We are in trouble – squirrels are falling down holes

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1. Hi Bill

   You sure know a lot about squirrels for a guy from Australia! Sorry I can’t be part of your headcount next week.

   Thought I’d reprint what I circulated in a private email yesterday regarding the NYT article’s warnings that interest on the debt could rise to $700B.

   If nominal GDP grows from 14trillion now by 6% each year (the post war trend), total GDP in 2019=25.1T
   If debt service is 700B in 2019 as the article “warns,” then this is 700/25100 = 2.8% of GDP, which is less than during the Reagan years through the mid-1990s. And btw, if GDP grows 5%, then we’re at 3.1% debt service.

   Also, CBO estimates assume the Fed will put short-term rates up to nominal GDP growth, even a bit higher, which is driving this estimate of debt service. They will find that they won’t be able to sustain rates that high unless household debt falls significantly to avoid a large increase in their debt service [which likely requires more govt debt in order to reduce household debt].

   Haven’t looked to see if they are using the right measure of debt service (that is, whether part of the 700B is for the trust funds). But the 202B for current is correct . . . though again, it was 250B in 2007.

   Best,
   Scott

2. Great title! There are two questions I’ve been meaning to ask…

   “Income growth, in turn, is dependent on aggregate demand (spending) growth. If spending growth falters, then output and income growth falters and the capacity to save by the private sector is compromised.”

   First, do you know whether there is any lag in the statistics (either due to the way things are measured or due to possible real-life lag effects) between an increase in the non-government sector’s attempted savings rate and the resulting fall in income as reflected in GDP?

   For example, does the recent peak in the US personal savings rate of around 6% reflect the desired savings rate or simply what was achieved as a function of the size of the government deficit (and CAD)? I’d guess the latter more likely (fitting MMT theory) and that the fall in GDP was a function of the extra attempted savings, but wanted to check regarding measurement or economic lags.

   “So net public spending is required to “finance” the household saving and debt reduction process that is now on-going and essential for recovery. Modern monetary theory (MMT) uses the term “finance” in the sense that private (and hence national) saving is a function of aggregate income growth (GDP growth).”

   Second, to what extent have MMT folks measured or modeled the dynamic feedback *effects* of government financing of the debt reduction process? Specifically, I have in the past (when worrying about Irving Fisher-style debt deflation dynamics) assumed that the end of credit bubbles (e.g., in housing) would reveal them for the unsustainable foolishness that they were, leading to a change in psychology to pay down credit cards, loans, etc, and that any extra income given to debtors by government would simply be used to accelerate debt repayment rather than adding to their spending. (Though of course giving money to *unemployed* debtors would still support their core spending, which I know is crucial!)

   I do understand that a fall in discretionary spending (cutting back on non-necessities) as folks paid down debt faster could still be offset at an aggregate level by additional government-funding spending, so I’m not making a case against MMT prescriptions. But I am curious whether you look at network feedback style effects that result from government actions (e.g., in Japan)… i.e., in effect, might not the private sector escalate its savings target as a RESULT of the government sector accommodating the desire, and what are the impacts if so?

   Such escalation might not matter much in reality… but taken to an implausible extreme (but for the sake of illustration), the government might effectively pay off all private debt via transfers to debtors. I guess then you just have a lot of private debt (bank loans, bonds, etc) replaced with government liabilities (right?)… and you’ve eliminated many private debt service obligations. This may be inflationary but MMT says if so you raise taxes or reduce government spending… It’s potentially politically inflammatory for private balance sheets to change in this way, but the theory (as I work through it, and ignoring questions about practical limitations for now) seems solid and gives me increasing cause for optimism! (Still curious regarding MMT studies of dynamic feedback effect, though).

3. Bill – am wondering if there is a short sharp point form ‘frameworks’ or skeleton statement of MMT somewheres? I.e. no explanations or justifications, just sharp facts covering as many aspects of MMT as possible. Am currently trawling through the blogs creating my own, but why re-invent the wheel? Having no problem with the logic of the message so far, would like to start at the end and work my way back if possible? Like seeing the jigsaw puzzle whole first – for me! Thanks …

   jrbarch

4. JR Barch

   I was wondering if you had seen this simplified, stylised version of MMT https://billmitchell.org/blog/?p=1075

5. Thanks Sennex – I had read that blog: am wishing for a complete frameworks that extends to most aspects of the economy if possible? Somewhere between an index and a broad synopsis – even a bridge can be described in a few well chosen formulae – so am wishing for a list of short, sharp concepts that depict MMT. e.g. These are my first few entries for the concept of Government:

   Government Sector –

   1) A sovereign government spends first, so that the non-government sector can pay its taxes and net-save;
   2) It credits balance sheets with a stroke of the pen, and does not need to steal, beg, borrow, or work to do so;
   3) Its economic constraint is that it can only purchase what is available for sale – further constraints are ideological, environmental, or resource based;
   4) It spends by crediting balance sheets and taxes by debiting balance sheets – governments do not spend by ‘printing money’;
   5) Physical money is a separate system to the actual monetary system which is entirely balance sheet entries;
   6) Govt. creates money out of nowhere and destroys it through taxation or bond sales – sending it to nowhere!
   7) The idea that a sovereign government needs to ‘finance’ itself through speculation, borrowing or enterprise, is like a “fish in the ocean getting thirsty and begging for water from others” (Kabir) – it is completely nonsensical, systemically painful, mocks human ingenuity and is ultimately, comical! “Every time I hear that it makes me laugh” (Kabir).

   Idea is to build up the picture with very brief, sometimes personalised statements, easily digestible – that help me to understand.

   Cheers…

   jrbarch

6. Dear jrbarch

   I am very short of time at present but will catch up on all comments soon.

   best wishes
   bill

7. Nice job summing it up with humor, Bill. Here are a couple of political observations.

   First, while some of the shortcomings in current economic orthodoxy may be genuinely due to ignorance of stock-flow consistent macro models, there is also a strong incentive not to find out, and I find it hard to believe that others are not being disingenuous. I may be cynical, but it doesn’t seem possible that some people aren’t well aware of national accounting principles, for example, those directly involved in Treasury and Fed operations. The playing in the US is tilted so that income and wealth rise to the top, and the current economic universe of discourse supports this, especially in relation to its use in politics. The right has been working since FDR to rescind the New Deal and subsequent “big government” social spending programs. So whether in genuine ignorance or not, these fundamental errors are being used to tilt the playing field, and otherpolicy solutions are marginalized.

   Secondly, many Americans are brainwashed with the idea that the US “free market” economy defeated Communism, which is equated with socialism, and is largely responsible for American “exceptionalism.” There is also significant bias against the economic policies of European countries, especially Scandinavia. The people in charge know how to push these buttons to get ordinary folks to vote against their own interests.

   A corollary to this is the fact that there is a lot of bias in the US that is socially and racially based. “Socialism” and “redistribution” are code words for don’t tax me to keep “them” on the dole.

   As a result the cry against “spending” is always against social spending, except from the left, which is marginalized as unpatriotic. Military spending is sacrosanct, and the financial oligarchy has a key to the treasury. holding the country hostage when they get into trouble.

   Unfortunately, there are as yet no vocal proponents of MMT solutions with a soap box, let alone a bully pulpit, although Warren Mosler is courageously running for president. It’s a start, but, so far I haven’t seen a blip about it. I’ve been writing recently on a few progressive blogs, but have been pretty much dissed as ill-informed or unrealistic by progressive that have been brainwashed into mouthing neoliberal slogans, blithely unaware that they are stumbling into the trap set for them.

8. Tom: Which blogs? Maybe some BillyBloggers can help out.

9. I comment on Ian Welch, Open Left (Paul Rosenberg),and Washington’s Blog. ( I also use “tjfxh” as a monicker.) These are political blogs further to the left than most liberal (establishment) and other progressive (grassroots) blogs. The moderators are interested in the political import of economic issues and they are somewhat conversant in basic economics as it relates to policy. Paul Rosenberg basically agrees with the fundamentals of MMT, but I don’t think that he really gets it in terms of stock-flow consistent macro models. I had a go around with Ian Welch a few weeks ago on MMT, and he said he’d check it out and get back, but he hasn’t yet. Washington is sympathetic, but unfortunately he often seems to get stuck needlessly in orthodox memes that are counter-productive for progressives. While these blogs are not widely read, they are somewhat influential on the left. Washington’s blog is syndicated pretty widely though, e.g., on Seeking Alpha and Zero Hedge, so the comments could be read through these venues if readers are motivated to go to Washington’s blog.

   I also occasionally comment on Paul Krugman’s Conscience of a Liberal, Mark Thoma’s Economist’s View and Zero Hedge. There are one or two people who apparently know something about MMT and have been encouraging on Mark Thoma’s blog, but they generally don’t post on MMT. and ZH are widely read and influential. Whether many people read the comments is a question though. I have noticed that Krugman will occasionally do a follow-up blog that could have been influenced to something I brought up, but that’s hard to tell. Plus, he says a lot of stuff that indicates that he’s not yet a “convert.”

   This is an important “mission,” in my opinion, given the state of the nation and world, and where things seem to be heading a handbasket. I found out about MMT through a comment of Ramanan only a few months ago (where I can’t recall). When I first read his comment, I thought it sounded a bit far-fetched, but he provided references and I followed up. To say that I was astounded is to put it mildly. With MMT everything that you intuitively surmise is weird in mainstream economics suddenly falls into place. I was delighted to find a wealth of information online, but I may never have stumbled on it. For example, Bill’s Stock-flow consistent macro models sums it up, and Wray’s Understanding Modern Money gives the blow by blow, both in terms that virtually anyone should be able to understand.

   Kudos to Scott, JKH, winterspeak and others for schooling or at least trying to school dyed-in-the-wool Nick Rowe. And a big salute to Warren Mosler for intrepidly taking on the teabaggers, most of whom are Austrians and ill-disposed to anything but “sound money.” Keep up the good work. But admittedly, it’s a slog. Nick drove JKH to profanity in a recent thread. Yet, JKH gallantly stuck it out.

   Of course, RSS feeds are often the only thing that people read so a great number of folks never even see the comments. That’s a big reason to educate the bloggers themselves, so that the good news may eventually get moved up above the fold. The more people that get involved the better. There is only so much time, and lots of places to try to get a foot in the door where an understanding of MMT could do some good. More fingers on the keyboard are needed.

10. ‘”The tax revenue is accounted for but ‘doesn’t go anywhere’ in a physical sense.”

    We should perhaps clarify that something important (call it “money” or whatever) is in fact “going somewhere” when the government collects taxes and makes expenditures. In the U.S., the conservative iconography asserts that taxes are collected from the “productive” (i.e., wealthy) people and expended (“distributed”) to the “unproductive” (i.e., poor) people. Liberals like me assert that taxes are collected from anyone without a good tax lawyer and then expended on the military-industrial complex, drug companies and rich financiers. From either perspective, the real function of taxing/expending has nothing whatever to do with balancing the national accounts books or supporting aggregate demand or underwriting private saving. These are strictly economic concepts, much argued over within the field, and different economists’ interpretations are then exploited by politicians as supposed justifications for their actual use of taxing/spending to accomplish their specific socio-political agendas (whether conservative or liberal).

    Within the political process, deficits or surpluses are effects, not causes – they are the “leftovers” from the use of tax/expend to move money from one set of pockets to another. Deficits have predominated for the last 40 years in the U.S. simply because it buys you more favors and gets you more votes to expend than to tax, The cyclical attacks and counter-attacks over gov’t deficits and debts (the group out of power attacks the group in power over their “tax and spend” or “borrow and spend” behavior) are Machiavellian politics and nothing else. The media fools you correctly chastise don’t (or pretend they don’t) understand either the economics or the politics involved and they egg on the politicians to duke it out over deficits and debt because it (sometimes) makes good press. In my opinion, this is the reason MTM doesn’t get a place at the mainstream discussion table when we’re supposed to be analyzing, choosing and acting on real economic problems: You guys are actually serious about the intentional manipulation of taxation/expenditure to promote private saving and full employment while everybody else is playing Gimme the Money and Death Struggele for Power. Good Luck!

11. Actually, Michael, I don’t think that “productive” and “wealthy” are equated in the popular mindset, which is why the “tax and spend” meme works for well for conservatives. Most people in the US think that a portion of their taxes, however little they may pay, goes toward supporting “those people.” The loudest voices protesting this are being raised by ordinary people who are unwittingly opposing their own interests in thinking that cutting social programs will mean lower taxes for them.

    This is going to take some explaining, and that means stepping it down to a level that ordinary people can understand. The problem is that most people’s understanding of economics and accounting is limited to balancing their check books, if they even do that. Therefore, they think of the government as a big household. It’s an erroneous analogy that conservatives have no trouble exploiting to their advantage with slogans like “fiscal responsibility,” sound money,” “pay as you go,” and “tax and spend liberals.” Countering this with a simple, clear, and emotionally grabbing alternative is definitely a challenge. Warren Mosler is actually pretty good at rising to this challenge, and he seems to be motivated to go for it in campaigning for president. It will be interesting to see what he comes up with. He’s already come up with a few simple examples that just about anyone can relate to.

12. Tom Hickey: “…or at least trying to school dyed-in-the-wool Nick Rowe.”

    Nobody can be *just* “dyed-in-the-wool”. I have to be “dyed-in-the-wool *something*”. What’s that something? 😉

13. Hi Nick,

    What I meant was that people who see things (data) from a particular point of view often resist seeing the same data from a different perspective. For example, the Copernican/Newton way of viewing the astronomical data and the Ptolemaic are alternative viewpoints. The motion of the heavens can be seen (modeled) in both ways, but the former is preferred because it is a lot more elegant and has much more explanatory power. Cognitive science has shown that certain pathways open through use, while others potential one may not have been opened yet. This is the problem with an established narrative and its attendant norms and memes. It become s conceptual framework that tends to get equated with reality. The teether to reality is evidence, and debate brings out shortcomings of particular views as ways of structuring reality.

    While I admire your willingnes to listen to people like JKH, Scott Fulwiler, and Winterspeak, and often respond, I often get the impression that what you are doing in your head is trying to translate what they are saying in terms of MMT into neoclassical-speak, while what they are asking you to do is shift your stance and see what they are saying in terms of MMT. Given their reactions, they may be thinking this, too. To return to the astronomical analogy, sometimes it seems to me that you are trying to translate elliptical orbits into epicycles.

    However, I certainly don’t think that you are as dyed-in-the-wool orthodox as Mark Thoma apparently is, given his refusal even to consider the merits of MMT as put forward by a full professor of economics who is widely published, counsels to governments, and is well respected among his peers. This is comparable to a classical physicist refusing to consider quantum mechanics in 1900, or even entertain a model in which discontinuity of motion plays a fundamental role, since “everyone knows motion is continuous.”

    BTW, since Professor Thoma has refused to participate in a debate with Bill on neoclassical monetarism vs MMT, perhaps you would consent. After all, debate is of the essence of the shared process of inquiry that we call science. If we can’t get down to measurable evidence that makes a real difference, i.e., that can be checked, then all this is just more baseless ideology. The crucial importance of this isn’t just winning an argument, or even discovering some abstract truth. What we are talking about makes a policy difference that affects people’s lives.

    I’m here not as an economist, but as a concerned citizen interested in policy alternatives, and economic policy is foundational to national and global welfare. What many of us are seeking here is explanatory and predictive power that can be put to use policy-wise to address pressing challenges. Down here in the US, we don’t seem to be doing too good at this right now using Bernanke’s monetarism as a policy tool and putting unemployment on the back burner of fiscal policy.

    I do want to commend you on your willingness to engage on your blog, where I am learning a lot from everyone. Thanks for hosting the discussions and contributing to them.

    Best regards,
    tom

14. Hi Tom. I get what you are saying about different perspectives. And thanks for your thanks, and commendation.

    Getting into a debate with MMTers would be worthwhile, for both sides. And I have done it a bit. But the problem is this: there are just loads of other people I want to get into worthwhile debates with as well, to try to understand what they are saying. And I’ve only got one brain, and only so many hours in the day. There’s just so much intellectually engaging stuff out there, and I don’t have any chance of handling it all. I am already spreading myself far too thinly over too many areas. (As a career-move, my own policy has been unwise; even though I can’t stand the thought of doing what I ought do career-wise, which is to narrow down to one petty little specialty.) There are just so many different competing perspectives out there, all demanding our attention. MMT is just one.

    And I really sympathise with Mark Thoma. I am amazed he is able to get his head around as much stuff as he does. God only knows how he finds the time to sleep.

    By the way, I’m much more monetarist than Mark.

15. Thanks for getting back, Nick. I well know about falling into the speciality hole. It’s difficult to be a generalist in this information age and also stay on the cutting edge of one’s own speciality. My field is philosophy, which, properly conceived, studies the whole, so I have to be a generalist that considers the key fundamentals of just about everything relevant to life, while also pushing out the envelope in my specialty, which is the philosophy of spirituality (as distinct from religion).

    My interest in economics is in terms of political and social philosophy, which is another reason I am chiefly interested in economics as it relates to policy. My approach to philosophy is historical because I believe that human thought is dialectical. The dialectical moment in political economy at the moment is the conflict between neoliberal monetarism, which emphasizes monetary policy over fiscal policy, and what I would call “soft Keynesianism,” which finds a role for both, but emphasizes fiscal policy in a liquidity trap. Given my understanding of MMT, both fail to address the problem at its root, hence, do not resolve the real issue, which is permanently achieving full employment with price stability, a necessary condition for the general welfare. Therefore, I am interested in hearing from proponents of all sides on this issue, and the best way to get the cards on the table in my view is through open and informed debate which is based on evidence, instead of just pitting ideology against ideology, which only leads to disagreement over presuppositions and norms.

    I agree with you about Mark Thoma, by the way, which is why I was flabbergasted at this response to an invitation to debate. The classy what would have been to say, “Sorry, time does not permit.” But his response smacks of avoidance. I found that uncharacteristic.

16. Tim Hickey: Two good political points in your first post above. Plus carry on posting at Washington’s Blog: I nearly always agree with you.

17. Jrbarch: You’ll have problems finding a “short, sharp skeleton framework” explanation of MMT. Or at least for every “framework” you find, you’ll find a dozen economists disagreeing with some aspects of it.

    E.g. take me. I basically agree with Bill Mitchell, Warren Mosler and Tim Hickey about what needs to be done to get out of the recession. But I don’t agree with them that it is tax and tax alone that gives money its value. Plus I don’t agree with them on how money evolved from gold and silver coins to what we have today. I’ve set out my reasons here: http://chartal.blogspot.com

    And finally, how about you change your name to jsbach (Johann Sebastian Bach). It would sound very classy. I call myself jpsartre on one blog (Jean Paul Sartre, the philosopher).