Watch Stephanie Kelton explain why TINA falls apart as justification to tolerate unemployment once we understand the relationship between the United States and her currency. The lecture took place at Luther College in beautiful Decorah, Iowa on September 28, 2011. Note: if you would like to see the handout featured in the video click here.
Comments Off on Why You and I Can’t Spend More Than We Bring In, but the Government Can – and Probably Should
Posted in MMT, Stephanie Kelton, Uncategorized
Tagged curse of tina, luther college, MMT, sovereign currency, Stephanie Kelton
Below are some of the wildest, boldest, and most surprising stories we ran across this week. Thanks to all who shared their favorites. Keep them coming! This is a weekly series, so we’ll be back with more next Friday.
The Wall Street Journal reports that the European Union (EU) finance ministers are discussing whether governments with the strongest public finances can provide some budget stimulus to help support flagging economic growth in the 27-nation bloc.
Could it signal a small reversal of a policy adopted by ministers in October 2009 that calls on all EU countries to start cutting their deficits in 2011? We sure hope so.
Watch this one if you’ve got 47 seconds and you want to spend them smiling.
Last weekend, Denmark became the first country to adopt a “fat tax” (story here). The tax hits all foods with a saturated fat content above 2.3 percent. And while there is scant evidence that a tax of this sort will lead to changed behaviors and improved health outcomes, researchers are worried that a the tax would be quite regressive, hitting lower-income families much harder than higher earners.
The New York Times reports that “Britain is beginning to taste the bitter medicine David Cameron warned was necessary to fix its wounded economy . . . Figures released last month showed growth in Britain had slowed to 0.2 percent in the second quarter, diminishing hopes that the country’s businesses can generate new jobs to replace public sector posts being lost under the austerity plan. In the last year about 250,000 public sector workers have been laid off, and the country’s jobless rate was 7.9 percent in the period between May and July. It’s left some wondering: Is the remedy worse than the symptoms?” What a shame. Britain had the good sense to stay out of the Euro, but it’s behaving like a member of the cash-strapped system. If the Brits understood their monetary system, they’d realize that their wounded economy could be fixed with a few good keystrokes.
New York City Mayor Michael Bloomberg can’t understand why protestors are so upset about the divide between the haves and the have-nots. After all, he says, Wall Street salaries are only about $40 to $50,0000 a year. Except that they’re not. Sure there are some average folks working in the back-offices, answering phones and filing paperwork, but this isn’t what’s got people napping against barricades in NYC. So what do Wall Street workers really make? (Story here) “In 2010, the average cash bonus in New York City’s securities industry was $128,530 per person, according to the state comptroller’s office. That figure doesn’t include salaries, pay tied to stock options and some kinds of deferred compensation. At the Envy of Wall Street, Goldman Sachs, the firm in the second quarter set aside $90,140 per employee for compensation and benefits.”
Mocking the Occupy Wall Street protestors, some Chicago traders hung signs in their office windows, declaring themselves the 1%.
Comments Off on Say W-h-a-a-a-t?
Posted in Uncategorized
Tagged bloomberg, fat tax, goldman sachs, occupy wall street, say what, Stephanie Kelton, uk austerity
On Tuesday, October 4, the Royal Swedish Academy of Sciences awarded the Nobel Prize in Physics to three US-born scientists who discovered that the universe is expanding at an accelerating rate. On Monday, October 10, they’ll award the Prize to Robert J. Shiller for recognizing that the housing market can’t do the same. Or, maybe not . . . the polls are still open. Who do you think they’ll choose? Care to wager? It turns out, you can!
Since 2009, some economists at Harvard have been running a prediction market. For the price of $1.00, you can submit your pick. And, if you’re right, you get to share in the jackpot. But remember, this isn’t about picking the the economist whom you believe to be the most “worthy” recipient. This is about trying to figure out whose contributions the Academy will decide to honor. So it’s really more like Keynes’ beauty contest.
And, yes, we’re aware that its called the Memorial Prize in Economics, but c’mon — it sounds so much more prestigious to call it the Nobel.
Comments Off on Who Will Win This Year’s Nobel Prize in Economics?
Posted in Stephanie Kelton, Uncategorized
Tagged harvard prediction market, nobel prize in economics, robert j. shiller, Stephanie Kelton
Robert Reich, former secretary of labor under President Clinton, continues to make a strong case for infrastructure investment (the wise Homer in him), pointing out that, “unemployment in America remains sky-high” and “the nation’s infrastructure is crumbling.” But then, things go wrong. He says, “now connect the dots. Anyone with half a brain will see this is the ideal time to borrow money from the rest of the world to put Americans to work rebuilding the nation’s infrastructure.” As any MMTer knows, the US doesn’t need to “borrow money from the rest of the world to put Americans to work.” The government is the source of our money. It spends by crediting bank accounts. It is not revenue constrained.US Congressman Dennis Kucinich (D-Ohio) has introduced legislationmodelled on a the kind of Job Guarantee (JG) or Employer of Last Resort (ELR) proposal that MMTers have been advocating for more than a decade. Unfortunately, the bill also advances the American Monetary Institute’s wrong-headed plan to fundamentally change the nature of our monetary system. The problem with the Kucinich legislation is that it views the JG as an employment creation scheme rather than a mechanism to promote macroeconomic stability (I.e. Full employmentand price stability). As MMTers have explained, the JG buffer provides the nominal (price) anchor, and it is perfectly compatible with the monetary system we have in place right now.
For the handful of readers who haven’t already seen this, here’s a BBC interview with market trader Alessio Rastani. We found it shocking, not because of its content but because of its candor.
By Stephanie Kelton
Dean Baker has just written another piece on Social Security. Dean and I have always disagreed at some fundamental level on the best way to run opposition against those that are committed to weakening and ultimately destroying this vital program. Thus, while Dean and the MMTers are on the same philosophical team (we all want to preserve the program), we run our offence using very different strategical play books.
When it comes to Social Security, MMTers have taken many pages out of Robert Eisner’s play book. To my mind, no economist has been a more honest and forceful defender of the program. (Eisner was Professor Emeritus at Northwestern University and one of Bill Clinton’s friends and former teachers. He passed away in 2010.) In my favourite piece on the subject, Eisner said:
The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities….
…Our payroll taxes or “contributions” go directly to the United States Treasury. Our benefit checks come from the Treasury-and those receiving them can verify on those checks that the payer is the Treasury of the United States, and not any trust fund. Social Security payments are an obligation under law of the U.S. government. Our government and its Treasury will not,indeed cannot, go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, “[A] government cannot become insolvent with respect to obligations in its own currency.”
Baker’s latest piece is interesting because it shows that he has at least one foot in the Eisner door. He says:
While there is nothing in principle wrong with financing Social Security in part out of general revenue for two or three years in the middle of a severe economic downturn, the question is what will happen when the economy recovers enough that we no longer need this tax cut as stimulus. In principle the tax should simply revert to its normal level.
When the economy recovers, Baker is worried that Congress will lack the political will to raise payroll tax rates, leaving the program vulnerable. He says:
If the Social Security tax were not restored to its former level, then we could in principle continue to make up the difference from general revenue. However, there certainly is no agreement that this will be done. Since its inception, Social Security has been financed from the designated payroll tax. This tax has been used to sustain the trust fund, which is in principle separate from the rest of the budget.
Okay, there is a bit of MMT in here — the government could always make up the difference from general revenue — but the rest of the argument breaks sharply from Eisner, who explained that the perceived funding of Social Security through a dedicated payroll tax is nothing more than a useful myth.
Baker accepts that myth, arguing that as long as Congress has the guts to return the payroll tax to its original rate after the recovery takes hold, then the Trust Fund “would be sufficient to keep the program fully funded through the year 2038 and more than 80 percent funded through the rest of the century.”
To ensure that this happens, Baker proposes:
[A] very simple way around this potential problem. If we want to give a tax cut to workers equal to 3.1 percent of wages, as President Obama has proposed, along with a similar cut to some employers, we can just write that into the law without any reference to Social Security.
In other words, the tax cut would take the form of a tax credit that is paid out to workers and firms in exactly the amounts that President Obama proposed. However this credit would have no connection whatsoever to the Social Security tax, which continues to get collected at its normal rate.
MMTers would argue against this. Indeed, we have argued in favour of a more generous payroll tax cut — i.e. reducing FICA withholdings to zero for employees and the employers — and we would prefer to keep it that way so that the entire program is overtly, and permanently, funded out of general revenue. Baker has vehemently opposed our policy recommendation, arguing that it would make the program vulnerable to attack if it lacked a dedicated source of funding. So Baker wants to make sure the Trust Fund is “there” in order to protect Social Security from attack.
Here’s how Eisner dealt with the same problem:
Expenditures alleged to be related to trust funds are often less than their income-witness the highway and airport funds as well Social Security. There is no particular reason they cannot be more. The accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law. The Treasury can pay out all that Social Security provides while the accountants declare the funds more and more in the red.
For those concerned, nevertheless, about the “solvency” of the trust funds, there are simple, painless remedies for this accounting problem….why not award balances in the Trust Funds, instead of the current 5.9 percent interest rate on long-term government bonds, [a] higher return… [for] it was not God but Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances.”
So Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire “problem” go away. At 100 percent interest, even the most pessimistic CBO official would have to give the fund a clean bill of health, and future retirees could get 100 percent of the benefits they have been promised.
Which solution should progressives advocate? Baker’s tit-for-tat replacement tax that promises to preserve Social Security in its current state — able to pay just 80 percent of promised benefits to future retirees? Eisner’s tongue-in-cheek remedy that artificially pumps up the size of the Trust Fund to astronomical proportions in order to placate the accountants? Or the MMT solution that advocates a straightforward payment of promised benefits to all future retirees?
Posted in Social Security, Stephanie Kelton, Uncategorized
Tagged payroll tax, Social Security, Stephanie Kelton
By Stephanie Kelton
The Federal Open Market Committee (FOMC) just announced that it’s going to begin another round of asset buying, this time offsetting its purchases of longer-dated securities with sales of shorter term holdings. The goal? Flatten the yield curve. The hope? Engineer a recovery by helping homeowners refinance at lower rates and making broader financial conditions more attractive to would-be-borrowers.
At this point, it looks like Obi-Ben Kenobi realizes that Congress isn’t going to lend a hand with the recovery. Indeed, as a scholar of the Great Depression, he’s probably deeply concerned by the “Go Big” mantra that is now drawing support from people like Alice Rivlin, former Vice Chair of the Federal Reserve. And so it is Ben, and Ben alone, who must fight to prevent the double-dip. It is as if he’s responding to the public’s desperate cry, “Help me Obi-Ben Kenobi. You’re my only hope.” Will it work? Not a chance, but that conversation is taking place over at Pragmatic Capitalism, so drop in and find out why. Below is a description, taken from the full FRB press release, that describes just what the Fed is going to do. May the force be with us all.
“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”
Posted in Stephanie Kelton, Uncategorized
Tagged ben bernanke, FOMC, operation twist, Stephanie Kelton
Good news. Republicans have just unveiled a bold new plan (see below) to create jobs in the private sector. Don’t worry, it isn’t another “wasteful” stimulus package that hires people to repair roads and bridges or helps state and local governments hold onto their teachers and firefighters. This one won’t cost the government a dime! It’s a simple idea, really. A good old-fasioned meet-and-greet, where throngs of unemployed Americans can claw their way through a crowd of equally desperate men and women looking to land the perfect mate. I mean a reasonable match. I mean any job whatsoever.
Are these people delusional? (rhetorical) What, exactly, is it that prevents them from understanding the root of the problem? Econ 101. Sales Create Jobs. Income Creates Sales. So easy a caveman can do it.
We don’t need to introduce employers to the unemployed — they can throw a rock and hit one every 10 feet. We need to introduce employers to new customers. Sales create jobs. The problem, as Cullen Roche points out again today, is that too many households are still struggling with high debt levels. As Cullen said, “spenders have become savers,” and this is hurting the economy. Until households finish de-leveraging (restoring balance sheets by paying down debt), there will be no new source of demand — i.e. customers — to support private businesses.
The government could provide that demand — directly, through a job guarantee program modeled on the WPA, or indirectly, through a full payroll tax holiday and another round of revenue sharing for the states. But it looks like the deficit owls are the only ones prepared to support those kinds of bold initiatives. Until then, Congresswomen like Lynn Jenkins (my own “representative,” by the way) will settle for a pathetic event that promises to pair hundreds of potential employers with thousands of job seekers.
Posted in Stephanie Kelton, Uncategorized
Tagged job guarantee, Lynn Jenkins, payroll tax, Stephanie Kelton
My mother used to say, “If at first you don’t succeed, try, try again.” It’s good advice when you’re encouraging a child to take her first steps or hit a fastball out of the park. You pretty much want the person to stick with the general approach until the effort pays off. But it would be crazy to stand there and flap your arms, convinced that if you just keep trying you’ll eventually be soaring with the eagles.
Paul Samuelson described FDR as a president who “knew which whiskey wasn’t working.” With unemployment above 20 percent, the banking system in complete disarray, and the mortgage market in serious crisis, Roosevelt’s challenges were far more daunting than Obama’s. Of course, he didn’t get everything right on his first pass, but he didn’t stand there and flap his arms either.
When offering businesses a carrot (incentives) to hire the unemployed didn’t spur job creation, he created the Works Progress Administration (WPA), the Civilian Conservation Corps (CCC) and the National Youth Administration (NYA), and he hired the unemployed himself. When modest tweaks to banking laws failed to stabilize the financial system, the government created the Federal Deposit Insurance Corporation (FDIC) and the Security and Exchange Commission (SEC). When the housing market failed to stabilize, the National Housing Act of 1934 established new lending practices, propping up home values. And, when Americans struggled to make ends meet, Congress passed the Social Security Act and the Fair Labor Standards Act (which introduced a minimum wage). And he did much more.
President Obama, in contrast, seems determined to keep flapping. He thinks:
It’s as if every instinct he has is wrong. So maybe he should start doing the opposite of whatever his gut (or Larry and Timmy) are telling him. The general approach is modeled beautifully here:
You might expect the head of the group of countries that use the euro to understand the common currency better than anyone. You would be wrong.
Jean-Claude Juncker, head of the Eurozone’s group of finance ministers, can’t figure out why financial markets are so anxious about Europe’s ability to service its debt and so unconcerned about debt levels in other parts of the world. He’s convinced that Europe’s fundamentals are better than ours, so he can’t figure out why investors are gobbling up Treasuries despite the “disastrous” debt level here in this United States. To him, financial markets appear to be getting it badly wrong. He said:
“The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy.”
Well, Mr. Junker, not only have we – the scholars of MMT – explained why the debt crisis hit members of the Eurozone, we also predicted that the design of the euro system would lead, precisely, to this outcome. Even before the launching of the euro, people like Charles Goodhart, Wynne Godley, Jan Kregel and Warren Mosler were sounding the alarms, warning that the Maastricht Treaty contained a dangerous design flaw that would strip member nations of their power to safely expand their deficits in times of economic crises. And so while mainstream economists like Willem Buiter were busy arguing over the appropriateness of the 3% deficit-to-GDP and 60% debt-to-GDP limits established under the Stability and Growth Pact (SGP), those of us working in the MMT tradition were busy pointing out that bond markets, not the SGP, would impose the relevant constraint under the new monetary system. I wrote in 2003:
“[B]y forsaking their monetary independence and agreeing to the terms set out in Article 104 of the Maastricht Treaty …. obligations issued by EUR-11 governments begin to resemble those issued by state and local governments in the United States ….. Since markets will perceive some members of the EUR-11 as more creditworthy than others, financial markets will not view bonds issued by different nations as perfect substitutes. Therefore, high-debt countries may be unable to secure funding on the same terms as their low-debt competitors. ….. if interest payments are becoming a significant portion of a member state’s total outlays, it may be difficult to convince financial markets to accept new issues in order to service the growing debt.”
As a group, we warned that without a fiscal analogue to the ECB, the euro was essentially an accident waiting to happen – a sort of ticking bomb, ready to ignite the periphery at the slightest strain on public budgets. We wrote pamphlets, articles, chapters and books, travelled the Eurozone, met with elected officials, appeared on television, radio, and in print media.
We explained that the issuer of a non-convertible fiat currency never faces an external funding constraint. The United States, Japan, the United Kingdom, Australia and Canada can always pay their debts on time and in full. They cannot “go broke” or be forced to default on their obligations.
In contrast, we explained that Greece, Portugal, Ireland and the rest of the Eurozone nations have become users of their currency. They cannot create the euro. They can become insolvent, and they can be forced into default. And yet Mr. Junker claims that no one has been able to explain why the Eurozone remains in the epicenter of a global financial crisis.
Today, we continue to write about what went wrong and what the ECB could do to restore prosperity. William Black, Randy Wray, Marshall Auerback, William Mitchell, Warren Mosler, and I have worked tirelessly to explain that countries that are USERS of their currency just aren’t like the U.S. and Japan.
Perhaps we have been too opaque. Let’s try something simpler. Carefully study the images below.
Now watch this:
Earlier this week, President Obama talked about the weakening state of the economy, telling us that he’s not worried about a double-dip recession and that the nation should “not panic.” It’s hard to imagine a more alarming assessment at this juncture.
The recovery is faltering. Our economy is growing at annual rate of just 1.8 percent. Manufacturing just grew at its slowest pace in 20 months. More than 44 million Americans – one in seven – rely on food stamps. Employers hired only 54,000 new workers in May, the lowest number in eight months. Jobless claims increased to 427,000 in the week ended June 4. The unemployment rate rose to 9.1 percent. Nearly half of all unemployed Americans have been without work for more than 6 months. About 25% of all teenagers who are looking for work are unemployed. Eight-and-a-half million Americans are underemployed – i.e. working part-time because their hours have been cut or because they can’t find full-time work. There are, on average, 4.6 unemployed people for every 1 job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.
The Case-Shiller index shows that the housing market has already double-dipped.
And, because of the huge shadow inventory of yet-to-be-foreclosed homes, Robert Shiller, a co-creator of the index, thinks home prices could easily fall another 15-25% before bottoming out. If he’s right – and I suspect he is – this spells the end of the recovery. As prices continue to decline they create hidden losses elsewhere in the economy, hurting not just homeowners but the financial institutions that hold their mortgages. The list goes on and on.
These are not, as Obama said, “headwinds” that will slow the pace of our recovery. They are gale force winds that will push millions of families into poverty and thousands of business into bankruptcy.
In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:
“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”
Click images to view details
