questions in terms of MMT. MMT literature says that government deficits are “net private savings” (give or take the current acount). Warren Mosler describes government bonds as swapping a “checking account” (cash) for a “savings account (a bond). I’ve seen arguments in this blog that corporate profit growth cannot occur without government deficits along with arguments (after the Reinhart and Rogoff controversy) that the higher the national debt the higher the GDP growth rate. Then there are Joe Firestone’s arguments that Social Security can never be in crisis because the government can always just spend the money along with the “platinum coin” shell game to avoid debt limits.
In this context, a concern about debt sustainability in this forum is not something I expect to see.
I don’t know anyone who’s claimed this:
“corporate profit growth cannot occur without government deficits”
Link please, or withdraw the claim.
I don’t know anyone who’s claimed this:
“the higher the national debt the higher the GDP growth rate.”
Again, link please, or withdraw the claim.
“Then there are Joe Firestone’s arguments that Social Security can never be in crisis because the government can always just spend the money along with the “platinum coin” shell game to avoid debt limits.”
Don’t think I ever said that. Of course it can be in crisis, if the politicians refuse to provide the electronic credits SS needs. What I do say that SS can never be in crisis if the Government makes its payments by using its fiat money power as exemplified by minting platinum coins to cover any shortfalls which occur.
Now, why is the platinum coin “a shell game?” Why is it a shell game for the government to use its fiat money authority under the constitution to spend what Congress has appropriated, whether doing it avoids the debt ceiling or not?
Mr. Firestone — First, let me reiterate that my comment was about claims I’ve seen in this blog. I’m not suggesting that all of the authors agree with all of the claims.
In terms of corporate profits and government deficits, see http://neweconomicperspectives.org/2012/10/sectoral-balances-within-the-domestic-non-government.html. I found the post rather confusing, but looking back at it I think he is claiming profits cannot exist at all without government deficits — “If (G-T)=0, p>0 … is impossible”, where G = government spending, T = taxes, p = net profit.
For higher national debt leading to higher GDP growth, I was incorrect. Looking back, those claims tended to be in the comments (which don’t reflect the authors here) and I incorrectly remembered another post which argues against conventional debt to growth but does not argue a positive relationship. I apologize for the misstatement.
For Social Security, I present a quote from your own NEP post yesterday. It sounds like you’re claiming there cannot be a Social Security crisis.
“Let’s begin getting to that solution by noting that Social Security solvency is a faux “money” problem because the Federal Government can never involuntarily run out of money to pay Social Security and Medicare obligations, as long as Congress is willing to provide the authority to meet those obligations. Yes, the problem is a political one, not an economic one.” —
As to why the Platinum Coin proposal is a shell game, MMT defines money as created when the government spends and destroyed when the government taxes the money back (I’ll find references if you like but I think that’s basic enough to MMT that it can be accepted). Since all of the Platinum Coin proposals I’ve seen involve the mint stamping a coin followed by transfers between the Fed and Treasury, this piece of Platinum is never “spent” (never leaves the government), therefore IT IS NOT MONEY as defined by MMT.
In actual fact, issuing a Platinum Coin is no different to the economy than government spending without issuing bonds — in both cases the government spends newly created money without increasing the national debt. The only difference is whether a piece of metal is sitting in a vault someplace along with fiddling some accounting numbers.
Paul Meli is not claiming that in any given time period, under all conditions. First he’s assuming Exports – Imports (X – M) = 0. That means no trade deficit or trade surplus, just no trade at all or perfectly balanced trade. As you know, the US consistently runs a trade deficit with the rest of the world. So that is not our situation.
He also assumes that Government Spending – Tax Revenues (G – T) = 0. So, in his ideal case, the Government budget is also in perfect balance. Spending = Tax Revenue. Since,the sectoral balance model is:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
Then given his assumptions we can derive from the model that the domestic private sector balance must also be zero, to fit the equation. Next, Paul assumes that the private sector is divided into Households, and Businesses. Ignoring his further breakdowns of the household and business sub-sectors of the private sector, we see that since businesses, given his assumptions, can’t profit from trade balance inputs or from Government balance inputs, they must get their profits from each other or from households. However, if they get their profits from each other, then that doesn’t represent a net gain in profits in the business sector taken as a whole, because one business’s profits must be made at the expense of other business’s losses. Given this, we can see that the only source of business profits given the various assumption is the household subsector.
Now what if at the beginning of the period of transaction flows being considered, the household sector has no savings? Then there are no savings for businesses to extract from the household sector, and the only way that the business sector as a whole can profit (get net financial assets) during the period is for the household sector to go into debt to provide the nominal assets to the business sector.
The way Paul put this was:
Of course, this doesn’t exclude the possibility that individual businesses can profit from other businesses losses or that business as a whole could nor profit from the household sub-sector going into debt.
Thanks for your honesty.
Right, the point being that the SS funding problem is represented as a solvency problem because it’s projected that SS will run out of money in 20 years, but that it’s not really a solvency problem, caused by some necessary and impersonal economic conditions. Rather, it’s a political “problem” created by politicians who only want to fund SS through cutting benefits; but who are refusing to fund it either by removing the payroll tax cap, or using platinum coins, or using consols, or using some of the other options available. In that post, I do indicate that the politicians can certainly create a political SS crisis over funding, but there never is any incapability to fund in a fiat money system, only a lack of willingness.
Well again, I need a link and this time a quote. MMT does say, and I’ve often said myself, that when Government spends it creates money and when it taxes it destroys money, but that is not MMT’s definition of money.
Please read the MMP primer for definitions on this point, or see Stephanie Kelton’s presentation in seminar 2 of the Columbia MMT seminar series. Apart from that, however, platinum coins deposited at the Fed, clearly become “vault money” even if they never go into circulation.
That’s right. That’s why I like platinum coins, but not as much as I like Treasury being able to create reserves without issuing debt. But what does that have to do with a shell game?
The constitution grants the Congress unlimited authority to issue fiat money. It has delegated part of that authority to the Fed in the area of reserves, and part of that authority to the Treasury in the area of coinage. So, why is it “a shell game” for the Executive to use that authority to make the debt ceiling a dead letter?
Thank you for your kind and patient responses. Two more rejoinders if I may…
[1] “If you go around telling people, ‘There is no federal debt’ you will just sound like an ignoramus and nobody will listen to anything you say.”
I very rarely tell people anything, because few people want to hear the truth. But when I do speak, I explain that the so-called “national debt” is also a national asset. It simply refers to the amount of T-securities that have been sold. It has no bearing on the US government’s ability to create and spend money. Hence, all the doom-saying about the “national debt” is garbage designed to legitimize the elimination or privatization of social programs, thereby widening the gap between the rich and the rest.
[2] “You’re falling into ‘free lunch MMT’ – the idea that the existence of a fiat monetary system corresponds to the existence of a magical fiat wealth machine. That’s not the MMT perspective as I understand it.”
We do not have a magical fiat WEALTH machine. We have a magical fiat MONEY machine. The two things are different, but related. A monetary sovereign government’s fiat money is not physical. It is purely digital. (Currency bills and coins represent this digital money, just as a title represents a car, or a deed represents a property.) A monetarily sovereign government creates its digital money out of thin air. It is 100% free. It does not need to tax or borrow, as you know.
“Wealth,” by contrast, is physical and social. If I control than you do, then I am wealthier than you. More power, more people, more energy, more resources, and so on. We measure and exchange this wealth by using money.
Therefore, in terms of money, there is indeed a free lunch. However, in terms of wealth, someone must pay. In our system, that someone is the middle and lower classes, who must pay in the form of poverty, or else in slavery to the 1%, who enjoy their free lunch (in every sense of the term) at our expense.
Our system of exploitation and inequality is maintained by lies and brainwashing, which include things like the “debt-to-GDP” you feature above. If such “debt” refers to the so-called “national debt,” then the chart is meaningless for monetarily sovereign governments. Japan’s debt-to-GDP is 214%; Libya’s is less than 2%. What does that tell you about the size or strength of their respective economies? Nothing. So I don’t understand why you would include such a chart.
In any case, let’s go back to your original comment: “Federal debt has continued to climb despite the fall in the size of government, driven perhaps by the dramatic tax cuts under Reagan and Bush II.”
There could be a connection between tax cuts and the sale of T-securities, since the federal government must sell T-securities each year in an aggregate amount equal the federal deficit each year. What I don’t like about your statement is that it sounds like the typical “progressive” person who says, “Yes we have a deficit crisis and a national debt crisis, and the cause is rich people not paying enough taxes.” Such thinking helps to sustain inequality.
First, there is no “national debt crisis” whatever. There is only a personal, private debt crisis.
Second, the only “deficit crisis” is that deficit spending is far too LOW.
Therefore, in terms of money, there is indeed a free lunch.
Only to the degree that the economy is operating significantly below capacity. If the government injects dollars into the economy so as to increase the total broad money supply by X%, and the total output of goods and services available for sale increases by some amount less than X%, then the purchasing power of each dollar is decreased.
That’s why I blanch when I see arguments that seem to suggest that the government can always meet its obligations to its seniors, its sick, its poor and its young people simply by deploying its fiat monetary power. Meeting our society’s obligations to seniors and others involves much more than providing nominal dollar balances. It requires assuring the right levels of total economic output and the means of distributing them so that the provision of nominal dollars to people corresponds to the level of real material well-being we want them to have.
Fiat monetary power is an important and useful tool of macroeconomic policy. But it is not an economic miracle drug. I am strongly resistant to types of discourse that seem to pervert MMT into an enabler of magical thinking.
Therefore, in terms of money, there is indeed a free lunch.
Yes to your remarks, Dan & Mark – but the real mistake – illustrating what the real danger is – is in the next sentence – not that one. Do people dying of thirst in a desert need to be taught the dangers of drowning? The “advanced” economies have suffered through 40 years of various degrees of stagnation, culminating in today’s mess. Deciding to not stagnate no more, to not believe in the mainstream voices in your head, like deciding to not be anorexic, to not indulge suicidal impulses is a stupendous free lunch. It’s magical thinking to NOT think that believing in magic no more, putting aside childish beliefs in magic, has an uh, well, magically positive effect. 🙂
However, in terms of wealth, someone must pay.
Absolutely not. Only at white-hot, chock full employment. And if the government directs society more wisely than the private sector, or in a way that only the government can (as in a war of survival) – not even always then. Predistribution, not redistribution. (Which can come later) Money, as the highest powered form of debt, is needed for the division of labor for production, the distribution of which redeems the value of money.
Mark,
Perhaps a “debt” can be owed without “borrowing” per se?
Like if someone does a favor for you, perhaps you would consider that you “owed them a debt” of gratitude or thereabouts, but you actually didn’t borrow anything from them in the first place?
rsp,
Thank you for your response.
Q. Can a debt be owed without borrowing, e.g. owing a debt of gratitude?
A. Yes. However, in monetary terms, ALL MONEY IS DEBT — although this does not mean that all money is lent by banks. Some of our money is created via federal government spending. Is that money debt-free?
Let’s clarify…
Monetarily speaking, a debt refers to a claim to ownership. If I have a dollar bill, then I have a claim to ownership of one dollar’s worth of money in the US system, i.e. one dollar’s worth of the “full faith and credit of the USA.” The US government owes me one dollar’s worth of credit.
On the personal level, if I owe you one dollar, then you have a claim to ownership of one dollar’s worth of my personal time, energy, or property.
Therefore, when we speak of debt and owing, we must be very clear about what exactly is owed, and who it is owed to. Otherwise we will be subject to brainwashing. A debt is a claim. Who has the claim, what is the claim, and who is subject to the claim? And how does it affect our lives?
What is the “national debt”? For the US government, which is monetarily sovereign, this is the amount of T-securities that the Federal Reserve’s FOIC has sold. (Federal Open Market Committee.) Investors have a claim to ownership of the money they have used to buy T-securities, plus the interest that accrues to those securities.
This “national debt” has no effect on the US government’s ability to create money. The US government has unlimited money. However the 1% and their puppets (politicians, professors, and media creeps) don’t want you to know that. They want you to believe that the US government has a “debt crisis,” so that you submit to ever more poverty and inequality.
So-called “progressives” also want you to believe this same lie, so that “progressives” can get attention. Such people are not actually “progressive,” since the lie increases our poverty and inequality.
Look at it this way…
All of us can access our bank accounts online. We can move money between accounts. Now suppose we could also increase our numbers at will, so that we had more money. Further, suppose that we had a car loan. Would we be in debt? Yes, but so what? It would be a trivial natter; a mere formality. We could always create more money to make payments. We would have no debt burden.
So it is with the US government.
I’m not concerned with technicalities. I’m concerned about poverty, inequality, and the lies that sustain them.
Yes, Matt, that is the primary meaning of “debt” – the important meaning of “debt” – a moral obligation- the one that MMT uses and is universally understood. Using, basing meanings of “debt” on “money” or “currency” is getting things backwards, defining the fundamental in terms of the derived concepts and is the soul of bad, confused theory.
In that, the important meaning, “debt” has exactly the same meaning for currency issuers and currency users. That was Mitchell-Innes’ great contribution – to clearly treat state credit/debt and private credit/ debt on the same footing. There is no magical, fundamental difference between state money and bank money and personal IOUs. Anybody can issue currency. The hard thing is getting people to use it.
The national debt is exactly that, a debt like any other. (Currency should be included & intragovernmental debt should be excluded.) It’s an asset for currency & bond holders , and a debt, a liability for the state, exactly like any other creditary relationship.
The true borrowing is when, say, somebody works for Uncle Sam, giving US his or her labor in return for a “mere” promise, a dollar bill. The worker becomes the creditor of Uncle Sam and Uncle Sam the debtor. Uncle Sam redeems his promise, pays his debt to the worker, say by the worker buying a meal in a government cafeteria, or the worker obtaining the direct benefit to himself of paying the government taxes with this dollar. This is just like borrowing a cup of sugar, one of Wray’s favorites. Sugar one way, IOU other way.
One can become indebted or become a creditor where “borrowing” is very hard to see: Through free gifts with no strings attached. But that is finding $100 bills on sidewalks. Not very common or important.
In your favor example, one can think of “you” as borrowing “someone’s” time, or borrowing the benefit of the favor. Similarly, Uncle Sam has borrowed the worker’s labor by paying him. An important insight that Geoffrey Gardiner emphasizes is that the division of labor is simply logically impossible without credit/debt, and that is the basic function of money in monetary economies, to direct the division of labor. One has to indulge in the most magical thinking imaginable – to imagine that there is any benefit to forcing millions (or one) to NOT labor against their will, and that there are NOT enormous benefits to be gained by stopping this behavior, just as there always are with the cessation of any extreme self-destructive behavior. But that is most “economics” for you.
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The dogma of market fundamentalism is equally as bad as that of state fundamentalism. Balanced thinking is needed to overcome the extremists.
Bitcoin is significantly higher now than when it was just before silk road got shut down. Might be a good time to write another article on bitcoin.
Nice piece, Dan. I don’t know what the following sentence means:
Despite contemporary bouts of public debt hysteria to the contrary, the current Federal debt and level of debt service seem sustainable, even on very conventional understandings of “sustainable.”
What is the current conventional definition of “sustainable” and does the term have any applicability at all within an MMT framework?
Hi Bill, I was thinking of Scott Fullwiler’s NEP series on the debt ratio. Scott introduces the series as follows:
This five part series will explore at length (warning!) and in detail (another warning—wonk alert!) the MMT perspective on the debt ratio and fiscal sustainability. While the approach suggests a macroeconomic policy mix and strategies for both fiscal and monetary policies that most neoclassical economists currently believe are unsustainable, ultimately the MMT preference for a significant role for fiscal policy in macroeconomic stabilization is shown to be consistent with traditional neoclassical views on fiscal sustainability.
http://neweconomicperspectives.org/2012/12/functional-finance-and-the-debt-ratio-part-i.html
There are different definitions of sustainability based on what ratio people think it is important to sustain. I think in MMT the main focus is on the sustainability of the level of debt service to GDP in a full capacity economy, and in connection with that we point out that short and long term treasury interest rates are in fact a government policy choice.
Thanks, Dan. I appreciate and understand Scott’s analysis … but there’s something that’s always bothered me about framimg the issue in this way. It sounds a lot like trying to prove that MMT constructs and definitions of “sustainability” are in some way consistent with neoclassical constructs and definitions of “sustainability” — at least as regards certain outcomes and necessary conditions — even though those constructs and definitions are fundamentally flawed. In other words, I think the term “sustainability” is ambiguous and dangerous.
If MMTers think the way neoclassicals and neoliberals look at deficits and debt is fundamentally flawed, what good does it do to show that MMT’s way of looking at deficits and debt yields some results — among an infinite number of results — that should be acceptable to neoclassicals and neoliberals but are not, in fact, acceptable to them? I understand why one would want to do that as an academic exercise, but it just strikes me as an ineffective way for MMTers to be talking to policymakers about deficits and debt.
I could be all wet here but I think debating neoclassicals and neoliberals on “sustainability” grounds makes a big mistake in accepting deficit- and debt-hawk framing that is fundamentally flawed. If your last statement above is correct, and I think it is, talking about a specific level of deficit or debt level — or ratio of debt or interest payments to GDP — or a future stream of any of those levels as “sustainable” makes absolutely no sense. Those are all results of policy actions taken or not taken, given macroeconomic conditions, not policy instruments or rules.
In fact, I think it gives folks the false impression that we can today identify the levels of future deficits, debt, and interest payments that are consistent with having both full employment and “having our fiscal house in order.” And we cannot. All of those levels and ratios have to be determined and adjusted continuously and dynamically on the basis of current data and outcomes that we cannot accurately forecast.
But, once again, I could be missing the forest for the trees.
Well, in an economy running at or near full capacity, wouldn’t there be a sustainability issue related to price stability? If the government committed itself to a rate of ongoing dollar injections that exceeded the rate of economic growth, that would cause a rise in prices and a destruction in the real value of monetary savings, no? My recollection is that the MMT authors have always said that there is never a sustainability issue related to government solvency, but accept there is a sustainability issue related to price stability.
Yes, there is a “sustainability” issue in that sense. The constraint is inflation and the cure is taxation, as I understand it — which would moderate deficit, debt, interest payments, etc.
But, as you know, “sustainability” in that sense is very different from the way the term is used in today’s policy discussions. Non-MMT Folks think that they can identify ex ante the future levels and ratios that are “sustainable” with no reference to either full employment or inflation. In most cases, they intimate that there are thresholds that make the defict or debt “unsustainable” because the market will react in some very negative ways. There is also the elusive political aspect of “sustainability.”
I think it is a very dangerous term in today’s policy discussion. One that should be rejected outright. But YMMV.
You’re not missing the forest. The language of “debt” is broadly known, but that doesn’t make it very accurate when discussing the federal “debt”.
I definitely support federal spending on important stuff like infrastructure, but it seems the elimination of poverty is very simple. The federal government needs to be the sole funder of unemployment insurance, which should pay a minimum of $500 a week to every unemployed person.
What “free market?” What part of “government-backed banking cartel” sounds free market to you, Kervick?
The financial collapses of the 19th century weren’t caused by a government-backed banking cartel. And the collapse of 2007/8 emerged from the shadow banking system that had escaped from the government-run system. There was no run on ordinary deposits: the conventional deposit-based part of the system worked fine. Instead there was a run in the shadow banking sector of investment banks and insurance companies, the exploding new free market financial system that Greenspan thought was self-regulating.
There was no run on ordinary deposits: the conventional deposit-based part of the system worked fine. DK
Because of government deposit insurance and the lack of a Postal Savings Service. Otherwise, the banks would not have dared to create so many liabilities since reserves would quickly drain to the PSS at the first whiff of bank problems.
As for the 19th century, there was considerable explicit and implicit government support for the banks such as species suspension decrees, the gold standard, and the lack of a convenient, government provided fiat storage and transaction service.
And why the heck should anyone care about purely private bank failures anyway since losing is a normal party of gambling and gambling is what banking is?
Great post Dan. When I read the following section of it, I was reminded of J.D. Alt’s recent post and my comments praising and responding to it:
http://neweconomicperspectives.org/2013/10/mmt-struggles-political-democracy.html
“We are going to need new infrastructures for social living and transportation; new education systems; new forms of energy technology, health technology, financial technology and information technology; and all must be executed and organized thoughtfully and in optimally efficient and rational ways. This is going to take an enormous amount of work and intelligent strategic planning, as well as a lot of discussion, debate and experimentation. It is thus also going to require innovative new forms of democratic participation, deliberation and consensus building. And it is vital that as new infrastructure is created, the public retains ownership of the key systemic elements of that infrastructure instead of letting them fall into the hands of monopolists and oligopolists. Dismantling the plutocracy is itself part of the generational challenge.”
In my first comment responding to J.D.’s post I said:
“My initial reaction is that the model you describe [a “cooperative gene” funding mechanism] would be especially applicable to cooperative enterprise focused on the provision of “infrastructure/commons” services, including communication, energy, education and healthcare. In my view, none of these are well suited to competitive market structures (for various reasons, including high-fixed cost structures that lead to natural monopolies and/or high levels of positive or negative externalities that are not adequately reflected in market-based transactions). Though cooperatives can and do exist in a range of otherwise competitive markets, I think they are especially appropriate to the provision of basic infrastructure services, where profit-focused operations tend toward abusive monopolies that typically require ongoing (and too often insufficiently effective) regulatory oversight.”
In a follow-up comment I suggested the following, and wonder what you think of the idea:
“…I think the time is right to reach out to progressive leaders focused on various issues/sectors, in an effort to educate them about MMT and connect them with MMT’s leading thinkers, so they can come to appreciate how an MMT-aware policy perspective can be a fundamental game changer for the specific issues they’re focused on. Given the situation in Europe and the U.S. (i.e., austerity economics/politics is proving itself a dismal and cruel failure), I suspect there’s more of an opening for this than there was before.
Personally, I like the idea of a book and/or multimedia project that lays out a concise description of MMT and its broad implications, followed by segments describing progressive policies that would be enabled by an MMT-based understanding of economics and public finance. The latter could be written by–or at least informed by–progressive experts/activists in each policy arena.
This could provide a practical focus for building strong and ongoing links between the MMT community and the progressive advocates whose policy proposals have been constrained (or dismissed) by the “we’re out of money” meme that has been adopted even by most supposedly progressive pols and economists.
Perhaps this kind of MMT-centric “public education” project would be an appropriate task to take on for members of the growing MMT community who recognize it as an important opportunity and/or have helpful contacts within the progressive policy community. I’d volunteer for this, and have recently taken a few (very) small baby steps in that direction within the “community broadband” sector of which I’m a part. Of course virtually all the people we’d want to reach will be extremely busy and focused on whatever fight is directly in front of them, but I’m convinced that a strong case can be made that MMT does, in fact, open up a whole new range of progressive possibilities, and that it’s at least worth a sustained effort to build these bridges.”
After reading this analysis, I’m left with a few questions.
First, why does the first chart only extend to 1960 while all of the other charts extend to the present? I’m always wary when time periods or other ranges vary between different charts in an analysis, it leaves me with the impression the omitted data might not support the hypothesis.
While the argument seems to work for the United States starting in 1929, I’d like to see an equivalent analysis of the United States pre-1929. I may be imagining things, but I thought there was strong economic growth over the long term and much, much lower government spending, whether total spending or your “CGI” concept.
I’d also like to see the equivalent analysis for other nations. Does this work for Japan (did the government suddenly stop spending in 1990 bringing on Japan’s great stagnation)? Does it work for European nations with larger government expenditures than the United States (though I’m not sure how the “CGI” expenditures compare since that data isn’t as readily available).
There is also the question of showing causation. After all, for the last 30 or so years there is a positive correlation between Federal deficits and unemployment — higher deficits correlate with higher unemployment. This doesn’t imply causation either way (deficits cause unemployment or unemployment causes deficits).
First, why does the first chart only extend to 1960 while all of the other charts extend to the present? I’m always wary when time periods or other ranges vary between different charts in an analysis, it leaves me with the impression the omitted data might not support the hypothesis.
Because in that part of the essay I was discussing US performance in the immediate postwar period.
I have discussed the ideas in this excellent article with friends of my age group (all born in late 70s and early 80s), but in a vague way. Your article brought our thoughts into clear focus. We have a tremendous enthusiasm to participate in the remaking of American life in a more rational, sustainable, and equitable manner through science- based policy and through appealing to reason rather than wedge issues. Thank you for this article.
You’re welcome Alex. I’m gratified it struck a chord.
Brilliant post as always, NEP is a breath of fresh air, but there’s real substance to it and not just a “new voice” like the libertarian movement…where people who may mean well/are angry keep feeding it without thinking. I get the sentiment and want for a new voice, but it’s just being used by the GOP sadly.
I’m not a libertarian at all but I can say I’m probably more “market” and want less government than most here, but things like the Job Guarantee and this article are necessities. I still see some need to limit government, and I certainly don’t want a command economy, but we can’t keep this hands off approach. A Job Guarantee would do wonders, as it could greatly boost safety net, investment, public works and all that I don’t need to explain.
Regardless, I do hope this super free market dedication wears off, especially since the rich and powerful already break the rules (or more like live outside the rules), assuming we can’t ever change this, gov should at least work for the benefit of the rest of us as well then!
I get frustrated by the same things. There seems to be a trait of laissez faire spirit in the American character that, when things go wrong, makes people leap first to the assumption that government broke everything and all they need is more freedom. It’s hard to get the country to cooperate on anything.
It’s hard to get the country to cooperate on anything. DK
I think most people would go for universal restitution with new fiat and the elimination of all privileges for the banks. That would be justice or at least a down payment on it.
But what do you offer them? A JG so they can earn again what was stolen from them?
One post war expenditure which you didn’t mention was the Marshal plan. I’m curious if you believe that it had any special significance regarding what you are writing about here. Partly i ask in that i assume it may be desirable or even necessary sometime in the upcoming century that the US and the developed nations of the world may need to offer a similar infrastructure and democracy boost to some if the most troublesome, poor regions of the world. Including them in first world markets (which themselves may all need smaller, sustainable footprints) will likely become vital in this age of globalization. Rebuilding g and expanding those markets in Europe and Japan through the Marshal plan played no small role in America’ huge economic growth in the 50’s.
Great posting, nicely informative.
And yes, as a 25 year old college graduate currently working a low paying, unsatisfying job with no real skills being learned, I am pretty angry and the one party corporatist state we have, and the overall joke that is politics in the US. Many of us are not as concerned with inequality per se, if earned, but this rigged system is the issue.
Sadly, many of us also buy the free market/little gov as possible idea. I used to be one myself, but you said it best…times are changing, and old ideas just don’t hold up anymore, nor did they ever really exist