Regular readers will know that I have spent quite a lot of time reading the…
Today I was reflecting on the role of students in social change. I was a student activist and took that role very seriously when I was a full-time student. I did have a sense of entitlement that it was our future and we had to rock the boat to make it work in the way we wanted. I probably proposed things without fully understanding them – that is the nature of being a student – enthusiasm gets ahead of judgement. But I also was lucky to have a few really great mentors in my earlier days who helped me. It is the role of the mentors and teachers to steer that youthful zeal to develop mature, knowledge-based assessments and informed action. I find my profession to be seriously defective in that sense because they indulge more in propaganda than they do in educating the students who want to learn economics. I do not think the average economics program to be of much educative value. But I understand the conservative nature of my profession and the reasons they behave in that way. What is more objectionable is when a self-styled progressive organisation engages in the same sort of exercise with students yet denies that they are doing it. The problem then is the beautiful enthusiasm of our youth becomes manipulated by their mentors and what should have been an educative process becomes a compromise ideological exercise serving the top-end-of-town. So today – continuing my truth theme – I am writing about processes and organisations that become ineluctably compromised.
A person is a student because they are learning. We are all students at some point in our lives and to be progressive requires us to remain life-long students in various ways.
Learning should mean that we embrace a wide literature – certainly go back to primary sources – and construct an understanding based upon the rules of knowledge that the education community accepts for the moment (but which are always contestable).
We would not consider a student to be well-educated or capable of informed viewpoint on a technical topic if they hadn’t been confronted with the range of approaches that any discipline will yield.
While my blog about macroeconomics is presented in as non-technical language as I can muster the reality is that the discipline is highly technical and there are concepts that are, for example, embedded in accounting frameworks that defy opinion. The reality presented by these frameworks is indisputable.
I acknowledge that we can debate the underlying concept of accounting. But that is another debate. We can also debate the concepts and their associations. For example, we know that the National Accounts present a highly partial view of human progress and discriminate along gender and other grounds (unpaid housework not being counted etc). But that is another debate.
Within the existing logic of the National Accounts there are some ineluctable certainties. For example, external deficits drain demand and hence growth; the private sector cannot sustain deficits (spending more than it earns) indefinitely, and non-government surpluses have to equal government deficits.
An understanding of how these “facts” and the relationships between sectors (external, private domestic and government) play out in spending and output determination is at the heart of macroeconomics.
But if the non-government sector is draining demand (via external deficits and/or private sector overall saving) then the level of economic activity will fall unless the drain is offset by government deficits. Spending creates income and it has to come from somewhere.
Then if you to juxtapose that knowledge with an understanding of the essential features of the fiat monetary system you quickly realise that no credible concept of fiscal sustainability can be defined with reference to public debt ratios or budget deficit to GDP ratios.
Please read my blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for more discussion on this point.
Modern Monetary Theory (MMT) tells us that when governments use fiat currencies within a flexible exchange rate system the monetary unit which is 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 other 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.
Accordingly, national government spending is not revenue constrained. A private citizen or firm is constrained by the sources of available funds, including income from all sources, asset sales and borrowings from external parties.
But the national 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.
So the 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 ultimately the source of the funds the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances). This makes 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.
Linking this back to the National Accounting discussed above we know that it is a matter of fact that the government deficit (surplus) is 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.
A student of fiat monetary systems would learn this material and eschew the way in which mainstream economics textbooks portray the world. The latter still use analytical frameworks which were applicable (to some extent only) to the fixed-exchange rate systems that were largely abandoned by the advanced world in the early 1970s.
Applying understandings about how convertible currency/fixed exchange rate monetary systems operate to modern fiat currency systems is invalid. It will always lead one to spurious conclusions and sidetrack the focus from the important issues which I outline below.
The way we understand the monetary system does not have to dictate the policy leanings one adopts. But it certainly constrains us in the way we seek to justify or defend our policy prescriptions which often reflect our underlying ideological perspectives or values.
For example, I might consider business profit margins to be the primary objective of policy and desire to “reward” entrepreneurship (as I define it) with a policy framework that empowers business firms over say workers and their union organisations. That would be a value judgement. I might then adopt the view that entrenched unemployment is a way of undermining union strength and tipping the balance away from workers in the bargaining process.
I would be misguided into think this is best for growth or in fact the long-term profit interests of firms. But ideologies can be in denial of the facts.
So an understanding of MMT with that political/ideological persuasion would support a campaign of fiscal austerity with fiscal initiatives that defended profits (expanding corporate welfare). I would know that this would damage economic growth and cause unemployment but it would be consistent with my “view” that unemployment was good for firms in their quest to rule over unions.
It would be dishonest of me to represent the call for fiscal austerity as a way of solving unsustainable fiscal trajectories or that a fiscal contraction expansion was forthcoming. MMT exposes those lies but doesn’t preclude one from advocating fiscal austerity for other political/ideological aims.
So students should be careful of what they say before they have a full and rich understanding of the area they are seeking to comment on. I do not think it is paternalistic to say that students should learn before they talk.
I support student activism but I also know how many student radicals in my day quickly became corporate executives pursuing the capitalist goals once graduation day passed. I also know how misguided students can be when they do not fully comprehend the complexity of a situation.
A whole bunch of eager students keen to be involved in their society and enthusiastic about the issues of the day is a good thing. But being a student is about learning and becoming educated. So care has to be exercised to temper the eagerness and innocence with a humility that accepts that one doesn’t know much at first.
Which brings me to the Budget for a Millennial America – which was produced university students in the US sponsored and organised by the so-called progressive US-based Roosevelt Institute under the guise of the Roosevelt Institute Campus Network.
Apparently students got together to develop the Budget for a Millennial America which they claim is:
… a rigorous plan that makes the essential investments in education, health care, infrastructure and green energy needed to ensure a robust 21st century economy, while reducing the federal debt to a sustainable level. The plan reflects the views of a cross-section of some three thousand Millennials. It was created democratically through the Campus Network’s unique model of student engagement with members and nonmembers alike. The budget addresses the root causes, not just the symptoms, of the federal debt …
If you see their launch site the first graph header depicts how much lower the federal public debt ratio will be under their plan. That is a highly revealing emphasis and it permeates the whole approach taken in the document.
They say that the budget plan “reflects the Millennial Generation’s priorities” without explaining where those priorities came from or the means they prioritise. Priorities have to reflect available means. If the conception of the available means is distorted or pure fiction then the priorities will be without application.
They do not discuss real resource conflicts nor acknowledge that these conflicts are likely to be small with such entrenched unemployment. Their analysis is pitched in terms of “unsustainable public debt” and problematic deficits. The latter are not related in any coherent way to the former.
My assessment as an educator is that this is not a rigorous plan because it is based on ignorance. And I would say – deliberately controlled ignorance.
You can get 3,000 or 4,000 or as many bushy-tailed students full of zeal together that you like. They can work hard and express their exuberance by producing a document aimed at indicating how the youth of America feel about public issues. But the results will be worthless if they are not based on an understanding of the subject matter. Exuberance is not knowledge. It is religious fervour if it is not backed by an educated understanding of the subject at hand.
So a “Budget for a Millennial America” has to be based on a proper understanding of how the fiat monetary system operates and the choices it gives the national government. It has to be based on a starting point that there is no fiscal problem as noted above.
The problem is that it assumes as its starting point that:
America has come to a crossroads … The role of government and public spending is now hotly contested, and our generation is faced with hard fiscal choices … Any solution to our fiscal trouble must not only resolve the gap between spending and revenue, but also address the underlying causes.
Where did that starting point come from? What knowledge was that based on?
I examined the reference list in the Report which as an examiner is normally the first task I undertake. I have examined many doctoral and lesser theses in my career.
An examiner has to be convinced that the student has covered the main literature in the area under consideration. As a proponent of MMT I do not confine that set (“main literature”) to MMT writing. There are many seminal and related mainstream articles and material that has to be considered and worked through by a serious student.
Not only is a historical understanding necessary of how the debates have evolved but also analytical capacities have to be developed as part of the learning process. A lot of radically-inclined students have approached me over the years seeking advice. There is a paucity of non-mainstream academics in economics and so I have always felt obliged to provide support. I always recommend, contrary to what these students expect, that they should become very skilled in the technical side of mainstream economics.
I tell them to become mathematically competent and skilled at econometrics. The only way one can engage with the debate and debunk poor analysis and false presumptions is to be at least as good at “their paradigm” as they are.
In addition, I advise students to really learn the way the monetary system operates – to study central bank balance sheets – to understand banking operations – to explore in depth the way government budgets operate and to really treat the National Accounting system as important rather then something you cover in the first lecture and then forget.
The reference list (bibliography) of the “Budget for a Millennial America” is very revealing. I would fail a student who submitted this document to me for examination simply on the grounds that it fails to demonstrate an adequate understanding of the literature that is applicable to this area of macroeconomics. That assessment is quite apart from the flawed method and spurious conclusions that the students have produced.
So the defective starting assumptions of the “Budget for a Millennial America” which probably drives the narrowly defined literature that the students appear to have consulted raises the question about why a so-called “progressive” organisation (the Roosevelt Institute) is publishing this sort of neo-liberal-inspired literature and promoting it in the public debate.
We now know that the Roosevelt Institute Campus Network (that is, the Roosevelt Institute) is sponsored to a significant level by the Peter G. Peterson Foundation – the vanguard of deficit terrorism.
I first referred to this issue in last week’s blog – Americans are stupid but they are not alone. The question of private wealth funding summits and research etc came to a head in the US a few week’s ago with the decision by the Roosevelt Institute to accept $US200,000 from the Peter G. Peterson Foundation to prepare a document as part of the 2011 Fiscal Summit organised by the Peterson group.
The Roosevelt Institute claims claims to be “carrying forward the legacy and values” of the Roosevelts (FDR and wife) – a point I will reflect on later.
The Peter G. Peterson Foundation is bankrolling the public hysteria about US fiscal policy and public debt and providing ammunition for politicians and lobbyists to undermine the government’s capacity to maintain a stimulus to growth. The Foundation clearly uses its enormous pile of funds to perpetuate a campaign of mis-information and lies about the current policy parameters and to advocate policies which would damage the disadvantaged citizens and entrench unemployment.
Their agenda which is highlighted during these now annual Fiscal Summits is not something a truly progressive thinker would associate with. Their starting point – that the fiscal position in the US is unsustainable and fiscal austerity is required – is the anathema of a progressive position.
But moreover it is a denial of a true understanding of the monetary system that operates in the US. To be categorical – there is no short-term or long-term fiscal problem in the US.
That is not to say there are not very significant problems in the US at present and into the future. At the top of the short-term list (with long-term implications) is entrenched high unemployment, rising inequality and sluggish non-green growth.
This malaise is overlaid by longer term trends towards excessive indulgence in health care by the rich and inadequate access to the same for the poor. The urban landscape in some American cities also acts as breeding grounds for intergenerational disadvantage. Further, public infrastructure is decaying due to lack of investment (public transport systems, schools, etc).
These are the problems that progressives should be focusing on – not non-problems like the budget balance or the public debt ratio.
As noted above Roosevelt the Roosevelt Institute’s “Budget for a Millennial America” assumes without question that the policy focus must address the “fiscal problem” in the US and that net spending cuts should be “progressive”. This is the way the “progressives” get compromised – by advocating cuts which are supposedly more “humane” than the conservatives proposals.
The problem is that no net public spending cuts are warranted (nor humane) at present given the entrenched unemployment. The US requires fiscal expansion not austerity.
Yves Smith (Naked Capitalism) wrote an excellent exposition of this “progressive” sell-out – Bribes Work: How Peterson, the Enemy of Social Security, Bought the Roosevelt Name recently.
And so it is that the arch-enemy of Social Security, Pete Peterson, rented out the good name of Franklin Delano Roosevelt, the reputation of the Center for American Progress, and EPI. All three groups submitted budget proposals to close the deficit and had their teams share the stage with Republican con artist du jour Paul Ryan. The goal of Peterson’s conference was to legitimize the fiscal crisis narrative, and to make sure that “all sides” were represented.
The New Deal 2.0 lot at Roosevelt responded to the accusations soon after – Speaking Truth to Power. Their “defense” was pathetic. They accepted the money, got some students to workshop a paper about deficit reduction, and claimed it was in the cause of advancing liberal views.
They cannot get beyond the fact that the PGPF compromised them by giving them cash to write material supportive of his deficit terrorism. The matter has since moved to other blogs and sites as so-called progressives try to defend the indefensible – progressives taking money from Peterson.
There is a question whether the legacy of FDR should be progressive anyway. That is the topic for another day because it is very complex. But at the macroeconomic level, the public works expansion notwithstanding, FDR and the New Dealers were fiscal conservatives and favoured balanced budgets. My view (to be explained one day) is that New Dealers were firmly in the deficit dove camp and which I consider makes them part of the problem and faux progressives.
The reason they are part of the problem is that in advocating balanced budgets averaged over the business cycle they ignore the fact that the budget balance is in fact an endogenous outcome, which is largely determined by private spending decisions and the state of the external sector. Prescribing a rule (average balanced budget) may be in contradiction with these non-government spending decisions such that either the budget rule is impossible to achieve with full employment or the goal of full employment is sacrificed.
They are part of the problem because they advocated balanced budgets (over the cycle) as a result of some fear about public debt and deficits. That fear is a religious artifact and is not grounded in any reasonable knowledge of the monetary system.
We have seen over the last thirty years or more that it is the goal of full employment that is compromised. “Progressives” who argue that there is a fiscal problem at present are falling prey to that bias.
FDR hired fiscal conservatives as his Treasury secretary and advisers (for example Henry Morgenthau Jr. and Lewis Douglas). If you read the documents of the day you will see that the narratives were all couched in terms of “deficit burdens” and “budget cost impositions” rather than the progressive terms such as “full employment”, “community need”, “rights of citizens”, “public purpose”.
It was only the scale of the unemployment problem that forced FDR to introduce large-scale employment programs. I would argue that these initiatives were against his conservative right inclination but he was pragmatic enough to implement them.
The give-away is in the language he used to artificially segment the budget into his “balanced regular budget” and the “emergency budget”. That construct reflected his underlying bias towards fiscal conservatism.
Further, as a link to the present it was FDR who fought for the Social Security program to be “funded” by new taxes on workers rather than from “general revenue”. The elaborate accounting gymnastics that now provide scope for conservatives to claim that the Social Security Trust Fund is going broke – despite the fact that the US government can always pay social security pensions – may be traced back to the debates in the 1930s where FDR leaned to the conservative side.
In short, I don’t hold FDR’s Administration as being the beacon for progressives.
If you take that line, it shouldn’t come as a surprise that the Roosevelt Institute – which says it is “Carrying forward the legacy and values of Franklin and Eleanor Roosevelt” – would take money from the Peter G. Peterson Foundation to support the latter’s obsession that there are unsustainable fiscal problems. A reasonable assessment – despite all their posturing to the contrary is that the Roosevelt Institute is not a progressive organisation in the first place.
My question is this: What would have the students come up with if they truly understood the nature of the monetary system they were discussing (implicitly) and understood that there is no long-term fiscal problem in the US?
What reforms would they recommend if they changed their primary goal from reducing the public debt ratio to creating full employment and equity?
The way it stands is that there Millennial Budget is highly compromised not only because they accepted a substantial sum from the Peter G. Peterson Foundation but more as a result of the fact that they engaged in poor scholarship as evidenced by the appallingly biased set of references that they cite.
The fact they adopted an unquestioning approach to the prior issue – that is, whether there is a fiscal problem or not – is testament to the biased nature of their work. They needed to first of all debate that issue and learn about the technical issues involved before developing a policy framework that expressed their ideals.
The Peter G. Peterson money notwithstanding, if they truly understood the monetary system and the options it presents to the US government as the monopoly issuer of the US currency, then I am sure the PGPF 2011 Fiscal Summit would not have welcomed their presence and I am sure they would have come up with a more employment rich and equitable plan.
Finally, it is way past the time that all MMT advocates should decamp from their associations with the Roosevelt Institute. The whole show is ineluctably compromised whichever way you think about it.
That is enough for today!
Update – Wednesday, June 15, 2011 – 21:06 AEST
As an update to today’s blog I received this E-mail from Marshall Auerback who has had an association with the Roosevelt Institute for some time now and who is listed in the Millennial Budget document in the Special Thanks section implying he gave some mentoring to the project or otherwise assisted it.
The Millennial Budget is available at:
– Peter G. Peterson Foundation
The documents are identical. It is also available in other locations if you search.
The following graphic is an excerpt from the credits of the official Roosevelt Institute document and shows the attribution given to Marshall Auerback and others:
Marshall is an MMT advocate and is prominent in the US media. I have had several exchanges with him in the last week or so about his association with the Roosevelt Institute and the Peter G. Peterson Foundation (by implication) along the lines of this blog – ineluctable compromises etc.
The E-mail was sent by Marshall to the following people:
Hilary Doe – Campus Network National Director – Produced the Millennial Budget Document
Zachary Kolodin – Project Director, Future Preparedness Index, Campus Network – Produced the Millennial Budget Document
And copied to:
Andrew Rich – President and CEO Roosevelt Institute, New York City
Nicholas Brown – Economic Policy Fellow at Roosevelt Institution – Produced the Millennial Budget Document
Brad Bosserman – Economic Policy Fellow at Roosevelt Institution – Produced the Millennial Budget Document
Reese Neader – Policy Director, Campus Network Produced the Millennial Budget Document
Mark Schmitt – Senior Fellow & Director of the Fellows Program, Washington DC
Lynn Parramore – Editor, New Deal 2.0, New York City
Marshall wanted me to make it public to demonstrate the way in which this organisation operates.
Dear Zachary and Hillary,
It has been drawn to my attention that I am listed as a “mentor” in the RI publication dealing with the millennial budget. As I’ve already indicated to you, I had NOTHING to do with the budget and opposed the prevailing paradigm that was apparent in the work, especially in regard to the notion that we have some sort of arbitrary “budget deficit constraint”. If you’ve read anything I’ve contributed to the Roosevelt Institute, you’d see that its contrary to everything I believe in economic theory and, in any case, as I’ve made persistently clear in my correspondence with you and others, I think it was a travesty of the Roosevelt name and legacy to have any association at all with that well known deficit terrorist, Pete Peterson and his odious institute.
I most certainly did not approve you using my name in that way and in fact am horrified by the underlying assumptions that went into Campus Network Budget document.
Please would you remove my name forthwith from the document as a mentor, as I want no association with the document, or anything remotely connected to the Peterson Institute.
The Roosevelt Institute clearly ignored his request. But then they are “progressive” and the future of America.
This Post Has 38 Comments
“Exuberance is not knowledge”.
Every self-respecting teaching institution seems to have its own, prestige-bestowing Latin epigram. I would humbly submit for the Roosevelt Institute
Exuberantia est non scientia
A thought-provoking piece. Thank you.
It occurs to me that, as economics as a subject, is so riddled with inaccuracy in its foundations, it is a very difficult subject to teach at any level. As you point out, most students have few reserves of life knowledge on which to call to allow them to discriminate between the sound and the unsound statements/’facts’. Its is the educators role and responsibility to show the way forward through any subject. As you have pointed out, in this many have failed for years as they have followed misleading mainstream views. It will only be the student with the deep thoughtful, questioning mind that starts to appreciate that all may not be as it seems with this subject. However, they know they need grades to get their degree and to then get a job; this is surely their main preoccupation at this point in their lives so they must ‘toe the line’ extolled by their tutor. Once indoctrinated in this way, many will follow the subject as taught at University. It is at this point, the start of their higher education course, that real change is needed.
Reading economics articles and books for the first time when I retired nearly 3 years ago, I was staggered at how wrong it all seemed; also how biassed towards the political views of the author. Text books from the library seemed at first to provide a stable underpinning, but even this in places made little sense. The internet is a source of much rubbish and I treated its output with great scepticism. MMT made sense because of its foundations in its use accounting equations. (I would certainly appreciate more blogs which expanded on this aspect even if they are more mathematical).
But back to the students who will use the internet; I suggest they need to have available an alternate view of macroeconomics; a “101 questions to ask your tutor about macroeconomics”, with rebuttals for the likely answers following a mainstream view that demonstrates where they are wrong. This blog, and others, fulfil part of that need. I suggest, however, that there would be real value in having a more organised website that that does provide a counterweight to the standard works used at undergraduate level. In effect, an online resource providing the MMT view and contrasting it with the mainstream view. Perhaps one exists, but I have yet to find it ………
Richard1, have you tried http://heteconomist.com/ a few posts on that deal with it.
Given the havoc caused by bad economic theories perhaps that epigram should be in Greek not Latin.
To all readers
I have updated today’s blog after receiving some additional material this evening.
The update is at the end of the main text.
Hmmm… $200,000. Pretty cheap, don’t you think? I mean, sure, FDR was no great progressive in his own right, and not even a particularly deep thinker, but come on. He symbolizes things that transcend him.
Two hundred grand is cab-fare money to the billionaire crowd. It’s like the monthly cost of maintaining one of their yachts.
Kudos to Marshall as well, for his categorical disavowal.
Thanks for the reference. I’ll follow it up
“What reforms would they recommend if they changed their primary goal from reducing the public debt ratio to creating full employment and equity?”
The public debt ratio is the accumulated financial assets of the private sector. Since those accumulate with the wealthy in proportion to how wealthy they are, the public debt ratio seems very relevant to equity. Unemployment is due to lack of aggregate demand due to the drain from the combination of taxes AND profits taken to build net saving. Inequity means that profits do not get distributed back to those with a propensity to spend but rather stay with those who have more than they can spend. That inequitable private wealth is employed to extract even more. Failure to use taxes to eliminate the accumulated financial assets that drive this downward spiral is championed by Bill as being “progressive”. I just don’t see how taxing Peter G Peterson and his ilk to the extent that the budget is balanced can be said not to cure the root cause of the problem.
Bill, Could you provide a short set of references, books say, that you think the students should have read before undertaking this task? One I am thinking of is Randall Wray’s Understanding Modern Money, not Keynes, Kalecki, or Minsky as these are relatively advanced, especially for someone with little mathematical background. Along with your own MMT Overview at http://mmtwiki.org/wiki/MMT_Overview. (The index page is http://mmtwiki.org/wiki/Main_Page.) I don’t think discrete blog entries not explicitly tied together will be of much help for most students just finding their way.
I agree that one has to understand the “enemy” in order to combat him. But one may not have to be an expert in the technicalities used by the enemy in order to be an effective critic. How far should one go is a bit of a grey area and depends on the circumstances. As an example, how much Calculus need one know in order to critique Pigou, somthing Pigou himself was exceptionally good at? As an aside re the use of the Calculus, there is the debate about the use of differential vs difference equations. I myself think it is inadequate to justify using the differential calculus on the grounds that the difference between them makes no difference without arguing why. Sometimes assuming continuity where the phenomenon is discrete will make no difference, but this can not be assumed a priori.
Can’t see Dean Baker being too pleased either.
This is all very sad as I don’t believe there is any solution how to beat these propaganda behemots running on budgets in billions of dollars. “My foundation is bigger than yours”. You have identified the predominant mechanism of intellectual corruption in the West I am afraid. It resembles me of the late communist era in Poland – actually it was way better then than it is now because there was much more intellectual dissent in the 1980-ties in the old Soviet Bloc then it is now in the West. We are trying to swim in the gumboots of the fiscal constraints and people wonder why we sink… Because the pulling force is stronger than the pushing force – pure accounting or pure physics.
The US has managed to beat the Soviet Union again.
Adam “I don’t believe there is any solution how to beat these propaganda behemots running on budgets in billions of dollars.”
-where do you think those billions of dollars came from? They are an artifact of the Regan and Bush tax cuts. They are an artifact of the deficits so beloved by MMTers. They are the “net savings” that supposedly need to be accommodated.
Stone, I don’t think MMT rules out distributional considerations such as a more progressive income-tax regime or even taxing wealth. The sectoral balances would remain (how can’t they?) because private-sector net saving would be reduced equally to net spending by government. The question would be the goal. I don’t think the point Bill is trying to make is that you must cut taxes on the wealthy/high-income earners so much as that you shouldn’t fail to spend what is needed to ensure the health of your society, based on a false notion of troublesome debt- or deficit-to-GDP ratios.
I must admit that I’m starting to get what your are trying to say more and more as I read your comments, Stone, and I think I largely agree with you. The differences you seem to have with Bill’s presentations of MMT may be matters of emphasis based on what he’s reacting to rather than true disagreement. How you spend and how you tax are sub-aggregate and distributional considerations that aren’t always presented but that do matter.
I strongly disagree! This is the same argument Greg Mankiw is making up in his recommendation of how to become a successful economist. Yes you can study Euler equations and then indulge yourself into a myriad of DSGE models. Better to waste your time with playing golf. This is in my opinion not the way to launch a promising attack on a ruling paradigm. I would follow Sun Tzu’s advice:
WHQ “I don’t think MMT rules out distributional considerations such as a more progressive income-tax regime or even taxing wealth. The sectoral balances would remain (how can’t they?) because private-sector net saving would be reduced equally to net spending by government. The question would be the goal.”
-To me the goal is to address the fundamental bug that derails capitalism after a few years with a minimal government or a few decades with deficit spending kicking the can down the road. When everyone owns a similar portion of the economy, then people can afford what they want, there are potential customers so as to make it worthwhile to invest and everyone prospers. The great thing about capitalism is that it concentrates resources with those who best cater to everyone’s demands. That over time is also capitalism’s undoing as soon enough a few people own everything, all profits go to them and they don’t have any customers who can afford what they could supply. I haven’t heard of anything that can solve that conundrum other than using tax to prevent the imbalances from accumulating. Government spending can support aggregate demand but if tax doesn’t prevent the wealthy becoming ever more wealthy , then the private sector becomes ever more disfunctional and in need of ever more government support/intervention. The real economy slips into becoming government run whilst the wealthy gain sufficient wealth to corrupt and take over the government too and bingo you get feudalism.
One more remark. I’m looking forward for Amazon to deliver the book Modern Political Economics by Yanis Varoufakis, Joseph Halevi and Nicholas J. Theocarakis which I hope is another nail in the coffin of this mathematical obsession of economists.
A short quote out of “The Lessons of History” by Will & Ariel Durant
“We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive recirculation.”
If the Durants are correct, than government policy regarding spending and taxing should take the above historical fact into consideration. Seems to me one of the important societal functions of taxes is to preclude the concentration of wealth. Progressive income taxes do this over the course of an individuals life. Estate taxes work as an obstacle to creating immensely powerful multi-generational family dynasties. Without all of his money who would care if Peterson was a little batty.
Bravo, Bill. This whole episode is a disgrace, and it was compounded with the attack on Yves for calling them on it.
You could fix that by making sure politicians cannot be affected by wealth – much in the same way that we try to make sure judges are not affected by wealth.
And the way you do that is to make the politicians even more wealthy than the so called wealthy elite.
In other words the state funds the political process and it funds it exceedingly well indeed. That is the only way to get the necessary balance. It also then attracts the best people to the process – rather than the current second rate wannabees.
Wealth only has any effect when you spend it. Prevent the spending having any effect and you neutralise it.
So that gives you two options: one is to prevent people getting wealthly in the first place and the second is to neutralise the power implications of wealth concentration. Which one you go for depends on the secondary effects – if you stop people getting wealthy will they also not bother creating companies and innovations that employ people and improve productivity?
Thank you for writing this. I really appreciate the work you put into it. I’m an ordinary US citizen and find your blog very educational.
If taxes aren’t required to fund government then why is taxation seen in punitive terms by people and why do tax collectors behave so aggressively, certainly in some jurisdictions you are guilty until proven innocent in issues related to tax.
Could this be a cultural hangover from the days in which taxes DID (fully or partially) fund government?
“As an aside re the use of the Calculus, there is the debate about the use of differential vs difference equations. I myself think it is inadequate to justify using the differential calculus on the grounds that the difference between them makes no difference without arguing why. Sometimes assuming continuity where the phenomenon is discrete will make no difference, but this can not be assumed a priori.”
Right. Steve Keen uses models in continuous time – something natural as he is a physicist by training – but complicates the issue IMO unnecessarily. The phenomenon at study are transactions involving money. A transaction is a pulse. Therefore discrete time models or difference equations are suited for modeling. I can distinguish 3 more advantages:
– They do not require the concept of derivative.
– There are natural periods in the phenomenon: day, month, year.
– Time delays can be incorporated as multiples of periods.
allow me to think out loud:
As you know taxation functions to create demand for government currency, with currency required to extinguish tax liabilities. Now, you ask, why does taxation need to burdensome? The answer is because the effort required to pay taxes adds to the value of the government’s currency. If the taxation liabilities were easy to pay and not burdensome, then there would be less reason for the private sector to want to obtain the currency in the first place. This is also means that the government is required to spend more and more in order to obtain resources from the private sector. The opposite applies too: if taxes were too burdensome, then you would get social and political unrest.
Regarding the second part of your question: The way I look at MMT is that MMT describes the laws (structure) in which the economic system operates (equivalent to physical laws). The interpretation of these laws at a subjective level (institutional level) may be entirely incorrect. For instance, it may be the belief that if we don’t pay homage to a particular god (the god of gravity), then gravity will fail and objects will float away. This interpretation of the law of gravity is entirely subjective, it has nothing to do with gravity, yet it conditions how people behave – “if I don’t pay homage, everything I own may float away”.
If the government is the monopoly issuer of its own currency, then it must be the sole issuer (this would be equivalent to the law or structure part above). It’s then nonsensical to talk about government bonds or taxes financing government spending. But at a subjective level that is what people believe, and their beliefs condition how they behave – “if the government doesn’t collect taxes soon it will run out of money!”.
Neil Wilson “So that gives you two options: one is to prevent people getting wealthly in the first place and the second is to neutralise the power implications of wealth concentration. Which one you go for depends on the secondary effects – if you stop people getting wealthy will they also not bother creating companies and innovations that employ people and improve productivity?”
– When thinking about all of this I think it is absolutely crucial to have some anchor concept of what we refer people’s wealth against. To my mind two sensible anchor points are multiples of the median wage and proportions of the value of total global assets. If you let people accumulate unlimited government financial assets but limit the amount of land, companies, commercial bonds, commodities etc they are allowed to own and prevent money being spent on political lobbying then true enough you have rendered the wealth harmless and prevented it from being employed to extract more. But that is just a more convoluted way to annul it by government fiat. I think we have to face up to the fact that capitalism is like a lawn that needs constant mowing in order to continue providing what is needed. I totally agree that the lure of potential world domination undoubtedly drives some capitalists to do great work. BUT it is so important to remember that it never was and never can be a genuine possibility that one person could own everything and extract profits from everyone else and yet have everyone else still able to afford to buy whatever the “global owner” sells. That is a bogus, self contradictory pot of gold at the end of the rainbow. All of capitalism is running towards that bogus pot of gold at the end of the rainbow. I don’t see why capitalism couldn’t just as well run against an asset tax set so as to maximize real prosperity. Status relative to others seems to be the underlying motivation behind much wealth seeking. If someones associates are all billionaires they will be upset with being a millionaire but they would be delighted to be the only person to have a million.
GeRoMi “We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution”
I think MMT really needs to confront that reality head on and frankly seems to me to be failing to do so. World War II was our previous rebooting of the system. I hope to goodness that we can find a much less dreadful way to deal with the same issue this time around.
“it is so important to remember that it never was and never can be a genuine possibility”
No, but are you sure that believing that you can isn’t the required motivator. You have to be careful about throwing the baby out with the bathwater.
You have to remember that philosophically life itself can be said to be completely pointless and we are all just organic pain collectors hurtling towards oblivion.
So really we’re all operating in a delusion that there is some point to all this. It’s all about picking the delusion that’s right for you. For some that is owning more wealth than Croesus.
“I think MMT really needs to confront that reality head on and frankly seems to me to be failing to do so.”
That’s not really MMT’s job. MMT just describes how a fiat/credit monetary system works and what options that gives you. It’s just one part of the system design. It’s doesn’t directly address how to improve investment productivity and real outcomes either.
I appreciate this is your hobby horse, and you are right to be concerned about it. But it doesn’t negate the insights of the MMT theorists. They just describe the world as it is and make a few mild suggestions about what that could enable. It’s not a complete theory of everything.
please do not blaspheme the god of gravity. I say my prayers and because I do my belongings stay earth bound. All hail the gravity god.
Neil Wilson, “I appreciate this is your hobby horse, and you are right to be concerned about it. But it doesn’t negate the insights of the MMT theorists. They just describe the world as it is and make a few mild suggestions about what that could enable. It’s not a complete theory of everything.”
I appreciate your help in guiding me through this as to me it is the crux of all of economics etc. It seems to me that the key conceits of MMT are that it tells the truth about how the monetary system operates and that by prescribing budget deficits it provides a stable plan for economic progression. Lets face it- very few people see those claims as being more than hubris. They also think “mainstream” neoliberal economics is just as bad. I guess most people just sense that the heart of it all is an empty deception. I’ve no idea whether my problem with it as I outlined above chimes with other peoples objections. I guess many people just sense it is bullshit but can’t be bothered to put their finger on why???
Neil Wilson, the tone of my previous comment was probably overly negative but I do see a dissonance between MMT saying it is all about being truthful and then saying that an illusion of increasing wealth is critical for herding us all into doing what those on high deem to be “good”.
…I do see a dissonance between MMT saying it is all about being truthful and then saying that an illusion of increasing wealth is critical for herding us all into doing what those on high deem to be “good”.
I just don’t see that. I’ve never seen bill or any other MMTist discuss “an illusion of increasing wealth” being desirable. You have to keep in mind that MMT; because of the way mainstream economists, having great sway over public policy across the globe, portray monetary systems incorrectly; focuses on debunking misrepresentations. If mainstream economists and the politicians who employ their work weren’t constantly using defits and debts as false excuses not to support their societies as they should, you wouldn’t see this focus on debt and deficits. And, as I wrote before, MMT does not preclude highly progressive income tax, wealth tax, estate tax or greater taxation of unearned income like capital gains and dividends. And bill, himself, actively advocates for spending, deficit or otherwise, to be targeted to provide the most good for the greatest number of people, not to promote the concentration of wealth in the hand of the few. As I also wrote before, I think you think you disagree more than you actually do.
WHQ, Bill doesn’t simply say that spending is needed. If he did, I would whole-heartedly agree with MMT. Instead deficits are said to be required- not just as a way to spend but as an end in themselves. Tax is said to create unemployment. Bill often says that accommodating net saving is desirable and necessary in order to avoid unemployment. That is very different to my mind from saying that tax needs to be targeted so as to prevent net saving so as to avoid unemployment. There is a strong MMT theme that government debt is private wealth and so an increase is to be welcomed. That was what I meant by “an illusion of increasing wealth”. Maybe I’m making a mountain out of a molehill but I don’t see MMT confronting the concentration of private sector assets into fewer and fewer hands. To me every other economic problem stems from that.
how do you tax “to prevent net saving so as to avoid unemployment”?
Taxes increase demand for the government currency and increase unemployment. Government then has to address it with spending.
I do agree that taxes are definitely need to be applied in such way as to reduce inequality. The purpose of taxes is to remove excess money so it makes perfect sense to me that they should be applied to those that have that “excess” money.
Bill often says that accommodating net saving is desirable and necessary in order to avoid unemployment.
Yes, but the net spending that accomodates the net saving can be targeted to be put in the hands of those who need it, not those who simply want to become extremely wealthy. If the wealthy (and large corporations and big banks) aren’t investing their money in ways that support full employment, the government can adjust net spending and target it to support full employment. It doesn’t simply get handed over to those few, with great financial resources, who have decided to pull their dollars out of the economy. Because the spending is needed in aggregate doesn’t mean that it needs to go into the hands of the wealthy or large corporations or big banks who are already sitting on their money. And aggregate net saving includes large numbers of middle class people putting money away (which may simply sit as reserves in banks unwilling to lend) and paying down debt. Again, just because bill or MMT generally doesn’t always address the sort of distributional aspects you are concerned with doesn’t mean that bill or MMTists aren’t also concerned about those things. They may simply be leaving those things aside to make a more specific aggregate-level argument or they may not see those things as part of MMT per se, rather they are policy preferences that work within the framework that MMT describes. It’s sort of like decrying the law of gravity because you think you’re too heavy. The law of gravity can’t help you lose weight, it can only tell you what you’ll weigh at a given mass, and it doesn’t tell you what your mass should be. That’s up to you to determine, given what you want to weigh.
Gary and WHQ, I think a big issue is that wealth can be deployed to extract more. Speculators can use commodity price volatility etc to in effect exert their own “tax” on the less wealthy. That creates unemployment just as surely as a government imposed tax. As you say goverment spending can be directed to where it is most beneficial. I’m just saying that it is also beneficial for the government to mop that money up afterwards by taxing it away once it has worked its way through the system and become concentrated at the top. Deficits means not mopping it up.
Speculators can use commodity price volatility etc to in effect exert their own “tax” on the less wealthy.
But, to do that, they would have to invest rather than save, which means, to the extent that that happens, government net spending moves from deficit toward surplus.
Deficits means not mopping it up.
No. There can still be taxation under deficit, and the taxation can be highly progressive and/or targeted at great wealth, while spending can be targeted to benefit workers.
WHQ- I think the economics definition of investment is different from the financial one. On wikipedia it says:
“In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. Examples include railroad or factory construction.”
Buying and selling various types of financial securities doesn’t count as investment in that sense. If a railroad company retains profits and uses them to upgrade the track, then that is investment. If it uses the profits for a share buyback that pushes up the price of the shares, then the increase in market capitalization of the company is an increase in saving not an increase in investment??? It is the later type of activity that has lead to such dramatic transfers of wealth to the very wealthiest. I’m just saying that taxation needs to be adequate and targeted so as to keep that type of activity at a steady state rather than ballooning as a positive feedback loop and swallowing up the real economy.
WHQ and Garry, the new deal2 web site has a good example of what I was trying to get at when I said that failing to tax enough can lead to the money not taxed away being deployed by the non-government sector to extract what in effect is a tax that causes loss of aggregate demand and unemployment;-
“Goldman says it will be involved with “ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities and other commodities infrastructure components, both within and outside the United States.” While the bank sees increased opportunity in “distressed assets” (ie. Cities and states gone broke because of the financial crisis), the bank also recognizes “reputational concerns with the manner in which these assets are being operated or held.”
The funds themselves are clear when communicating with investors about why they are good investments – a public asset is usually a monopoly. Says Quadrant Real Estate Advisors: “Most assets are monopolistic in nature and have limited competitors, creating the opportunity for stable, long-term investment returns. Investment choices include economic assets and social assets.” Quadrant notes that the market size is between $12-20 trillion, roughly the size of the American mortgage market. “Given the market and potential return opportunities, institutional investors should consider infrastructure a strategic investment allocation.”
Stone, I don’t know if you’re familiar with Michael Hudson, but check out these posts (and others):
Stone, I wrote a comment, with URLs/links, that is in moderation. In the meantime, google Michael Hudson and check out some of his stuff. He’s got a couple of recent posts regarding privatization of public assets that are pretty scary. “How Financial Oligarchy Replaces Democracy” and “EU Politics – Financialized Economies Privatized” are a couple I’ve recently read.