The time has come to tell the American people the truth

On May 17, 2011, the US Social Security Trustees Report and the US Medicare Trustees Report were released. The releases set the conservative deficit terrorists into a tail spin. They would have been better making a nice cup of tea, relaxing with a book and generally chilling out. In fact, the most interesting part of the US government’s Social Security Administration Home Page seems to be its Popular Baby Names search engine which allows you to plug in a name and find out how popular it has been over x years and its ranking by the year. My parents chose a name for me that remains popular. I don’t know whether that is good or bad. But playing around with that little toy is much better fun than reading the Trustees’ Report and the resulting hysteria in the media. The point is that these Trust Funds are just elaborate accounting smokescreens that ultimately mean nothing if one comprehends the financial capacity of the US government. They represent a case of a government creating a farcical structure to administer some program and then elevating the structure to a false level of importance that actually leads them to introduce policies which undermine the initial purpose of the program – and all without any basis. The time has come to tell the American people the truth.

As an aside – I note that the Greek economy has contracted further and as the austerity plans undermine spending and the labour force data released by Statistics Greece yesterday revealed an unemployment rate of 16.2 per cent generally but among the 15-24 year olds the unemployment rate is now 42.5 per cent rising from 29.8 per cent in 2010. For 25-34 year olds the unemployment rate is 22.6 per cent. Female unemployment was estimated to be 19.5 per cent.

There is no relief in sight as the EU elites continue to grind the nation into the ground and so a whole generation of Greek youth may spend their formative years unemployed.

The future for that nation will be severely diminished as a result. If I didn’t know it was happening it would seem like a science-fiction horror story.

42.5 per cent!

The smokescreen erected in the EMU can be cleared if the nations take back their currency sovereignty and abandon the Euro. There would be some dislocation associated with this decision but as things get worse in Greece and elsewhere I cannot believe that they will be better off in 10 years or so by staying on in the EMU. It is likely that some of those teenagers who are unemployed now will still be so in 2020.

But today we are talking about elaborate (voluntary) accounting smokescreens in a nation that has full currency sovereignty – the US. As noted in the introduction the release of the Trustees’ Reports for 2011 has sent the conservatives into a lather.

As background, each “fund” has six trustees – including the current Secretary of the Treasury (the Managing Trustee), the Secretary of HHS, the Secretary of Labor, and the Social Security Commissioner. Two Public Trustees are added (one Democrat and one Republican) to provide scrutiny on the conclusions of the other four.

The Trustee’s Reports are annual legal requirements under the US Social Security Act and aim to report on the “financial status” of each of the “trust funds” to the US Congress.

They provide elaborate projections of the revenues and outlays expected of each the funds based on actuarial and economic assumptions and modelling.

These construction of these Trust Funds beggars belief for a fiat currency issuing nation such as the US. Should there not be a positive balance in the funds then the attaching social security programs are unable to pay benefits.

The US government allocates payroll tax and income tax revenue to the revenue side of these Funds. Should the current revenues be insufficient to match current obligations then the prior Trust Fund balances are used (which mainly represent past surpluses). These past surpluses were then invested in Treasury bonds.

It looks to be an elaborate mechanism for the government lending to itself and pretending to raise revenue that is necessary to “fund” pension and medicare entitlements. Looks do not deceive.

In fact, the US government (via the Congress) can always pass legislation which transfers “General Funds” into “Trust Funds”. A stroke of the pen funding increase.

What gets the conservatives (and faux progressives) in a spin is the so-called Trust Fund exhaustion date which indicates when the Funds go broke (that is will not be able to make full benefit payments.

You can imagine the mindless reactions that follow the publication of one of these reports.

In the 2011 Social Security Trustees’ Report the following graph appeared (Figure II.D2):

The accompanying text said:

Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. The … Trust Funds are projected to … become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036 … For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period … scheduled benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.8 percent, or some combination of these approaches could be adopted.

The US Old-Age, Survivors, and Disability Insurance (OASDI) program “makes available a basic level of monthly income upon the attainment of retirement eligibility age, death, or disability by insured workers”.

So the report notes that within the logic (which is not questioned) of the elaborate accounting system adopted to accompany social security provision, the Social Security system is running a more or less permanent deficit which will grow in magnitude over time.

The current tax-sourced revenues have collapsed given the appalling state of the US economy and because stimulus packages allowed for a temporary reduction in payroll tax rates.

The reason that the Trust Fund continues to grow even though there are deficits is because of interest payments on the investment assets it holds. But they are just a transfer from one US government bank account to another – the net effect on overall fiscal situation is zero.

The Report says that by 2035, social security benefits will be about 13-15 per cent of taxable dollars. The Report says that the Trust Fund will be exhausted by 2036 whereupon the projected incomes would only match 77 per cent of scheduled benefits.

In this Wall Street Journal article (May 18, 2011) – Trustees Show Permanent Deficits for Social Security – which was written in response to the release of the Trustees’ Report we read:

The debate about whether Social Security faces a problem and needs to be fixed is over. The 2011 trustees report, which was released this afternoon, shows that the program already faces massive permanent annual deficits. In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, that deficit will be approximately $46 billion.

To which a Modern Monetary Theory (MMT) specialist would yawn.

The author is from the US Heritage Foundation which tells us that it:

… is a research and educational institution – a think tank – whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.

I loved that description. Research is about finding things out. Education is about explaining the things that research finds out. Neither is about promoting conservatism per se although “conservative” policy outcomes might be indicated by research.

The Heritage Foundation is in fact a political lobby group that provides little by way of research and education.

It lies to the American people to advance its own sense of ideological purity. It is no better than a Stalinist or Nazi propaganda machine that serves to cover up crimes against humanity.

The WSJ article “horrifies” the numbers presented in the Trustee’s Reports – sort of like – wow, revenue is this but spending is soooo much greater and the whole thing is going broke.

Here are some lies in the article:

1. “Congress would have to invest $9.1 trillion today in order to have enough money to pay all of Social Security’s promised benefits through 2085” – no it wouldn’t – it could pay all of the benefits in each year with the stroke of a computer key. The only question would be if the nominal transfers were possible in real terms – that is, will there be enough real goods and services for older Americans to enjoy in 2085? There is no mention of that in the article (or the Trustees’ Reports by the way.

2. “Any reform that eliminates deficits over the 75-year window must also solve the program’s problems beyond then” – no they don’t. There is no need to eliminate any deficits now or later.

3. “These new projections should end the claims that Social Security’s impending financial crisis can be resolved with modest changes to the current system” – there is no impending financial crisis. The US government can always fund any entitlements at any time.

4. “The billions that go to Social Security each year will make it harder to find money for other government programs or require large and growing tax increases” – not it won’t. The US government is not financially compromised in meeting spending on Y by spending on X. It might be politically compromised but that is nothing to do with the underlying features of the monetary system and the capacities that the US government enjoys as the monopoly issuer of the currency.

5. “… by the time the trust fund runs out. Congress will have to do this through some combination of other spending cuts, new taxes, or additional borrowing” – no they will not – see response to the previous lie.

6. “Unfortunately, younger workers have a great deal to worry about. Even though their parents’ and grandparents’ benefits are fairly safe, theirs are not” – that is also a lie. The largest problem facing younger workers is the entrenched unemployment and rising duration of unemployment brought upon by the failure of the US government to expand its deficit enough to support appropriate levels of job creation. This unemployment will cause intergenerational disadvantage and trying to cut spending now to “fix up social security” will worsen the situation for younger workers.

Peter G. Peterson hatchet man David Walker also waded into the discussion when the Reports were released. He claimed in a press release (May 11, 2011) that:

The release of the 2011 Social Security and Medicare Trustees’ Reports serves to re-enforce the need to take steps to address the huge structural deficits that lie ahead for these important social insurance programs and the federal government as a whole. This year’s Trustees’ Reports included only bad news for both programs …

The time has come to tell the American people the truth regarding Medicare and ACA. The federal government has promised far more than it can reasonably be expected to deliver in connection with these health programs. Both Medicare and ACA are in need of fundamental reform in order to rationalize the related promises and control health care costs. Washington policymakers should also take steps to make the Social Security program more solvent, sustainable, secure and more savings oriented

My arguments apply to both so lets just consider Social Security – that is, the US pension system.

I think it is time to tell the American people the truth. But that truth would not include any statement along the lines proposed by Walker.

Some might get confused by the the accounting structure that a particular government overlays on the spending and taxing flows that support a social security scheme. For example, the US Social Security Administration has two separate funds which underpin its social security system. First, the Old-Age and Survivors Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of future retirement benefits. Second, the Disability Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of disability support pensions.

The US system is referred to as pay-as-you-go system because employed workers pay into the funds during their working lives and retirees etc draw payments from the fund when eligible.

So while there are spending and taxation flows occurring, this accounting overlay creates an illusion that the two (the workers’ contributions and the social security payments) are causally related. They are not.

The contributions are just taxes that the US government levies. They don’t actually fund anything. They drain disposable income and result in net financial assets held by the private citizens being destroyed forever. The fact that they are recorded against the Social Security Trust Fund for accounting purposes is irrelevant. The fund is just an accounting record of the payments. There is no store of dollars sitting somewhere as a result of the taxation flows.

The fact that the fund might hold financial assets which seem to be bought with the excess receipts over outgoings is another source of illusion (and confusion). The financial assets it holds are purchased with US government spending, which of-course, is not revenue-constrained.

Additionally, the social security payments are just another type of US government spending. The spending comes from political decisions to provide a certain level of social welfare in the US and involves the Government crediting bank accounts of recipients on a regular basis in US dollars.

It is crucial, if you want to understand the underlying monetary economics involved, not to get seduced by the illusions created by the accounting structures which sit on top of the essential monetary operations.

As background, please read this blog – Social security insolvency 101.

Here is a restatement of some of the rudiments of MMT which bear on this debate:

  • Modern monetary economies use fiat currencies within a flexible exchange rate system, which means that the monetary unit defined by the sovereign government is convertible only into itself and not legally convertible by government into gold as it was under the gold standard, or any real good or service. The currency of issue is defined as the only unit that which is acceptable for payment of taxes and other financial demands of the government of issue.
  • Government spending is not revenue constrained. Unlike the government of issue, a private citizen is constrained by the sources of available funds, including income from all sources, asset sales and borrowings from external parties. Government spends simply by crediting a private sector bank account at the central bank. Operationally, this process is independent of any prior revenue, including taxing and borrowing. When taxation is paid by the private sector cheques (or bank transfers) that are drawn on private accounts in the member banks, the RBA debits a private sector bank account. No real resources are transferred to government. Nor is government’s ability to spend augmented by said debiting of private bank accounts.
  • A household, the user of the currency, must finance its spending, ex ante, whereas government, the issuer of the currency, necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire. The government is the source of the funds the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances), making government solvency in its currency of issue a given and a non issue. A sovereign government can always afford to purchase anything that is available for sale in the currency it issues and pay any entitlement/liability that is denominated in the same currency.
  • National income accounting defines the government deficit (surplus) as equal ($-for-$) to the non-government (residents and non-residents) surplus (deficit). In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. In other words, the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and thus eliminate unemployment is the government.
  • The systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings. Pursuing budget surpluses is necessarily equivalent to the pursuit of non-government sector deficits.

So is there an issue about Social Security that MMT recognises as being important? Answer: definitely.

Financial commentators often suggest that budget surpluses in some way are equivalent to accumulation funds that a private citizen might enjoy. Accordingly, accumulated surpluses are allegedly ‘stored away’ for the future which will help government deal with increased public expenditure demands that may accompany the ageing population.

The Social Security hysteria in the US is just one application of the idea that ‘taxpayers’ funds’ will be squeezed by the ageing population. But, as we have seen above, the notion that taxpayers fund ‘anything’ is without application. Taxes are paid by debiting accounts of the member commercial banks accounts whereas spending occurs by crediting the same. The notion that debited funds have some further use is nonsensical. When taxes are levied the revenue does not go anywhere. The flow of funds is accounted for, but accounting for a surplus that is merely a discretionary net contraction of private liquidity by government does not change the capacity of government to inject future liquidity at any time it chooses.

One has to acquire the capacity to see beyond the elaborate accounting smokescreens that are erected to blur the true operations of the monetary system.

The mainstream economic intertemporal (across time) analysis that deficits lead to future tax burdens is also problematic. The problem is that the federal budget is not really a ‘bridge’ that spans the generations in some restrictive manner. Each generation is free to select the tax burden it endures. Taxing and spending transfers real resources from the private to the public domain. Each generation is free to select how much they want to transfer via political decisions mediated through political processes.

When I say that there is no financial constraint on federal government spending I am not, as if often erroneously claimed, saying that government should therefore not be concerned with the size of its deficit. I would never advocate unlimited deficits. Rather, the size of the deficit (surplus) will be market determined by the desired net saving of the non-government sector. This may not coincide with full employment and so it is the responsibility of the government to ensure that its taxation/spending are at the right level to ensure that this equality occurs at full employment.

This insight puts the idea of sustainability of government finances into a different light. What we know is that if the national government continues to run budget surpluses to “keep government debt low” then it will ensure that further deterioration in non-government savings will occur until aggregate demand decreases sufficiently to slow the economy down and raise the output gap.

Clearly the goal should be to maintain an efficient social security and health systems. Clearly the real health care system matters by which we mean the resources that are employed to deliver the health care services and the research that is done by universities and elsewhere to improve our future health prospects. So real facilities and real know how define the essence of an effective health care system.

How much a national government devotes to social security and health care reflects political choices rather than government finances. Real resources are involved and if the government is allocating X real resources to a pensioner then that may reduce the real resources available for another age cohort when those resources are finite.

The government can always “afford” to provide that many X real resources and transfer them (via pensions) but it may not have a political mandate to do so. What the attacks on social security are about is a demand for less real resources to be made available to the elderly and more to the younger generations. While I have a position on that issue as a private citizen, MMT has no position. But the deficit terrorists should admit publicly that is their view and stop lying about solvency issues.

Moreover, by achieving and maintaining full employment via appropriate levels of net spending (deficits) the Government provides the best basis for growth in real goods and services in the future. But in a fully employed economy, the intergenerational spending decisions always come down to political choices sometimes constrained by real resource availability, but in no case constrained by monetary issues, either now or in the future.


It is time to tell the American people the truth so they can make a reasoned decision in this debate rather than be led into an erroneous set of choices by lying elites and billionaires.

Saturday Quiz

The Saturday Quiz will be back sometime tomorrow for your enjoyment or otherwise.

That is enough for today!

This Post Has 32 Comments

  1. “that government should therefore not be concerned with the size of its deficit.”

    From the reference point of the people, a government’s deficit is a people’s surplus. Government should be a delegation of people’s power and the relation of government and people should be framed in terms of agent – principal.

    If this is accepted, then the people is the consistent reference point to establish the sign (positive or negative) of the *government net flow of money*. The widespread use of the expression “government’s deficit” concedes that the debate be framed in terms disadvantageous for the people and ultimately nonsensical.

    A hydraulic analogy is at hand to illustrate the point. I, the people, the principal, commit to the government, the agent, the management of the irrigation of my plantation. Some water in the soil is constantly thrown back to the water supply. The government’s charter is to maintain the soil in a good moisture condition, by adjusting the positive flow of water from the supply to the plantation and the negative flow of water from the plantation to the supply. Would it make sense that I call a positive net flow of water to the plantation a “government’s deficit”?

  2. Thanks, Bill, for another real corker of a blog.

    Regarding the science-fiction-horror-story quality of it all:

    To me, it most resembles “The Matrix.” People think they’re living in the real world – in fact, they are so unshakably convinced of it that it never even occurs to them to question it. But they’re really all living in sensory-deprivation pods, getting 24/7 intravenous propaganda piped directly into their brains.

    I guess that makes MMT the crew of the Nebuchadnezzer.

  3. Bill,
    I’ve now been following you for about 3 years and it is getting stranger and stranger by the day here in New York. It took me about a year to really figure out the full implications what you were saying, but once you get over the household vs sovereign distinction in a fiat system, the view of the economic world really changes.

    That shift in perspective here is made nearly impossible by our blessed Supreme Court having decided that money equals speech with the result that rentiers of the world have united in funding institutions like Heritage and Cato, not to mention The Tea Party. Interestingly however pushback seems to be forming up among independent investors. Recently you took a good shot at John Mauldin, about a year and a half ago I had emailed him a couple of links to your blog. Six months latter he sent me a thank you note. Hmmmm…. I read his news letter in the spirit of trying to understand the stranglehold of theoclassicism on the small investor class and low and behold this week he re-published Michael Hudsons’ CounterPunch article on Greece.

    As an architect in NY many of my customers are in finance and among hedgies in particular MMT appears to be getting some real traction. The descriptive power of the theories are just mapping emerging facts so much better than any of the orthodoxies. Maybe we can get some hedgies to fund some youth camps in the public plazas here this summer! Except that most of the US has no public plazas….

  4. “Rather, the size of the deficit (surplus) will be market determined by the desired net saving of the non-government sector.”

    -What is the desired net saving that will satiate Goldman Sachs? Also for plenty of those determined net savers, what matters is wealth as a proportion of the total global assets. They want a bigger portion of the global pie. All 7B people on earth can’t all each have a bigger share.

  5. All 7B people on earth can’t all each have a bigger share.

    Except that all 7B people can make more pie if they are productively and sustainably employed. And maybe the 7B people on earth can do a better job of figuring what kind of pie is really best for their well-being, considering overall quality of life as opposed simply to material standard of living. (I’d start with more music and less plastic.)

  6. WHQ “Except that all 7B people can make more pie if they are productively and sustainably employed. And maybe the 7B people on earth can do a better job of figuring what kind of pie is really best for their well-being, considering overall quality of life as opposed simply to material standard of living. (I’d start with more music and less plastic.)”

    -I totally agree with you on all of that but that does not imply attempting to accommodate “net saving desires” will in any way be conducive to any of those wonderful aims. I’m just saying that it is futile to attempt to accommodate “net saving desires” because those amount to many people all wanting exclusive total power over everyone else. Instead we should face up to the fact that some people have “net savings desires” that never should be accommodated.

  7. stone,

    I think you’re taking the expression “net desire to save” too literally. “Desire” means *effective* desire in the same way “demand” means effective demand. It means desire as a preference or choice between saving, investment or consumption as the three things a private sector entity (whether a company or a household) can do with a unit of income.

    The larger point is that the government doesn’t determine the size of the deficit or surplus. The net private decisions of households and companies results in a deficit or surplus of some definite size in relation to the government’s spending and taxing decisions.

  8. Yes, I was addressing a side point, Stone. But “net saving” as I understand it from an MMT perspective represents money that is effectively being removed from the economy and not being employed for the purchase of goods and services (i.e. resources, aka “portions of the global pie”). Certainly, that money could be later put back in, and if enough of it were, could result in “net investment.” In that case, if growth or inflation were too great, government could respond by going into surplus, removing more money from the economy than it puts in. But aggregate over-investment doesn’t seem to be the current problem. Households, firms and banks are paying down debt or sitting on money, which means they aren’t attempting to grab up resources with those funds.

  9. Dale and WHQ, my understanding was that debts created by banks etc all have corresponding deposits so there is no change in net savings due to that. An increase in net savings has to come about by the government increasing the stock of net financial assets (government bonds and or monetary base) by taxing less than the government spends. If the government taxes less than they spend then there will be an increase in net saving irrespective of anything the non-government sector chooses to do with regard to passing those net savings amongst its self by paying for goods, services or assets or whatever. The net financial assets will (due to the positive return on capital) end up accumulating with the most wealthy. What Bill seems to be claiming is that somehow taxing less than the government spends will reduce unemployment. If the flow of net financial assets through the job creating parts of the economy drops due to money finding its way to speculators and hoarders, then everyone sensible recognises that those flows need to be topped up. Where I’m troubled with what Bill is saying is that Bill seems to be making a virtue of not extinguishing the net financial assets by taxation after they have moved away from the real parts of the economy to speculators and hoarders. The “desire to net save” is the desire to accumulate net financial assets in wealth portfolios. That is a bottomless pit. Having more cash and bonds enables the rich to exert more control over us and to own a larger proportion of everything.

  10. You say in your New York Times letter today that all mainstream economists, including Paul Krugman, did not predict the current crisis. Don’t know where you get that; Krugman’s been writing about it in his column for nearly four years now.

  11. IIRC, in the US, estate tax alone yields over trillion dollars over the decade from the 400 richest families. That’s one trillion dollars of net financial assets removed from the very wealthiest people on earth. One has to wonder though, do politicians have any idea what they are doing.

    Then there are charitable donations, endowments at the prestigious universities have become enormous. These concentrations of wealth act like money-fountains where pay is high and oversight is lacking.

  12. Dear John (at 2011/06/11 at 12:12)

    The crisis began to manifest 4 years ago. However, the origins date back long before that and I didn’t see anything in Paul Krugman’s writing at the time acknowledging that.

    best wishes

  13. WHQ “Households, firms and banks are paying down debt or sitting on money, which means they aren’t attempting to grab up resources with those funds.”

    – The typical billionaire feels duty bound to do her/his uttmost to maximise return on capital ie “grab up resources”. Sitting on money allows resources to be grabbed up ahead of the competition as and when oppertunity arises . Google for the Berkshire Hathaway shareholders’ letter for a description of why it pays them to hold $40B in cash. Holding 20%+ of assets in cash is a widespread tactic for aggressive aquisition and does not in anyway imply an ambivalent attitude towards maximising return on capital. In more volatile markets it becomes increasingly valuable to have a bufferstock of cash and large stocks of cash allow market participants to drive volatility. Adequate taxation would ensure that the rich sold real assets to pay the taxes. That would distribute the cash flows associated with those assets to people with a propensity to spend and so create jobs. It would also prevent the waste entailed by speculative price spikes in commodity prices driven by excess money with no productive outlet.

  14. “John says:
    Saturday, June 11, 2011 at 12:12

    You say in your New York Times letter today that all mainstream economists, including Paul Krugman, did not predict the current crisis. Don’t know where you get that; Krugman’s been writing about it in his column for nearly four years now.”

    “bill says:
    Saturday, June 11, 2011 at 12:42

    Dear John (at 2011/06/11 at 12:12)

    The crisis began to manifest 4 years ago. However, the origins date back long before that and I didn’t see anything in Paul Krugman’s writing at the time acknowledging that.



    Op-Ed Columnist
    That Hissing Sound
    Published: August 8, 2005

    Let me take this opportunity to remind matt_us of my invitation to a challenge (read when the elite wine & dines) regarding his approval of bill’s labeling of Paul De Grauwe a neo-liberal, and portraying him as lacking foresight. And allow me to cite his 1998 opus again:

    “Suppose a country, which we arbitrarily call Spain, experiences a boom which is stronger than in the rest of the euro-area. As a result of the boom, output and prices grow faster in Spain than in the other euro-countries. This also leads to a real estate boom and a general asset inflation in Spain. Since the ECB looks at euro-wide data, it cannot do anything to restrain the booming conditions in Spain. In fact the existence of a monetary union is likely to intensify the asset inflation in Spain. Unhindered by exchange risk vast amounts of capital are attracted from the rest of the euro-area. Spanish banks that still dominate the Spanish markets, are pulled into the game and increase their lending. They are driven by the high rates of return produced by ever increasing Spanish asset prices, and by the fact that in a monetary union, they can borrow funds at the same interest rate as banks in Germany, France etc. After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system.”

    Facts are stubborn and I’d very disappointed to see some distorting of the facts in a blog that otherwise does a very good job of debunking phony economists. Did I miss something?

  15. good luck with the American people getting the truth…this from NYT:

    “Douglas Holtz-Eakin, an adviser to Republicans, former director of the Congressional Budget Office and now president of the American Action Forum, a center-right research group, said he had no fear that the White House and Congress actually would cut too much. “I live for the day when a Congress cuts spending so aggressively that it actually endangers near-term growth,” he said. “We’ve never seen that.”

    But neither should they provide additional stimulus, Mr. Holtz-Eakin said. “It was appropriate when the economy was falling,” he said, “but it’s been growing for a long time. We need better growth policies.”

    Oh my….battle lines can’t come quick enough.

  16. @learning-greek
    matt_us is very busy commenting on many German blogs related to economics I occasionally visit. In fact it is almost impossible to find a German economics blog without a matt_us comment (at least for me). I will give him a short note because I think he will be very happy to hear that someone is waiting for his comment.

  17. @learning-greek

    I did not say that he lacked forsight. He states the blooming obvious. Even neo-liberals know that 2+2=4. My Grandma could have said that.

    Other more detailed comments are now in the “when the elite wine & dines” thread.

  18. stone “What is the desired net saving that will satiate Goldman Sachs?”

    Excellent point! It is not possible to satiate anyone’s private savings (profit) desire. Be it GS or my own ones. However, as we get past ex ante / ex post issue, the government in fact has to decide on how easy it is for the private sector to “make money”. There are many sides to this question. One of them has been aired here a couple of days ago, i.e. how “easy/fast” it should be to destroy private business and to restructure the private economy. You ask me? I do not know. While it is easy to say that the budget deficit satisfies the private sector net savings desire (and it does), the reality is that the government always decides a priory on how easy it will be for the private sector to make money. The balanced budgets story simply leaves it to the private sector alone.

  19. Sergei “While it is easy to say that the budget deficit satisfies the private sector net savings desire (and it does), the reality is that the government always decides a priory on how easy it will be for the private sector to make money.”

    I hope I’m not in a muddle about your meaning. My impression is that the budget deficit by definition creates the net savings but that attempting to satisfy private sector net savings desire by having a deficit is very much like pushing on a piece of string. The net savings desire will always expand ahead of whatever budget deficit is enacted. That is inevitable because the desire is to own a greater proportion of our finite world. Being able to dangle the carrot of a £10M lecture tour in front of Tony Blaire only carried any heft because few people could aford it. What needs to be faced up to is that we need a rational way to allocate ownership of what we have got. The most valuable thing we collectively have is all of us. To my mind, the most damaging misallocation of resources is mismanagement of peoples time due to wealth/power inequalities. Unemployment is simply a manifestation of wealth/power inequality. Conquering unemployment can only come about by conquering wealth/power inequality???

  20. @stephan
    “matt_us is very busy commenting on many German blogs related to economics I occasionally visit.”

    Not any more, as I have just been chugged out of the blog in Germany. If you call a spade a spade, and mention that some of these “independent” blogs could be part of the whole brainwashing set-up which the rich and famous specialize in and with which they manipulate us, you are banned. (The brainwashing mainly works through the proprietory media, which have written for the rich of wealthy for the last 200 years). Second ban now, I have also been thrown out of the FT alphaville blog.

    I hope I will be more welcome here.

    Bill Mitchell argues that the EU has been set up for the rich and wealthy. I do not agree. I buy the political argument. I benefit directly from the set-up being German living in Britain. So do family and friends living and working all over Europe. I believe the Euro is a good idea, but its implementation has had major faults (see Grauwe’s comments in Learning_greek comments above, e.g.) , which were not corrected until we were entirely at the hands of speculators which bet with CDS on the default of the EUro periphery. Now it seems a mess.

    Bill, by taking the view that the EU cannot work until it returns to the its own currencies you inadvertently help the CDS speculators, which are betting on a re-scheduling of Greek debt, as that would trigger CDS payments to them, allowing them to at least quadruple their money! The susms are enormous, and if CDS would be triggered, another AIG style bail-out would happen.

    Three points I want to pick up on.

    1) So first how badly is Greece affected by the recession there. The unemployment is as bad as stated, undoubtedly. But an interesting development in its GDP. In the first quarter it grew by 0.8%. Here a view why that is – mainly falling imports.

    2) Secondly – I never heard of MMT until a few weeks ago, but I think, if implemented, it would allow countries just to issue its own money for free. That is already happening within the EU!. Ireland’s Central Bank is allowing Irish banks (now all majority state owned) to draw down money from it. The Irish bank has to get adequate security. So it buys a bond from the Irish government. And the Irish Central Bank allows the Irish bank to surrender that bond in return for real money.

    Ah, you might say, it is not free money, the Irish State has to pay interest, say 3% to the Irish banks buying that bond. Yes – but the banks are state owned. One part of the state pays interest to the other part of the state. So in effect the money is free. The whole thing is called Emergency Liquidity Assistance.

    These are not trivial amounts which Ireland generates through that mechanism. Apparently it is over 50 bn Euro (36 bn USD), about 1/3 of its total government debt. So a third of its government debt Ireland does not pay interest on. And it does not need to borrow from the EU fund, which wants to charge 6% interest.

    3) Greece in the next 2 years needs about 100 bn Euro of new money to pay off bonds which expire and take up new money. The market interest rate for Greek debt is around 15%. So the plan so far is for the Greeks to fund themselves through additional money from the EU/IMF, doubling their loan facility there.

    As an alternative Greek could do what the Irish have done.

    Or they create their own money, lets call it the taxos. Taxos, because it sounds vaguely Greek, and because it can be used to pay Greek taxes. (“Taxos” copyright is held by a bunch of Germans, who first thought of the idea some years ago – somebody pointed me to it on a German website.)

    Taxos would be issued additionally to Euros by the Greek government. So you would have two currencies in Greece. Greece would issue these with the explicit aim to collect them in in ten years. The exchange rate would be 1:1 to the Euro. They would be legal tender only in Greece. 100 billion would be issued, 30% of Greeks entire state debt. Public salaries would be partly paid in Taxos, and bills paid by municipalities and governments would be paid in Taxos. Euros would be used to pay back the expiring bonds, in the mean time.

    (The little Island of Guernsey between England and France did something similar almost 100 years ago when they issued an additional currency to British Pounds, which they were short off to build a market hall and a road system – the currency was withdrawn by the Guernsey municipality after these projects were financed. As People from Guernsey could pay their taxes with the local currency, it was accepted everywhere and destroyed after the taxes were paid.)

    The same would happen in Greece. Greeks could pay their taxes in Taxos. They would be accepted as Greek tax payments until 2020. And by 2020 at the latest every Taxos would be destroyed. Greeks could not withdraw the money to put it into Swiss bank accounts, as it is only money acceptable in Greece. But it could be used in Greece everywhere, as an additional currency. Probably driving out the Euro from the payment system, as Euros would be horded. Bad money drives out good.

    So, there is no need have a seperate currency to apply MMT concepts to the Euro situation. Of course no shenanigans like the Irish with Central bank operations. Greece pays its civil servants and public employees and public works bills with Taxos, and they would come into the payment system just like that. It could work, I think, with a bit of imagination. What do you think, Bill?

  21. stone, budget is a p&l statement of the government and the budget result is the bottom line of this p&l statement. The private sector result is the mirror of the budget’s and the budget deficit is the profit of the private sector. When the government makes it hard or even impossible (i.e. budget surplus) for the private sector to make money then the private enterprise can start suffocating. On the opposite, when the budget makes it super easy for the private sector to make money then inflation can result depending on the velocity of this profit. MMT is also super clear on ex-ante / ex-post differences. JG is an ex-post correction of all ex-ante decisions which are and have to be taken … ex-ante. And one of those ex-ante decisions can be the amount of profit that government agrees to give to the private sector. Under this view neoliberalism simply denies any external profit to the private sector and the private sector then has to fight teeth and nails. The winner is clear and losers are many. Naturally, the losers are the weakest members of the society. Economic Darwinism, so to speak.

  22. Sergei “Under this view neoliberalism simply denies any external profit to the private sector and the private sector then has to fight teeth and nails. The winner is clear and losers are many. Naturally, the losers are the weakest members of the society. Economic Darwinism, so to speak.”

    -That was my understanding too. However I think it is very wrong to think that providing external profit to the private sector leads to it fighting in a less tooth and nail manner or being less ruthless in exploiting those it can and leaving others by the wayside. When you describe the private sector as suffocating in the absence of deficits – I’d attribute that to being down to concentration of wealth leading to not enough people being able to afford the goods and services supplied. If taxes were to constantly redistribute wealth so that profits constantly got recycled to potential customers, then there would never be any need for deficits??? Imagine a situation where everyone was equally able to afford anything- that would totally blow away any aggregate demand shortfall issues. In such a scenario I find it extremely hard to envisage a lack of oppertunities for private companies to find more customers than they would know what to do with.
    Your Dawinism analogy is apt but remember what Darwin meant by “evolution of the fittest” was that those that fit in along with all the others are those that prevail. In a rain forest all the lifeforms are in competition but it is a stable deadlock. In the long term every organism has an average of exactly one surving descendant. There is absolutely no accomodation for exponential population growth.

  23. If you put this

    “matt_us is very busy commenting on many German blogs related to economics I occasionally visit.”

    and this

    “He [Paul De Grauwe] states the blooming obvious. Even neo-liberals know that 2+2=4”

    together, in response to my quoting this 1998 detailed prophecy, there is little doubt in my mind that matt_us sacrifices quality over quantity.

    I also note that no one has acknowledged my quote of P.Krugman’s prescient warnings about a housing bubble, which contradicts, it seems, Bill’s negative assertions about him.

  24. stone, sorry for the late response. In general and in theory yes, there should be no budget deficits. Budget deficits clearly indicate inefficiencies. The problem however is in the difference between ex ante and ex post. Budget decisions and decisions about the design of the budget have to be taken ex ante while the result of the budget is realized ex post. As long as we do not want to institute a fully planned economy where “ex post = ex ante” (and arguments against it are not obviously clear or super-strong) we have to allow for some slack in the system as private sector always and constantly re-adjusts itself to the changing private sector conditions. Budget deficit is supposed to ease the pain of this economic slack on the “loss” side of the private sector, i.e. for the unemployed.

    We can and surely should ask why profit makers do not spend their profits. And there can be plenty of reasons. Any reasons that go along the lines of “and I do not intend to spend it never-ever” are clear indications of a) mis-pricing of products (monopoly?), b) anti-social behaviour (purchasing power grab). Any such behaviour shall be dis-incentivized by the fiscal system. Historically, inflation used to be the tool. However with central banks targeting inflation and over-“developed” financial markets inflation no longer serves this role. In this sense the no-bonds proposal advocated by MMT looks like a solid step in the right direction though not without its clear disadvantages.

    And I do not want to go into the population growth argument 🙂 Though it does not mean that I disagree.

  25. Sergie “We can and surely should ask why profit makers do not spend their profits. And there can be plenty of reasons. Any reasons that go along the lines of “and I do not intend to spend it never-ever” are clear indications of a) mis-pricing of products (monopoly?), b) anti-social behaviour (purchasing power grab).”

    -I thought that the purchasing power grab was the essence of what capitalism is. Assets and their associated cash flows accrue to those who hold the best performing assets. That might result in things being well managed BUT it is vital that people with the best performing assets grab assets from those who have managed assets less well rather than asset holders in general grabbing from those without assets. Current deficit spending acts to -as you put it- make it easy to make money. In other words it creates a situation where rather than asset holders tussling amongst each other for ownership, they instead en mass creme off resources from those without assets. Ideally assets need to be managed by those who can manage them best but the profits need to get out to potential customers so as to keep the whole thing going. Our current system seems to act totally counter to both sides of that equation.

  26. stone, I am afraid that is the standard “stocks vs flows” argument. Employment is a flow of GDP (product) which has to be purchased and while being purchased it creates employment. There are no assets in this equation. It does not mean that assets or their distribution are not important but it is a separate discussion.

    I think we put different meanings into the “purchasing power grab” which I would define as excessive *financial* savings. When the budget deficit replaces private savings in the flow of GDP, the private spending power does not disappear but is accumulated or, as I said, grabbed. And this happens due to economic inefficiencies of the fiscal policy. The fact that it is accumulated may lead to all types of negative consequences including real asset price inflation. But it also may not if, for instance, budget deficits will result in substantially more assets in the future.

    On the other hand, when the domestic private sector has savings of 2x GDP like it does in Japan, I would consider it as a serious inflation risk. As low as 5% rotating out of this volume can easily create pressure in the Japanese economy which can snow-ball onto the global scale. Fear is contagious.

    However, it is quite clear that the purchasing power of 2x GDP does not result in the asset grab in Japan. Or they do not have capitalism? 🙂

  27. I have still haven’t seen someone acknowledge his/her mistake of a) portraying Paul De Grauwe a neo-liberal and b) take up the challenge of citing a prophecy that would outsmart his. Silence, in this case, is not an attitude that speaks well of one’s fortitude and thirst for truth. I haven’t given hope, though, and let me cite another not too old article (2010) of his:

    Take government budget deficits, which now exceed 10 per cent of gross domestic product in countries such as the US and the UK. One camp of macroeconomists claims that, if not quickly reversed, such deficits will lead to rising interest rates and a crowding out of private investment. Wrong, says the other camp. There is no danger of inflation. These large deficits are necessary to avoid deflation. A clampdown on deficits would intensify the deflationary forces in the economy and would lead to a new and more intense recession.

    Or take monetary policy. One camp warns that the build-up of massive amounts of liquidity is the surest road to hyperinflation and advises central banks to prepare an “exit strategy”. Nonsense, the other camp retorts. The build-up of liquidity just reflects the fact that banks are hoarding funds to improve their balance sheets. They sit on this pile of cash but do not use it to increase credit. Once the economy picks up, central banks can withdraw the liquidity as fast as they injected it. The risk of inflation is zero.

    Does it matter that economists disagree so much? It does. Take the issue of government deficits. [If] you believe the first one, you will fear future inflation and you will sell long-term government bonds. You will have made a reality of the fears of the first camp. But if you believe the story told by the second camp, you will happily buy long-term government bonds, allowing the government to spend without a surge in rates [As in Japan for the past 20 years], thereby contributing to a recovery that the second camp predicts will follow from high budget deficits.

    The existence of wildly different models takes away this intellectual anchor and this translates into more market volatility.
    This conflict matters not only for market participants, but also for policymakers. According to the first camp, the Ricardians, the multiplier is closer to zero than to one, ie 1 per cent extra spending generates much less than 1 per cent of extra GDP, producing little extra tax revenue. Thus budget deficits surge and become unsustainable.

    By contrast, the second camp, the Keynesians, predict that the same 1 per cent of extra government spending multiplies into significantly more than 1 per cent of extra GDP each year until the end of 2012. This is the stuff of dreams for governments, because such multiplier effects are likely to generate additional tax income so that budget deficits decline.
    *Personally I think the Keynesians are right *, but my opinion is irrelevant. The point is that the cacophony of analysis helps to explain why policymakers react in different ways to the same crisis and why it is so difficult for them to come up with co-ordinated action.

  28. Sergei: In general and in theory yes, there should be no budget deficits. No. Assuming the absence of sustained deflation, sustained balanced budgets are only realistic in the not too realistic case of a completely static economy. No population growth, no technological progress/economic growth. MMT applies to all monetary economies. Some things are clearer in the case of a command economy, with the state as the only firm, employer and bank. E.g. if there is a growing population, and everyone decides to save one dollaruble for a rainy day, there need to be new dollarubles for the new people – by definition, deficit spending.

    Since deficit spending is the only ultimate source of money, “No deficit spending” amounts to “no money”, and a return to useless, moneyless, metallist/neoclassicist/commodity/barter theories.

  29. Some Guy, “no budget deficits” means that all income is spent. It has nothing to do with “useless, moneyless, metallist/neoclassicist/commodity/barter theories”. And it has nothing to do with prices, btw.

    But yes, it is only in “in theory”.

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