I read an interesting report this morning, which resonated with some other work I had…
The epithets being used as put-downs for Modern Monetary Theory (MMT) are growing. But some of the good old terms – that one might actually apply to mainstream macroeconomics – are also in currency. An article in Project Syndicate (May 27, 2019) – Japan Then, China Now – declared MMT to be “the latest strain of voodoo economics” that is “alluring for the Trump administration”. The article by a Yale University lecturing staff member (and former investment banker) really just reminds us why students should avoid studying economics at that university. The voodoo, I am afraid is actually on the other foot! There are some fundamental errors in the logic in the article that highlight why MMT is a superior paradigm for understanding how the monetary system actually operates in comparison to the mainstream logic that the author uses against it.
A related article in the right-wing National Review (July 22, 2019) – New Budget Deal Puts Final Nail in the Tea-Party Coffin – covers a similar terrain from a different perspective.
The author is bemoaning the fact that Trump has wiped out the ‘tea-party’ by breaking with the “2011 Budget Control Act”, which was the centrepiece of small-minded conservative politics a few years ago.
The decade-long shredding of these hard-fought budget constraints mirrors the shredding of Republican credibility on fiscal responsibility.
Trump’s election and subsequent fiscal expansion “marked a replacement of the GOP’s free-market conservatism, exemplified by Ryan, with a more populist, big-government conservatism”, which has changed the narrative considerably.
The author cannot seem to get his head around all this and finishes with a cry of anguish: “With Republicans like these, who needs Democrats?”
Both articles (the National Review and the Project Syndicate) are rehearsing the growing angst that the deficit terrorists who were dominant in the 1990s up until recent years are now feeling as their anti-government, anti-fiscal policy message – their continued prophesies of doom – but most of all, their relevance – is evaporating before their very eyes – exposed by too many predictions of doom and disaster which have never been realised.
Exposed by too many, repeating lies – that have come home to roost!
Someone said to me in conversation the other day that the timeless Aesop Fable – The Boy Who Cried Wolf – should have told them when they were children to be cautious in making predictions.
I said that the Fable did not apply in this situation because at least the little lying shepherd boy eventually did get it right even though he was ignored when he did.
In this case, the fiscal liars will never be correct.
And that is because they are just serving sectional interests and use their media clout to create smokescreens among a largely ignorant public to further those interests.
They also draught politicians who do not have the capacity to see through the smokescreens but who are ideologically aligned.
And they compromised a whole cohort of mainstream macroeconomists who would produce spurious analysis, dressed up as independent, scientific opinion, to justify the unjustifiable.
The angst these conservatives are now going through is mirrored by the obvious fact that mainstream macroeconomics is growing in irrelevance itself.
Which is why many of the ‘big’ names are attacking MMT so relentlessly. The MMT economists are delivering the alternative paradigm in macroeconomics. No other challenge to the mainstream has succeeded and the heterodox tradition just became lost in peripheral issues. MMT is front and central macroeconomics and the mainstream cannot deal with it.
And when a character like Trump comes along who doesn’t play by the script the world of these ‘free market’ liars is blown apart.
A similar scenario is now playing out in Britain with the rise of Boris Johnson to the top job – he is also not quite the round peg for the round-hole Tory vision and is causing all sorts of dissonance.
While I prefer neither of these monsters, the dissonance they are creating is creating new opportunities for the progressive side of politics, although the leadership vacuum on that side is debilitating.
In the US, however, the fabulous ‘Squad’ is creating havoc within the largely neoliberal Democratic Party and changing the dynamic considerably for the better.
And Trump is demonstrating by his fiscal actions that the main weapon the Republicans used to kill off any progressive policy dreams is now defunct. No one believes the deficit horror stories any more.
And just last week (July 19, 2019), the conservative shock-jock Rush Limbaugh told his radio audience, after a naive caller tried to run the usual fiscal conservative Republican line in an attack on Trump, that (Source):
Nobody is a fiscal conservative anymore … All this talk about concern for the deficit and the budget has been bogus for as long as it’s been around.
Bogus for as a long as it’s been around. In other words, deliberately used to deceive.
Later in his Tuesday show he said:
How many years have people tried to scare everybody about the deficit? The years, how many decades of politicians tried to scare us about deficit the national debt, the deficit, any number of things. And yet, here we’re still here and the great jaws of the deficit have not bitten off our heads and chewed them up and spit them out.”
And reflect back on the way Limbaugh used to talk about Obama’s fiscal intervention during the GFC. It was just a political ploy.
This sort of admission ranks up there with Alan Greenspan’s confession on August 7, 2011 when he told the NBC Meet the press program that:
The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
Apart from the spurious “print money” reference, this was a clear statement to debunk all the deficit terrorists, who are now running around like headless chooks because their lies have lost traction.
The Project Syndicate article though is trying hard to continue promoting these myths.
In essence, the article is saying that Trump’s attacks on China, like Reagan’s attacks on Japan before him, are missing the point – the real problem is:
America’s increasingly insidious macroeconomic imbalances.
And that imbalance is due to:
… a dramatic shortfall in US domestic saving spawned large current-account and trade deficits …
Throughout the article, the author uses the concept of ‘domestic saving’, which is taken from the Domestic Capital Account constructed by the US Bureau of Economic Analysis within their National Income and Product Accounts (NIPA) or National Accounts framework for short.
Under Net Saving, the BEA sums:
1. Personal saving
2. Undistributed corporate profits with IVA and CC Adjustments
3. Net government saving
If we drill down into the other accounts we find:
Personal saving is presented in the Personal Income and Outlay Account as:
Personal current taxes
Personal outlays (consumption, interest payments, transfer payments)
Undistributed corporate profits is presented in the Private Enterprise Income Account as:
Corporate profits with IVA and CC adjustment
Taxes on corporate income
Net government saving is presented in the Government Receipts and Expenditures Account as:
Total government current receipts
Current transfer payments
The problem here is that the ‘accounts’ do not embrace intrinsic function or capacity.
There are two ways of considering the Project Syndicate article’s argument.
1. Historical accuracy – and revisionism.
2. Monetary understanding.
One of the ways in which the conservatives operate is to revise history or leave out essential details when they pursue a particular argument.
This article is a classic example.
The author, Stephen S. Roach writes:
When Reagan took office in January 1981, the net domestic saving rate stood at 7.8% of national income, and the current account was basically balanced. Within two and a half years, courtesy of Reagan’s wildly popular tax cuts, the domestic saving rate had plunged to 3.7%, and the current account and the merchandise trade balances swung into perpetual deficit. In this important respect, America’s so-called trade problem was very much of its own making.
Which, of course, is luring readers into constructing those facts as a causal chain suggesting that rising deficits undermine private saving and cause the current account deficit to rise.
The major event that Roach excludes which ties together a very different narrative is that during the “two and a half years”, the US endured a major recession.
Why didn’t he mention that?
Answer: it would have been an inconvenient complication for his simplistic spiel.
The actual facts are as follows:
1. By the September-quarter 1982, the American economy had shrunk by 2.2 per cent, on the back of the major global recession.
2. By the December-quarter 1982, US exports had slumped by 13.3 per cent, while imports had fallen by 2.2 per cent, which meant that the global recession created a rising external deficit.
3. Federal government spending rose from 21.6 per cent of GDP in 1981 to 22.8 per cent in 1983.
4. Federal receipts fell from 19.1 per cent of GDP in 1981 to 17 per cent in 1983.
5. The Federal deficit rose from 2.5 per cent of GDP in 1981 to a peak of 5.9 per cent in 1983.
6. Net saving (as computed in the NIPA framework explained above) did fall from 7.8 per cent of GDP in the March-quarter 1981 to 3.8 per cent in the September-quarter 1983. Its trough in that recession was 3.6 per cent in the December-quarter 1982.
7. But the decline in Net Saving as a percent of GDP was almost all to do with the rising fiscal deficit at the Federal level.
8. The personal net saving ratio fell from 7.62 per cent of GDP in the March-quarter 1981 to 6.99 per cent in the September-quarter 1983, but had risen earlier in the period as the economy went into recession.
9. Conversely, as a result of the fall in tax revenue driven by the recession, in the most part, the NIPA measure of Federal net government saving went from 2.39 per cent of GDP in the March-quarter 1981 to 6.1 per cent in the September-quarter 1983.
10. The tax cuts Roach is referring to were delivered under the Economic Recovery Tax Act of 1981 – and were designed to provide a growth stimulus to an economy that was stagnating.
11. Without the stimulus, the increase in the deficit and the decline in GDP growth would probably have been larger. The NIPA measures of net saving would have fallen even more.
Putting together those facts, provides a very different picture to the story of fiscal profligacy that Roach is trying out on his readership.
His attempt is revisionism at its worst.
After telling his readers that MMT is “the latest strain of voodoo economics” which “is equally alluring for the Trump administration and a bipartisan consensus of China bashers in the US Congress”, thus implying that somehow MMT is a policy regime rather than what it actually is – a superior lens for understanding the linkages and operations of the monetary system, Roach writes:
The tough macroeconomic constraints facing a saving-short US economy are ignored for good reason: there is no US political constituency for reducing trade deficits by cutting budget deficits and thereby boosting domestic saving. America wants to have its cake and eat it, with a health-care system that swallows 18% of its GDP, defense spending that exceeds the combined sum of the world’s next seven largest military budgets, and tax cuts that have reduced federal government revenue to 16.5% of GDP, well below the 17.4% average of the past 50 years.
I noted above that the NIPA accounting structures did not provide any deep insight into the intrinsic function or capacity of the currency issuer relative to the currency users.
By lumping the sectors together under the Net Saving column, the NIPA framework blurs this crucial distinction.
Roach also doesn’t understand the significance of this point.
Saving is an act of foregoing current consumption in order to generate more consumption possibilities in the future by earning interest on the income not spend now.
That is the way a household, for example, can manage their consumption possibilities over time, and enhance future consumption.
The household has to do it this way – forego spending now, to increase spending opportunities later – because they face financial constraints on their spending.
As the currency user, the household (for example) has to generate income, sell an asset, run down prior savings, or borrow before it can spend.
That is the intrinsic financial constraint it faces and is the context in which the concept of saving has meaning.
So if the private component of domestic saving is rising, then current spending as a proportion of income is falling. This would have a number of implications including a decline in spending on imports and, other things equal, a reduction in the trade deficit (or an increase in the external surplus, depending).
But try applying that logic to the currency issuer.
There is no meaningful construction of the concept of saving for the national government.
Its spending capacity tomorrow is not enhanced by what it does today. It can spend whatever can be absorbed by the economy today (which relates to real resource availability) and do the same again tomorrow.
Running a fiscal surplus (which the NIPA accounts would record as a positive contribution to domestic saving) doesn’t enhance the future spending capacity of the US government.
It only destroys non-government wealth accumulations.
Further, running a fiscal deficit (which the NIPA accounts would record as a negative contribution to domestic saving) doesn’t undermine the future spending capacity of the US government.
Which means it makes no sense to quote NIPA ratios that conflate the currency issuer with the behaviour of the currency user.
The fact is that a rising fiscal deficit, recorded in the NIPA as a decline in domestic net saving, will allow the private domestic sector to save more because it stimulates income growth, upon which private saving is dependent.
The opposite is also true.
Attempts to follow Roach’s proposal – to cut fiscal deficits in the US – will undermine GDP growth, undermine national income growth, and undermine the capacity of the private domestic sector to save (as disposable income falls).
Since Trump came to the Presidency, the Federal deficit has risen from 3.37 per cent of GDP to 5.13 per cent as at the March-quarter 2019.
But over the same time, State and Local deficits have shrunk from 1.37 per cent of GDP to 1.06 per cent.
And the personal saving ratio has been relatively constant at 4.98 per cent.
I am not endorsing the fiscal mix that the US endures – as Roach indicates massive resources pumped into an inefficient, rent-seeking health system and a ridiculous sinkhole called the military – but that is not a reason to advocate cutting the fiscal contribution to growth.
As I will write on Thursday, there is a requirement for some very significant public investments in the US (and elsewhere) that will increase fiscal deficits beyond what is normally considered.
But that would be in the context of significantly lower spending elsewhere (military etc).
So I think the voodoo tag belongs to the sort of macroeconomics that Stephen Roach pumps out. A narrative that even Rush Limbaugh as told us is just bogus.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.