When you’ve got friends like this … Part 1

… who needs enemies. I am forming the view that many so-called progressive economic think tanks and media outlets in the US are in fact nothing of the sort. Tonight’s blog is Part 1 in a series I will write but the series really started in November 2009 when I wrote about The enemies from within. Today I read two position pieces from self-proclaimed progressive writers which could have easily been written by any neo-liberal commentator. True, the rhetoric was guarded and there was talk about needing to worry about getting growth started again – but the message was clear – the US has dangerously high deficits and unsustainable debt levels and an exit plan is urgently required to take the fiscal position of the government bank into balance. Very sad.

The American Prospect describes itself as:

At the dawn of a new progressive era and a time of economic transformation for the United States and the world, The American Prospect will strengthen the capacity of activists, engaged citizens, and public officials to pursue new policies and new possibilities for social justice. The Prospect was founded in 1990 … as an authoritative magazine of liberal ideas, committed to a just society, an enriched democracy, and effective liberal politics … The magazine’s founding purpose was to demonstrate that progressive ideas could animate a majority politics; to restore to intellectual and political respectability the case for social investment; to energize civic democracy and give voice to the disenfranchised; and to counteract the growing influence of conservative media.

I hope your feeling optimistic after reading that – “progressive ideas” to “animate a majority politics”; “to energize civic democracy”; “give voice to the disenfranchised” and to “counteract the growing influence of conservative media”. That is heady stuff which should warm the cockles of any well-intentioned “progressive”.

My question: what the hell is a progressive these days if a major self-styled publication is advancing the case against budget deficits designed to improve employment outcomes?

For that is exactly what one of the lead articles in the current edition (January 6, 2010) is about. The story by Tim Fernholz entitled – Dems Versus the Deficit, carries the subtitle What’s the progressive approach to deficit reduction, anyway?

Fernholtz actually discusses another Op-Ed article, which was written by former Clinton hack John Podesta and Michael Ettlinger and was published on January 4, 2010 in the Financial Times under the title – A 10-year plan to close the budget deficit.

Podesta now runs the so-called Centre For American Progress and Ettlinger is second-in-command. George Soros is one of its benefactors.

Podesta is one of the power men in Democrat politics and lists his skills as “Federal budget and tax policy, government information, privacy, Patriot Act, civil liberties, security and terrorism, national intelligence issues, regulatory reform, telecommunications security and regulatory policy, environmental issues, technology, federal powers, the judiciary”.

Ettlinger lists his skills as “Taxes, economics, employment, cities and metropolitan policy, budget and fiscal policy, social security, state economic development”

This is what the CAP says about itself:

The Center for American Progress is a think tank dedicated to improving the lives of Americans through ideas and action. We combine bold policy ideas with a modern communications platform to help shape the national debate, expose the hollowness of conservative governing philosophy, and challenge the media to cover the issues that truly matter.

They have strange notions like “Restoring America’s global leadership to make America more secure and build a better world” which doesn’t resonate well does it, when one considers that global leadership for the Americans is usually backed with an invasion force and some solid armaments.

On their About us Page I counted the word “progressive” (or plural forms) 18 times and that doesn’t include the title graphic which also mentions how progressive they are. So ladies and gentlemen we better consider these characters as serious progressives. Not!

With that sort of background, one would be think the writers would go out of their way to mount a strong argument that sought to defray the central propositions of the deficit terrorists who parrot their nonsense on a daily basis at all levels of debate (politicians, business interests, media, academics etc).

You would be very wrong.

Fernholtz starts by noting that:

With the economy stumbling towards recovery — we’ll know more after this week’s unemployment numbers are released — deficit worriers and those with a political ax to grind are complaining about the budget shortfall and the accompanying national debt, and placing blame on President Barack Obama and the Democratic Congress.

Well we now know the US labour force numbers for December. They were bad, if not terrible. The US Bureau of Labor Statistics shows that in December 2009, a further 85,000 jobs were lost in the US taking the 2009 total to 4.164 million. In 2008 the economy lost in net terms 3.1 million jobs.

The BLs say that “Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs”. So underemployment will have risen and broad labour underutilisation (the BLS U6 measure) rose to 17.3 per cent.

Over the decade from 2000 to the end of 2009 the US economy only added net 378 thousand jobs which is virtually no jobs in an economy of this size.

The unemployment rate was 10 per cent in December 2009 and the only reason it didn’t rise sharply is because the participation rate fell as more people have given up looking for work (that is not there).

So the US is desperately in need of continued Federal budget support and will require this for many years to come.

Fernholtz continues:

… though, the American public’s priority continues to be job growth; they also remain confident Democrats are better equipped to handle jobs (and deficit reduction) than the Republicans.

So you see the sneaking agenda of “deficit reduction” is there. The same sort of claim is being aired elsewhere. The Australian Labor Government also claims they can manage a conservative budget stance in a more socially reasonable way than the Liberals (former government). But trying to find light between their two positions is difficult at the best of times.

But moreover since when has the progressive agenda consisted of worrying about deficit reduction as a policy aim? Placing a focus on some specific targetted deficit outcome will almost always lead a policy maker astray in a modern monetary economy. It is not a progressive position.

Fernholtz says that the Democratic Blue Dogs are joining forces with the Republicans to use the “budget deficits as an excuse to go after progressive improvements to social insurance and infrastructure of all kinds.”

The Blue Dog Coalition are conservative Democrats who have a primary aim to advance fiscal conservatism. They are also socially conservative although that plays out in more subtle ways than does their opposition to spending bills and their promotion of tax cuts.

The existence of this group always raises the question in my mind: Why does a so-called progressive party tolerate membership of conservatives who seek to undermine the progressive agenda? The answer is fairly obvious and relates to the topic of this post.

But then Fernholtz sets what he thinks is the smart “progressive sail”:

Progressives also need to worry that increasingly large debt interest payments, which reach hundreds of billions of dollars, could threaten their budget priorities.

At that point he introduces the second article noted above by Podesta and Ettlinger. So I will skip over to that article and back to see how the progressives are meant to interpret it courtesy of Fernholtz.

Podesta and Ettlinger open by saying that Barack Obama has played a “leading role” in “saving of an economy on the brink of a second Great Depression”. They refer to the “$787bn American Recovery and Reinvestment Act”, the “most aggressive stimulus package in history”.

They also hint that the recovery is now well underway but of-course wrongly anticipated the December employment figures, which show that there is now a very real danger of a double-dip as the lost incomes from unemployment erode saving and start dragging private spending even lower than it has been in 2009.

But for Podesta and Ettlinger the “worst appears to have passed” and the focus is shifting to “the federal budget’s red ink”, which many are using to undermine “reforms critical to rebuilding a strong economy – most recently the Senate’s healthcare bill”.

While they say that the current budget deficit of around 10 per cent of GDP is “necessary and appropriate” because “they accelerate recovery” and should not be suddenly cut as the conservatives are demanding – because “a sudden drop in economic demand driven by dramatic cuts in the fiscal stimulus would derail recovery and hinder job creation in a still fragile economy”, they then say:

The deadlier threat lies in the long-term debt outlook. The deficit is projected to drop in the next few years, but never below 4 per cent of GDP; in 2014, the shortfall is expected to be at least $700bn. After hitting a low in the middle of the decade, it will rise for the rest of the decade and beyond. The mere anticipation of such a large, sustained deficit poses risks to financial markets and the economy, and undermines US standing. Markets, and the world, will worry about buying our debt, question investments in the US, and act with caution in fear of higher interest rates. When those deficits come to fruition, public expenditure will be siphoned from necessary services and investment into the abyss of rising interest payments on a growing debt. The debt might also leave the US unable to borrow further in the case of another crisis.

In that paragraph you will see no reference to rising poverty (poorest children in the advanced world); rising inequality; urban decay and rising crime; rising drug and alcohol abuse; sluggish output and income growth; and … persistently high unemployment and underemployment which drives some of the earlier pathologies.

Addressing these issues is the core agenda for a progressive. Proving sustained solutions to these problems is what makes a nation great and improves its standing in the World.

Last time I checked the “abyss of rising interest payments” was in actual fact income streams for people who had voluntarily chosen to park some of their accumulated financial assets into public bonds. Why are those incomes an abyss – something bad? That is conservative talk.

A truly progressive position challenges the whole notion of a government, which issues its own currency under monopoly conditions in a fiat monetary system, borrowing in the first place. It is clear that the US federal government does not need to borrow a cent.

A progressive would want to bring that out into the public debate and push the logic of it.

But recognising that the debt arrangements have a long-standing in US government relations and will take a great effort to undermine, a progressive, who understood modern monetary theory (MMT) – that is, understands how the fiat monetary system actually operates – its opportunities and constraints – would also challenge all the conservative humbug which Podesta and Ettlinger are now, themselves, perpetuating.

What risks are there to financial markets of a federal deficit or the debt that (voluntarily) accompanies it? The financial markets get a risk-free annuity that they use to price other investment assets and pension funds use to balance risk in their portfolios.

When in the recent history have the financial markets refused to buy US government debt? Prior to 1971, the currency was convertible, and the federal government was constrained financially.

So it was even tougher on the government to manage a huge debt portfolio of the level it sustained after the Second World War. That level of debt did not destabilise financial markets nor did it stop the US government from running its broader socio-economic program (and from prosecuting a few unnecessary military invasions).

Further, the foreign debt holders (these amorphous “Markets, and the world”) who have been converting their trade positions against the US into holdings of US financial assets (including government debt) are well-placed to invest in the US with the US dollar assets they hold.

But moreover, if the deficits are actually driving strong growth and sustainable saving strategies by the US private sector, then its investment profile will be attractive. The alternative is a badly functioning economy being throttled by an artificial retrenchment of the deficit.

Finally, the question of what government can do with its spending (which includes interest service payments) really cannot be answered in isolation of the real position of the economy. It is true that if the US government reaches full employment – and it is a long way off that – then nominal spending growth will come up against the real constraint embodied in the real capacity of the economy to absorb it with production increases. Then something has to give or inflation becomes the issue.

At that point, the US government will have to decide what the public and private command over the real resources should be (that is a political decision). Interest payments on public debt then compete with other spending including private spending.

But the crucial point is that if the US achieves that sort of growth then the debt levels will be falling anyway and the interest payments will be also falling.

This raises the other progressive point – by running a low interest rate policy the government can reduce its interest payments anyway. This generalises into a discussion of the relative merits of fiscal and monetary policy. The conservatives (neo-liberals etc) are obsessed with monetary policy as the principle counter-stabilisation policy tool.

This obsession has led governments around the world to pursue austere fiscal positions which have undermined the capacity of their governments to advance living standards. Why didn’t these authors note that rather than blindly falling into line, lock-step, with the conservative mantra.

This also relates to their presumption that deficits raise interest rates! They do not. The central bank raises interest rates because it thinks they are effective tools to discipline inflation expectations. However, the evidence is very clear that inflation targetting countries have done no better on that front than non-inflation targetting nations.

Podesta and Ettlinger though continue on the conservative line:

The scale of the deficit problem, and the risks it confers to sustainable economic growth, warrants the creation of a long-term plan to solve it. This means devising a path back to a balanced budget. Given the time necessary for the economy to reach full strength, and the uncertainties regarding war costs and the impact of health reform, our goal should be a budget in balance by 2020.

This is nonsense. No truly progressive person who understood what this means would say this.

First, they don’t seem to realise that the federal budget outcome in a modern monetary economy is endogenous and determined, ultimately by the non-government saving desires. While the government can try to reduce its deficit by cutting net spending if this runs, for example, against the desires of the private domestic sector to increase their saving ratio (assuming, say a current account deficit) then the government’s aspirations will be thwarted.

The fiscal drag will combine with the spending withdrawal of the private domestic sector (and the leakage from net exports) and the economy will contract further pushing the deficit back up via the automatic stabilisers.

So trying to pretend that a goal like a balanced budget by 2020 is something that policy can attain directly is to perpetuate a conservative myth of the worst kind.

It is impossible for a government in a fiat monetary system to guarantee a budget deficit outcome if it is working against the behaviour of the non-government sector.

Further, what this statement is saying is that unless they have a plan to generate significant current account surpluses (which will not happen in the next decade in the US), then these so-called “progressives” want the private domestic sector in the US overall to be dis-saving and becoming increasingly indebted.

The average extent of this private domestic sector deficit position would mirror the average current account deficit at 2020 (if a budget balance was achieved).

So the so-called “progressives” want to return to the unsustainable growth path where the American private sector accumulates ever increasing levels of debt. That is total idiocy and reflects the fact that these characters, despite their alleged “skills” in budget analysis (see above) do not understand the way the monetary system and the aggregate relationships between the government and non-government sector work.

It gets worse though. Podesta and Ettlinger, warming to their task, say:

Such a distant goal will not be credible, however, unless today’s policymakers set intermediate targets. One should be to achieve primary fiscal balance – when government spending on current programmes equals revenues – by 2014. Overall there would still be a deficit, because we would still be paying interest on past debt, but it would be a huge step forward.

The primary fiscal balance they refer to the non-interest servicing component of the budget outcome. So it would be balanced when spending equals taxation receipts and so the deficit is just the interest payments on past debt.

They want to achieve this by 2014! Why 2014? Do they expect the US economy will be back to full employment by then and the private sector will have resumed strong spending growth so there will be a reduced need for net public spending? My reading of the data is that the US economy won’t be anywhere remotely near that position.

Further, the private sector has a lot of balance sheet repair to accomplish yet and that process will take years. Demand for credit by households is falling in recognition that they are pursuing this repair job. The last thing the government would want is to start squeezing the household sector for liquidity (by contracting net spending) as they try to save.

But Podesta and Ettlinger are blind to this. For them:

This target is simple, clear and easy to measure. Reaching primary balance would also mean US debt would cease to rise as a share of the economy – a critical milestone in returning to full health … In addition to hitting primary balance in 2014 and full balance by 2020, two other measures are critical to get us back on fiscal track: specifying year-by-year steps towards those goals; and formulating a scheme to help Congress discipline its budgeting process. The former is straightforward; the latter, less so. Congress should start by passing strict pay-as-you-go provisions, which existed before the Bush administration and Congress allowed them to expire in 2002. The second step is to give the pay-as-you-go process teeth. That will include ensuring tax levels and loopholes, as well as spending, are included in rules that automatically adjust the budget in the event of excess deficit levels.

That is about as far away from a progressive position as anyone could get. The imposition of fiscal rules is the archtype tool that the conservatives propose to straitjacket their national governments. Please read my blog – Fiscal rules going mad … – for more discussion on this point.

The concept of fiscal rules is in denial of the endogeneity of the public budget outcome. The government can specify year-by-year targets until the cows come home but will only be able to achieve them if by some coincidence those targets match the saving preferences of the non-government sector.

At present, if you read all the data coming out of the US at present, those saving preferences are strongly upward. There is also no foreseeable dynamic to reduce the net export drain. So trying to withdraw government net spending is tantamount to pushing the US economy further over the cliff.

And as I noted above will cause the budget deficit to increase anyway.

Further, what are “excess deficit levels”? This is nothing more than conservative talk and it has no meaning to someone who understands the way the monetary system operates.

The deficit level is whatever it is. The real question is what is the state of the labour market? Or, how strongly is the US economy growing and is that growth environmentally sustainable? Or, what regional policies are in place to ensure this growth is being geographically spread to generate jobs in all the places people live? Or, _ _ _ _ (fill in the missing blanks).

The only time the budget deficit could be considered excessive is if the economy was pushing past full employment and the private sector provided a mandate (at an election) to reduce the public command on resources and maintain the private demand. Then I would agree that in political terms the deficit should be cut to avoid inflation.

The US economy is so far from that situation that such debates have no relevance.

So then we turn to Fernholz, who as I noted is writing in the “progressive” American Prospect magazine. I was expecting, therefore, to see a full-frontal assault on the conservative ravings of Podesta and Ettlinger.

Along the lines say of – How dare these characters, who clearly don’t understand how our modern monetary economies operate, hold themselves out as progressives, but, instead, merely act as conservative mouthpieces of the worst kind. That sort of attack would have been appropriate given the self-styled charter of the magazine (see above).

Well, I was wrong! It got worse. I guess he thought that “progressives” don’t read the Financial Times and so he would do his bit to spread the conservative word but dress it up as if it was progressive..

Fernholz seeks to promote the Podesta and Ettlinger article to his readers as something that is compelling and worthy of their attention. He says:

Podesta and Ettlinger’s is an aggressive approach, and one the Obama administration is unlikely to embrace — to reach a primary balance in 2014 would require reducing the deficit by roughly 4 percent of GDP, which is larger than all current non-defense discretionary spending.

Fernholz then says that “(r)unning a relatively large deficit now is economic common sense as the public sector makes up for reduced private investment; we’ve seen the beneficial results in recent GDP growth and declining unemployment”.

What is he talking about? Sure enough unemployment fell by 77 thousand in December (15,340 thousand in November to 15,267 thousand in December) but the Labour Force also fell by 661 thousand in the same month as discouraged workers stopped looking for work (Source). So no joy there.

Further the BLS measure of U6 rose from 17.2 per cent in November to 17.3 per cent in December (Source). So no joy there.

It is not even clear that the situation is stabilised yet and the risk of a double-dip recession has been avoided. A progressive position would be to continually reminding the public of this massive real damage into the public debate and informing them of how the modern monetary system provides opportunities to the federal government to militate against the damage.

A progressive would not be trying to massage the “declining unemployment” driven by participation drops as being something positive.

With the decline in employment in December, if the labour force had not have declined, then unemployment would have rocketed up in that month. That is the fact. That should be the thing a progressive should be broadcasting into the wider debate.

Anyway, Fernholz, again trying to mollify the discussion a bit to make his position seem mature and responsible yet reasonable too, says:

The usual warning signs that come with dangerously large deficits — rising inflation and interest rates — have not appeared, affirming Democrats’ policy choices. Nonetheless, it’s also clear that our long-term fiscal path is unsustainable thanks to rising debt.

First, when has the US in modern times had a dangerously large deficit? The fact that there has been no inflation has nothing to do with the “Democrats’ policy choices” – that claim is just the voice of an apologist.

The lack of inflation reflects the massive output gap that exists in the US at present and in part has persisted for much longer than it should have exactly because the Democrats have made poor policy choices by not achieving the maximum employment bonus per dollar of net spending.

They have also pandered to the Wall Street bullies and handed over billions of public money to the characters who got the world into this mess in the first place.

Second, the fact interest rates haven’t risen is no mystery and nothing to do with the “Democrats’ policy choices”. There is some implicit notion that the “financial markets” set interest rates but haven’t yet exercised their option to push them up.

The reality is that the Federal Reserve sets the rate (exogenously) and has chosen to drop it and hold it at near zero levels because the economy is in such bad shape.

Third, what exactly – in accounting terms, economic terms, social terms, whatever terms that are acceptable reflections of the operations of the monetary system – is an unsustainable long-term fiscal path? That is just a piece of conservative jargon that has no content in and of itself.

If he means solvency risk then there is none.

If he means, interest spending will rise to levels that are unsustainable then please refer back to my earlier discussion. He is just mimicking Podesta and Ettlinger in this regard and doesn’t know why their position is what is unsustainable. Why doesn’t Fernholz relate this to the real aggregates and the projections of non-government saving?

The gap in understanding between what a budget deficit actually does and its dynamics and what is being expressed in these articles in almost infinite.

Then Fernholz decides its time for so-called “progressives” to lead the charge in reducing the deficit:

The left has traditionally been leery of deficit-reduction initiatives because they often target progressive programs designed to increase equality. At its most cynical, deficit reduction is simply an excuse to target the poor and under-resourced … But over the past year there has been a growing consensus among left-leaning policy experts that progressives need to be more aggressive in framing their approach to deficits and the national debt, which has resonated in liberal Washington. This was highlighted in September by a joint conference on the topic hosted by the Center for American Progress and the Center on Budget and Policy Priorities.

So these “progressive organisations” are doing the work for the conservatives. The only thing that could be driving this “growing consensus” is ignorance of how the monetary system operates.

The conservatives want to reduce the deficit because they hate government’s command on economic resources. Their ideology then predisposes them to argue in this way – other than when they have their hands out for billion-dollar payouts and salvage operations for failed companies they own or large military contracts to wreak havoc on disadvantaged citizens around the world.

Their problem is in not understanding the relationship between the national accounting balances, they cannot see that the budget outcome is endogenous – as I explain above. So they do not comprehend that the government will face a rising budget deficit if it tries to contract the fiscal position at a time when net exports are dragging local spending and the private domestic sector is trying to increase its saving ratio.

They also don’t understand what a balanced budget means – as I explain above.

But these so-called “progressives” who argue more or less the same way think they are being “responsible” rather than “ideological”. So their crime is pure ignorance. That is, they don’t have an ideological reason for arguing in this way.

Fernholz demonstrates this in the most inelegant manner by claiming that “most progressive economists, support balanced budgets when the economy is strong”. The correct statement is that progressives who think like this are misguided and progressive wannabes who think like this are just neo-liberals who think it is a nice career move to call themselves progressive – presumably to get somewhere in the Democrat political machine.

Fernholz finally leaves the worst for last by quoting Ettlinger:

“There’s no substantive reason to be running deficits during a period of economic growth unless there’s something, some unique spending requirement, like a war or some other crisis,” Ettlinger says. “If we’re in a period of strong economic growth in 2014, why should we be running a deficit?”

Really! Well I can think of several reasons Mr Ettlinger – all relating to an understanding of the way the monetary system operates; and all, specifically, relating to the desire of the non-government sector to save and the likelihood that your nation will continue to run current account deficits.

Strong economic growth with a current account deficit and a government in surplus can only occur – for a time – if the private sector runs increasing deficits which means … increasingly raising its debt levels.

That is not a progressive position. Ettlinger doesn’t have a clue.

That is enough for today!

Digression: Wages and employment in the 1930s

Prompted by questions from the “commentariat”, I have been investigating the issue of wages and employment in the US during the Great Depression. I may write about it tomorrow but I think the findings of this research will be of interest to most.

This Post Has 26 Comments

  1. “Digression: Wages and employment in the 1930s”

    I have veiwed data that purports to show that Australia recovered from the depression after the premiers plan was introduced. This plan slashed public spending if I read it correctly – yet the country recovered.

    This seems completely at odds with what MMT would say about that.

    Have I read selectively presented, misleading data?

  2. Let me add a voice to the peanut gallery, asking for your analysis of economic history.. in this case the stagflation of the 70’s. Neoliberal monetary policy has attained high prestige in the US largely for its effectiveness in slaying the dragon of inflation. It is very difficult to understand how that could have been done without imposing recession and unemployment. The job guarantee, while sounding very nice, has so many incentive and management difficulties (the reason why a private economy exists in the first place) that it would not be a plausible solution on the face of it.


  3. Hi Bill,

    I am a US “progressive” who has only recently discovered MMT and am still in the process of trying to wrap my mind around it. I’m slowly reading through the archives here and at the handful of other MMT blogs… After the financial crisis, I realized that I did not understand nearly as much as I should about economics, and have started to try and educate myself. My academic exposure to economics formerly was through the Mankiw textbook… Yep, another victim here.

    I am pretty sure that the major issue is not that US “progressives” are not progressive, but rather that essentially nobody has ever heard of the ideas associated with MMT. Even Krugman style New Keynesian Economics is not much a part of the discourse. Educated people who pay attention to the news have never heard of MMT, and the vast majority of people don’t even have any real understanding of the dominant neoclassical economic approach.

    Because nobody knows what is going on, “experts” rule the roost by default, and in the US, the experts are all trained in the neoclassical school.

    In particular, your “A simple business card economy” blog post is excellent. I think you should develop that analogy further, and periodically repost it. Like Krugman’s babysitting coop, I think that analogy can help popularize MMT and help people who have never heard of MMT to understand it.

  4. I saw that piece a couple days ago and wondered “what would Bill say about this?”.

    You are right. Its very hard to have people on your side fighting for the other side. In my trips around the blogosphere its clear that MMT is fighting an uphill battle. But its a fight worth fighting, so just keep on.

  5. Bravo, Bill. Great post.

    Here’s a question for another post that continues this. It would be helpful to have the MMT answer to this. I asked it at Warren Mosler and Scott Fulwiler’s blogs, too, In fact, there is some overlap here between conservatives and libertarians who are concerned with the intrusion of financiers into money creation (“end the Fed”), and liberals and progressives who want more direct funding of social programs. I’ve summarized it below as I understand it.


    All the money in the economy is either currency of issue (fiat money) or bank money (credit money that nets to zero). The problem with credit money is that pulls demand forward and creates an interest obligation. History shows (Steve Keen, Michael Hudson) that over time, increasing debt is financial poison.

    Some are suggesting that it is more desirable for the government to fund public goods directly, like education, health care, infrastructure, basic research, and a job guarantee, just as it now funds the DOD. Ellen Brown, author of Web of Debt, summarizes this briefly in“A Radical Plan for Funding a New Deal”. This approach would not only make more public goods and services available, but also reduce the need to compound debt in society, interest being a rent imposed by rent-seekers on workers as a hidden private “tax” on their future income.

    There are two objections as far as I can see. The first is that spending must be funded by taxing or borrowing, which is erroneous in a fiat system such as ours.

    The second objection is that this much spending would be inflationary. However, that seems to rest on the false assumption that simply increasing monetary aggregates increases inflation, when inflation only results when nominal AD exceeds real output capacity.

    All of the spending on public goods results in increased production of goods and services, some which are provided by the private sector, since the government would function mostly as a contractor hiring subcontractors. This would increase real output capacity, GDP, and national prosperity (by lowering the Gini coefficient). Automatic stabilizers could be used to stabilize NAD relative to real output capacity to maintain price stability by altering spending and taxation appropriately.


    Anything wrong with this picture that I am not seeing? Or is it just obsolete thinking that has us stuck where are are? If it is feasible, then it seem that liberals/progressives should be pushing for the whole enchilada.

    Professional economists are needed to provide the economic reasoning on which this proposal rests, countering the myths that progressive often buy into, underming their own position. Bill and other have done great work on the job guarantee. But how about a comprehensive progressive agenda based on MMT, simply stated in a brief article that is accessible to non-economists

    However, it won’t be an easy job to convince a lot of progressives who have been captured by the myths. Douglass C. North, who received a Noble in economics in 1993 for contributions in institutional economics, examines why in “Economics and Cognitive Science”. Cognitive scientist George Lakoff has also written about how progressives need to reapraise their aproach in light of cognitive science in such books as The Political Mind, and Don’t Think of an Elephant.

    What they point out is that the conscious mind is only the tip of the iceberg of brain functioning. There is a reason that myths are so persistent and hard to change. Memes function like genes, being structured in neural pathways through use, They underlie linguistic norms and rules that structure mental events and get expressed in social behavior as conventions, which become the basis for institutions that structure social life not only mentally and emotionally but also socially, politically and economically. So changing these ingrained patterns involves not only changing minds but also altering brains.

    That means that it is not merely a matter of educating people to “see the light.” An enormous amount of resistance and inertia needs to be overcome through constant exposure and proper framing, including not only logical argumentation but also rhetorical persuasion, in order to break down the myths embedded in the established narrative that have become ingrained. Conservative intuitively realize this and use it (talking points, keep on message) but most progressives haven’t gotten it yet. Progressive need a simple to understand, emotionally gripping message that will stick. The problem with a lot of progressive thinking is that it is just too wonky for wide appeal and the proponents don’t present it in a simple, compelling message that is repeated over and over until it becomes a meme. This is what it takes.

  6. I think Tim Hickey and Ellen Brown are working towards “full reserve banking” or 100% reserve banking. This is a system under which private banks are just not allowed to create money or credit. All money is central bank created. I am very sympathetic towards this. The following are or were advocates:

    1. Abraham Lincoln, who said “The government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”

    2. Milton Friedman.

    3. http://www.moneyreformparty.org.uk/ This is a very small political party in the UK.

    4. Claude Hillinger at: http://www.economics-ejournal.org/economics/discussionpapers/2010-1/view (p. 29)

    I don’t agree with Tim Hickey when he says “This approach would not only make more public goods and services available….” A properly run fractional reserve system should bring full employment and any ratio of private sector size to public sector size that the electorate chooses. Same goes for a properly run full reserve system.

    Also I don’t agree with Tim when he says “The second objection is that this much spending would be inflationary…”. In converting from fractional to full reserve one would have to gradually raise banks’ compulsory reserves: i.e. government created money would gradually replace private bank created money. If this was well organised, the result would not to be excessive inflation or deflation.

    The basic advantage full reserve banking (seems to me) is that it should be more stable: under fractional reserve the private bank system creates loads more money exactly when it shouldn’t (in a boom). Plus it extinguishes money exactly when it shouldn’t – in a recession.

  7. I believe the biggest hurdle faced by those of us who want to use the fiscal ability of the government to reduce poverty, increase employment, pay for social programs and greatly reduce environmental destruction is the prevelence of microeconomic, household logic. People relate things to their personal experience. The financial logic of running a household holds a powerful intuitive appeal since everyone must do it, no matter the income level. A household that spends more than it earns year after year, runs up large debts and carries an increasing interest payment burden will inevitably go bankrupt and lose everything. A household that is careful with its money, saving some of it, will have more to spend in the future and can leave an inheritance to its children.

    The call by conservative politicians for balanced budgets, budget surpluses, and the danger of leaving government debt to future generations rests on that. It has a very powerful and intuitive appeal to people of all political stripes. It appeals directly to small government conservatives but also sounds convincing to people favourable to government intervention but who only have the weak response that deficits are OK for now but must be corrected later.

    The fact that a government equipped with a sovereign free-floating currency is not so constrained is completely non-intuitive. The fact that saving money for the future is meaningless and counter-productive for such a government is non-intuitive. The fact that increasing interest payments on bonds are simply government income for people and not a menacing burden is non- intuitive. The fact the central bank could allow the banking system to accumulate huge quantities of money as excess reserves instead of issuing bonds and not create inflation is non-intuitive.

    In my opinion the “progressives” who have succumbed to household logic are not necessarily dishonest or closet conservatives. They may well be genuine well meaning “progressives” who are confused by the power of household logic. ( I have no idea if this applies to the people referred to in this blog – very unlikely in the case of a former Clinton hack).

    Anyway, that’s the challenge. Somehow we have to figure out how to overcome household logic in an intuitively appealing way.

  8. Tom . . . I would argue that some of those ideas (state banking, etc.) may have merit (I’m not an expert on whether they are or not), but it’s not as if establishing such institutions helps the government finance its spending . . . it already spends first, taxing and issuing bonds later, or the Fed lends to pvt sector the reserve balances to do these. (that’s the US case, anyway.)

    The problem with 100% reserve banking is that it’s untenable in practice if the goal is to get rid of credit money. Sure, you can stop banks from creating credit and just turn them into savings institutions that do nothing more than hold Tsy’s and settle payments (and that could very well be desirable . . . that’s certainly a position held by a number of people). But then you’ve just moved the endogeneity of credit money to the non-banks, as credit is fundamental to a capitalist economy (as in trade credit, or credit at the department store, or whatever) you’ll never get rid of the fact that there will be some institutions extending credit without first having “money” short of doing away with capitalism. The question is, those institutions issuing credit . . . will they receive overdrafts for settling their payments? If yes, then you haven’t changed much of anything aside from making a strong separation b/n savings institutions and credit creating institutions. If not, then you’ve set yourself up for an inevitable payments system crisis that could bring a good part of the financial system down.

  9. Scott, thanks for your elucidation. Actually, I was not particularly interested in 100% reserve banking though. I cited the Brown article because the options she mentions are flying around the blogosphere now. I am more interested in the MMT possibility of directly funding a spectrum of programs (Brown’s option 3). I posted a response to Ralph clarifying this, but it seems to be have gotten lost in cyberspace so I’m resubmitting it hereunder. Hopefully it makes it to the land of Oz this time.

    Ralph, did not cite Ellen Brown’s article because I am interested in 100% reserve banking. I cited her because her short piece nicely summarizes positions that are floating around the blogosphere on both left and right. Ellen is neither an economist nor person involved in finance, but rather a lawyer who understands issues and arguments and a writer of popular books, mostly in the health field, that knows how to present a complex subject simply and persuasively. In the short piece to which I linked, her option 3 is closest to MMT, but no details are given. I would be interested in hearing what MMT says about options 1 and 2, however, since a lot of people, left and right, are talking about this. I haven’t read her Web of Debt yet, so I don’t know if she has any understanding of MMT. Web of Debt getting to be influential because she is pushing it, so I’ll probably have to get to it sometime. Several friends have already asked what I think of it. BTW, Steve Keen has gone big time in the US since being picked up by Mish Sheldrake, a well-known financial analyst and blogger, who is an Austrian economically and a libertarian politically.

    There are also several other influential things circulating underground, so to speak, that are related to this and have a lot of people, left and right, abuzz. One is the video Money Masters and the other is Chris Martenson’s site and blogChris Martenson’s site and blog. This is where much of the popular “action” is right now, and it’s getting some traction politically. I think that many of the libertarian “teabag” crowd are on to this, and this is part of those that MMT’er <a href="Warren Mosler is already addressing as a presidential candidate. Several of his talks at tea parties are available at his site and on YouTube.

    So this discussion of MMT is not happening in a vacuum. Quite a few people aren’t drinking the kool-aid anymore and are seeking some real answers. There’s an opportunity to present MMT to them as the most comprehensive, coherent, and viable option for reorganizing the system by balancing and harmonizing individual opportunity (right) and public purpose (left).

    Keith: “I believe the biggest hurdle faced by those of us who want to use the fiscal ability of the government to reduce poverty, increase employment, pay for social programs and greatly reduce environmental destruction is the prevelence of microeconomic, household logic.”

    Absolutely. The government-finance-is-the-same-as-household-finance analogy, now a cultural meme, is one of the most powerful myths of the established narrative, and it is undermining discourse. It is so deeply ingrained that when many people hear of MMT, they laugh at it as totally silly, without even considering that it might be true. Even progressives.

    Why? Because it contradicts a norm of established universe of discourse. It is much more difficult challenging and changing these rule than overcoming ignorance about a subject. A corollary is “All debt is bad.” However, this conveniently only applies to household and government debt. Anyone of any financial sophistication is well aware that traders and large corporations regularly use leverage to amplify profits.

    The basic error that people make is that they think that the economy generates financial assets (it only generates real assets), and that these financial assets are then drawn out of people’s pockets upon to fund taxation and borrowing. That’s why the “small government, low taxes” is such a powerful conservative meme, and why “fiscal responsibility” is something to which liberals and progressives feel that they are forced into echoing if they want to win elections.

    Without changing the memes of the established narrative it is going to be hard to advocate for progressive programs without prepaying them – which we know sunk health care from the get-go. Moreover, single-payer was dismissed out of hand as incompatible with the established narrative, which the Administration just didn’t want to take on. A a result the Democrats talked more about making the bill deficit-neutral than anything relating to health care, and the progressive caucus got rolled. There will now, it seems, be no public program other than subsidies to pay for private insurance.

  10. Feeding the debt-is-bad meme, Reinhart and Rogoff report preliminarily in Growth in a Time of Debt that debt above 90% of GDP reduces growth:

    “First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private) -which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.”

    All the more reason to make borrowing unnecessary by paying interest on reserves.

  11. Hi Tom

    some of us were discussing the 90% threshold privately and I replied “just like the US after WWII with it’s 125% debt ratio . . . it was all down hill after that!”

  12. Scott,

    “the problem with 100 per cent reserve banking …”

    That’s the first time I’ve noticed this specific structural issue being addressed.

    I’d always assumed that the (“theoretical”) answer was that overdrafts wouldn’t be permissible, since as you say allowing them would not accomplish anything – it effectively contradicts the purpose of 100 per cent reserves on demand money.

    Therefore I’ve assumed credit granting institutions would have to issue liabilities first in order to warehouse demand deposits (that are 100 per cent reserved by the deposit issuing bank), before extending new credit.

    The MMT principle of “loans create deposits” would no longer apply I think. Instead, a “pre-funding” principle would apply to credit granting institutions. This in turn is equivalent to a compound 100 per cent reserve requirement at the point of credit creation. The credit granting institution must hold 100 per cent “liquidity” reserves instantaneously in the form of demand money, and the bank with the demand deposit liability must hold 100 per cent reserves permanently according to reserve specifications for demand money.

    For this reason, it seems to me that such a “pre-funding” principle or liquidity constraint is analogous very roughly to a sort of fixed rate monetary constraint for the non government credit sector, viewed in isolation from the usual context of the government fiat money characteristic.

    Such a liquidity constraint would provide 100 per cent insurance against the type of payment systems crisis you note, but only with respect to the aspect of risk around new credit issuance.

    It would still be possible to have crises generated by credit risk per se (over the lifetime of the credit exposure) and capital adequacy issues, relating to the quality of credit per se (as opposed to liquidity risk around new credit creation.)

    Just a thought – I’ve not considered this one fully – but your explanation is the first I’ve seen otherwise. I wonder if Bill has written on this specific point, or perhaps you have elsewhere. It’s an interesting one.

  13. Warren Mosler addresses the issue of overcoming poisonous memes of the established narrative in his book draft, 7 Deadly Innocent Frauds. Warren has a knack for making the complicated simple and engaging. Hopefully, his book will catch on when it is published and begin to shift the universe of discourse onto the solid ground of reality instead of mythology.

    Warren’s presentation is interesting also from the point of view of the interface between economics and politics. MMT simply describes how the monetary system operates. This understanding can be the basis for different political positions regarding the distribution of public and private allocation. Conservatives prefer to limit the amount of money (net financial assets) that the government creates to make more room for private (individual) choice through markets. Progressives would prefer to see a greater proportion go to funding matters of public purpose instead. Warren takes a more conservative position than, say, Bill does, or I would like to see. But the same economic principles apply regardless. However, the different options available are a matter of policy debate rather than differences over economic theory. With this model, liberals/progressives would be on a sound economic footing instead of grappling with erroneous myths like “fiscal responsibility.” Then at least liberals and progressives, radicals, libertarians and conservatives could argue on the merits instead of jousting with windmills to the glee of those who like things just the way they are.

  14. While we’re waiting for Bill, if he’s interested . . .

    Some MMT’ers prefer 100% reserves (Minsky, Kregel), but they realize completely that this is simply to do away with deposit insurance and create pure savings institutions, while the endogenous nature of credit money remains for another set of FIs. I have no theoretical quarrel with that, though I don’t know that it’s necessary (Wray’s on this side of the argument, BTW).

  15. Hi JKH/Scott,

    Bill did mention no reserve requirements: Comment #4 in Operational design arising from modern monetary theory

    … no reserve requirements other than a non-negative balance (over some period of accounting).

    I find 100% RR unachievable in practice. There is no worry about the endogeneity of money and in fact it should be such for good capitalism. Regulation should be done by other methods instead of using reserve requirements. I like the Operational design post a lot. I would also do away with other measures such as capitalistic requirements which according to me try to artificially play around (unsuccessfully) with the horizontal nature of money.

  16. Tim wants comments by MMT sympathetic people on Ellen’s proposals. My comment, for what it’s worth, is that I agree with Scott’s 10.06 post above. I.e. as Scott righly says in reference to the “state banks” which Ellen wants to set up ” it’s not as if establishing such institutions helps the government finance its spending”.

    However, I don’t agree with Scott’s criticisms of 100% reserve banking. Scott claims that stopping existing banks creating credit will just tempt non bank institutions into credit creation. Obviously non bank institutions will always be involved in extending credit to each other in the sense that a car parts maker allows a car manufacturer a month or two to pay for the parts. But that does not make the car parts maker a bank, which creates money.

    However the car parts maker does become a “money creator” as soon as the debt is passed from hand to hand, in exchange for other goods or services. But I do not see why there would be a big temptation to do this as long as the state supplies the private sector with enough state created money to bring full employment. Put another way, where firms are working at about capacity, they will not want more money to lubricate yet more activity.

    An analogous point applies to those “local currencies” that individual towns sometimes set up. There was a thread on this subject on Warren’s blog. We ended up agreeing that these currencies only work given high unemployment. That is, given full employment (i.e. an adequate supply of state money) the state’s currency drives local currencies out of business because the former is more efficient.

  17. Dear JKH, Scott, and Ramanan

    I will respond about banking and reserve requirements tomorrow. Suffice to say I don’t support 100 per cent reserves on demand money.

    best wishes

  18. Dear Ralph

    You’ve misunderstood my point. While I did say that endogenous creation of credit was inherent to capitalism, I didn’t say that trade credit was a bank liability, obviously (and I don’t like to use the term “money” . . . it’s always someone’s liability, so better to just say whose).

    My point is that non bank FINANCIAL institutions that would now be responsible for financing the bulk of economic activity would either (a) still endogenously create credit and issue liabilities as a result if they were provided overdrafts either by the CB or somewhere else in the financial system, or (b) if they are not provided overdrafts, then what you have is the crises generated by credit risk and so forth that JKH alluded to would eventually be accompanied by liquidity crises as there’s no institution providing for an “elastic currency.” (As an aside, I generally don’t agree that it’s actually possible to completely forbid the non-bank financial institutions from creating credit endogenously . . . even if it’s possible, the profit driven drive to innovate would win out, as there’s massive incentive (profits, return on equity) to find a way to get around such limits. And again, in that case, without an “elastic currency,” you’ve eventually got a liquidity crisis.) Further, if the “state supplies enough state created money to lubricate economic activity” it still doesn’t necessarily stop a liquidity crisis, unless of course you supply that money as overdrafts to financial institutions at risk of a liquidity crisis, in which case again you haven’t really changed anything.


  19. In a Newsweek article, Robert Rubin reiterates the liberal deficit dove position about deficit spending for public purpose, reinforcing the meme with the public. Seems to state pretty well the administration position being crafted by Summers:

    “First, there must be sound fiscal and monetary policies. The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family…. The conventional concern here is that private investment will be crowded out, which would result in a reduction of productivity, competitiveness, and growth. In addition, the very early 1990s showed that unsound fiscal conditions can have a symbolic effect that broadly undermines business and consumer confidence. But finally, and far more dangerously, our bond and currency markets could react with severe distress to fears about imbalances in the supply and demand for capital in the years ahead or about the possibilities of inflation.

    “Second, public investments and other policy measures must deal with areas that are absolutely critical to growth and widespread income participation that markets will not adequately address, such as education, health-care coverage and cost constraint, a sound energy regime, basic research, infrastructure, fair labor markets, equipping the poor to enter the economic mainstream, and much else.”

    Rubin also lists his proposals for fixing the system in the article.

  20. Just got to this on Monday after only getting three correct on Saturday.
    Haven’t seen today’s post yet.
    It’s really great that Tim brought up the question of full reserve banking.
    I am personally a supporter.
    As were the Chicago Plan supporters, the most progressive of the 30’s economist and as is Minsky, etc.
    And a reading of the Douglas, Fisher et al “A Program for Monetary Stability’ shows the many advantages of FR banking.
    I am trying to get my head around Scott’s comment about its obvious failures.
    Keep on keepin on.

  21. Regarding fractional reserve lending, it seems to me that any consideration of credit money needs to begin with Minsky’s financial instability hypothesis (now QED), Irving Fisher’s theory of debt deflation, and uncertainty affecting risk pricing (Keynes, Roubini, Soros’s reflexivity), none of which neoliberals took into account in their REH and EMH models that were used in setting policy. In addition, a lot of libertarians believe that if we just get rid of central banking and fractional reserve banking, everything will be hunky-dory, and they are loudest opposition voice right now. But a lot of the problem, even most of it, wasn’t a direct result of either the Fed’s monetary policy or commercial banks fractional reserve lending. It was unsustainable consumer debt ratios and the Ponzi finance built on it, inviting a crisis that would collapse NAD and affect the real economy. So credit money creation, risk pricing, regulatory oversight, as well as transparency and accountability, all come into play in preventing a repeat.

  22. Tom: I have read Warren’s 7 Innocent Deadly Frauds a few times, enjoyed the read and found the arguments revealing and convincing. Unfortunately I am not sure this would be a general reaction. A couple of weeks ago I gave it to a clever, well-educated, non-economist to read. To my chagrin she did not find it convincing at all. To reach a broader audience I think MMT arguments need to be written up by people versed in popular education, tested on people such as my friend, rewritten, tested again, then rewritten for a more general audience, tested again, etc. It needs time to be developed and worked through with multiple focus groups, incorporating the insights of George Lakoff (and no doubt others) regarding cognitive neuroscience as you suggest.

    With respect to US health care: the US has the most inefficient health care system in the developed world and the worst health outcomes on average. My guesstimate is that the inefficiencies amount to about one trillion dollars if you compare the its GDP share devoted to health to other developed countries. So there is a lot of money at stake and lots for lobbyists, lying politicians and TV ads, etc, to keep all those inefficiencies (private insurance companies needlessly duplicating work, excluding people for all kinds of reasons, over-treatment for many conditions,etc, etc). Of course it does keep people working, essentially digging holes and filling them again, but there must be other more worthwhile things they could all do. The only way to overcome the power of all that money would be to mobilise millions of people on the ground, something Obama clearly decided not to do. Too bad.

    By the way, I spent 5 minutes scrolling through the Reinhart and Rogoff article. I think it confuses cause and effect, compares countries and situations that are not comparable and makes the assumption that ”taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact” of which ”is likely to lower potential output”. In other words it’s nonsense. They should read Scott Fullwiler’s ”Interest Rates and Fiscal Sustainability”. (Sorry, I don’t have the link)

  23. Keith . . .you should have your friend type her response and send it to Warren. He’d respond for sure. It would also be useful to us to see the reaction.

    Thanks for the plug on the paper . . it’s a working paper at http://www.cfeps.org. I hung out a bit with Carmen at Warren’s place in the USVI a few years ago (Bill was there, too). Very nice woman . . . we didn’t talk economics hardly at all, though (her and I, I mean).

  24. Scott: OK I’ll ask her. I’ll tell her you asked! She is a very effective writer and adult educator. She’s also a tough critic so she’ll need assurance nobody will be offended.

  25. I can pretty much guarantee Warren wouldn’t be offended. I’ve never seen it, and there’s been a number of times where nobody wouldn’ve blamed him if he did. Just let her know that Warren’s going to send a reply . . . he always does . . . is she up for that?

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