{"id":15055,"date":"2011-06-24T17:32:04","date_gmt":"2011-06-24T07:32:04","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=15055"},"modified":"2011-06-24T17:32:04","modified_gmt":"2011-06-24T07:32:04","slug":"ignorance-undermining-prosperity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=15055","title":{"rendered":"Ignorance undermining prosperity"},"content":{"rendered":"

\t\t\t\tI gave a talk about Modern Monetary Theory (MMT) today at a workshop on Stock-Flow consistent macroeconomics organised at the University of Newcastle by the economics group here. While I hold the research chair in Economics at this university I am not formally part of the economics group – my affiliation is with my research centre (CofFEE<\/a>) which stands outside the Department\/Faculty structure. So it was good to interact with the economics group. It is coincidental because the things I was talking about were being played out in the US and elsewhere (for example, Greece). The US conservatives are now pushing hard for a balanced budget amendment to the US Constitution. If they understood economics they would never consider doing that. If they succeed they will undermine US prosperity forever. It is a case of ignorance undermining prosperity which really describes a lot of what is going on at present in the public debates.
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\nThe news is that the US Republicans are once again demonstrating their lack of responsibility as political leaders. They walked out of budget discussions surrounding the negotiations about extending the debt ceiling and the House Majority Leader Eric Cantor (R-VA) today issued a statement<\/a> “regarding House consideration of a balanced budget amendment”.<\/p>\n

I will come back to that in the context of today’s talk.<\/p>\n

But first, today (given time differences) is also notable because the University of Chicago closed<\/a> the highly controversial Milton Friedman Institute after only three years in operation in what is an embarrassing retreat for them. The press release waxes lyrical about the new venture (a merger with an existing but smaller Becker Center but the closure is humiliating for the conservatives associates with the MFI.<\/p>\n

Why was this merger necessary? University of Chicago is silent on that front. It seems that Gary Becker (the neo-classical human capital theorist who doesn’t understand that labour (the flow of services) is not the commodity bought in the labour exchange) has supplanted Mr Freakonomics (Steve Levitt the former Director of the Becker Center) and Lars Hansen the former MFI Director has been pushed down the hierarchy (now Research Director of the new centre). <\/p>\n

The MFI has been the subject of staff petitions opposing its existence given the role that mainstream economics of the type championed by Milton Friedman himself played in the financial crisis and the poverty of the paradigm in addressing the crisis once it occurred. You will laugh at this statement<\/a> (issued June 1, 2010) from Hansen defending the MFI against the petitioners.<\/p>\n

Here is a Chronicle of Higher Education report<\/a> that backgrounds the controversy. The news from those that opposed the MFI is that the University of Chicago has had trouble raising funds to support the institute partly because of the “declining value of the Friedman name and reputation” (severely compromised one might say by the global financial crisis) and also has been severely embarrassed by the campaign pointing out the flaws in the decision to create such a centre in the first place.<\/p>\n

Anyway, good riddance.<\/p>\n

But talking about embarrassing developments, come in Mr Cantor!<\/p>\n

The Balanced Budget amendment would change the US Constitution such that the US Congress would have to balance the budget each year. The goal to keep the US public debt “in check”.<\/p>\n

In his press release (linked above) Eric Cantor described the move as a “common sense measure” which will “get our fiscal house in order”.<\/p>\n

The reality – RIP America.<\/p>\n

The BB bill was approved last week (on June 15, 2011) by the House Judiciary Committee<\/a> – which is sometimes referred to as “the lawyer for the House of Representatives because of its jurisdiction over matters relating to the administration of justice in federal courts, administrative bodies, and law enforcement agencies”. The Committee considers legislation that “carries a possibility for criminal or civil penalties”.<\/p>\n

The Committee voted 20-12 for the balanced budget amendment proposal. Here is a Transcript<\/a> of their deliberations. It would have a comical air to it if it wasn’t so tragic.<\/p>\n

You read statements like this:<\/p>\n

\nIn fact, as written, this bill would cut total funding for non-defense discretionary programs by approximately 70 percent in 2021, by more than $3 trillion over 10 years\n<\/p><\/blockquote>\n

And:<\/p>\n

\n… in balancing the budget, we will have to find savings in a variety of government programs, and that discussion should include Medicaid. Social Security, Medicaid and other government social programs will be helped, not hurt, by a balanced budget amendment. If the Federal Government is crippled with debt, it won’t be able to fund Medicaid or other government programs.\n<\/p><\/blockquote>\n

And:<\/p>\n

\n… I think it is unfortunate that the Medicare issue is being used to distort this debate … But the truth is Medicare, Social Security, this country itself is at risk unless we change our budgetary and our fiscal habits … Mr. Goodlatte has put the balanced budget amendment here before this committee to remedy that situation\n<\/p><\/blockquote>\n

And:<\/p>\n

\nThe problem is you can’t repeal the laws of arithmetic. The fact of the matter is Medicare is going broke\n<\/p><\/blockquote>\n

And in the Statement of Judiciary Committee Chairman<\/a> we read:<\/p>\n

\nAmerica cannot continue to run huge federal budget deficits. Financing federal overspending through continued borrowing threatens to drown Americans in high taxes and heavy debt.<\/p>\n

Members of Congress on both sides of the aisle recognize this problem.<\/p>\n

According to President Reagan, “Only a constitutional amendment will do the job. We’ve tried the carrot, and it failed. With the stick of a Balanced Budget Amendment, we can stop government squandering, overtaxing ways, and save our economy.\n<\/p><\/blockquote>\n

QED.<\/p>\n

RIP, USA.<\/p>\n

The workshop talk I gave today examined fiscal austerity from within a stock-flow consistent framework with MMT underpinnings. You can start with this simplified transactions matrix which is a particular view of the National Accounts. I explain that framework in considerable detail in this blog – Stock-flow consistent macro models<\/a>.<\/p>\n

Here, Gross Domestic Product, Y, is equal to Private expenditure, PX, plus government expenditure, G, plus exports, X, minus imports, M. The ROW account reveals that imports minus exports, transfers paid and interest received by the external sector, TF, equals the current account deficit.<\/p>\n

Every item in the Production (GDP) account is matched by a corresponding negative entry in some other column. Taxes net of transfers are received by the government who pay interest on outstanding debt (B).<\/p>\n

Net property income, taxes and transfers, TF and TP, are paid by the external and private sectors, respectively.<\/p>\n

The final row totals reveal that the Budget deficit (or public sector net borrowing) equals the private net acquisition of financial assets, NAFA (private savings less investment) minus the external surplus (or plus the deficit).<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The last row expresses the familiar sectoral balances accounting relations which is another “view” of the National Accounts. The sectoral balances provides a first-line reality check against some of the propositions that are abroad in the policy debate.<\/p>\n

Sectoral of financial balances relate to total receipts less total outlays of the three sectors – government, external and private domestic.<\/p>\n

You have seen this accounting identity for the three sectoral balances before:<\/p>\n

(G – T) = (S – I) – (X – M)<\/p>\n

National income adjustments in response to aggregate demand shifts ensure this relationship between the three sector financial balances always holds.<\/p>\n

From the perspective of a stock-flow consistent approach to macroeconomic modelling outlined above, the fundamental accounting identity states that government savings (surplus) or tax revenue net of government spending and payment of interest on bonds is equal to the non-government sector’s dis-saving.<\/p>\n

If (G – T) > 0 (that is, a budget deficit) then the sum to the right-hand of the equals sign (the non-government balance) must be in surplus and vice versa.<\/p>\n

The term (S – I) equals total private domestic saving and (X – M) or net exports represent the net savings of non-residents. That has to hold as a matter of accounting.<\/p>\n

As I noted in the talk, an understanding of this framework produces four incontrovertible facts.<\/p>\n