{"id":4157,"date":"2009-08-14T18:01:37","date_gmt":"2009-08-14T07:01:37","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=4157"},"modified":"2009-08-14T18:01:37","modified_gmt":"2009-08-14T07:01:37","slug":"some-myths-about-modern-monetary-theory-and-its-developers","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=4157","title":{"rendered":"Some myths about modern monetary theory and its developers"},"content":{"rendered":"

\t\t\t\tToday’s economics blog is about some reactions I have to the many pieces of correspondence I get each week about my work via E-mails, letters, telephone calls. It seems that there is a lot of misinformation out there and a reluctance by many to engage in ideas that they find contrary to their current understandings (or more likely prejudices). It always puzzles me how vehement some people get about an idea. A different idea seems to be the most threatening thing … forget about rising unemployment and poverty – just kill the idea!. So here are a few thoughts on that sort of theme.
\n
\nTo set the scene consider this graph which was published by the Financial Times<\/a> in June which is meant to show why US voters should be scared of what the US Government is doing with respect to its budget. It was sent to me by someone who says I should learn from it and “wake up to myself and stop advocating socialism … that he didn’t want to work in one of my crummy public sector jobs”. Okay, I hope he has a job elsewhere.<\/p>\n

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

<\/div>\n

You will note that the time period begins in 1997 which I think is good (although the article fails to appreciate the significance of that). In fact, the short sample is deliberately intended to deceive and bias the conclusion. As you can see it shows a big splash of red (outlays) currently and a corresponding rapid decline in receipts. Horror story really! Don’t you agree?<\/p>\n

Anyone who isn’t quaking in their boots upon seeing this graph is evidently a “delusional or was it fanciful left wing nutter” who “wants to impose socialism on everyone” by forcing “everyone to work for the government”. More about which later.<\/p>\n

The first thing to note from the graph is the Clinton surpluses in fiscal years 1998, 1999 and 2000 (increasing each year). And you can guess what happened? The private sector became more heavily indebted than before as the fiscal drag squeezed liquidity. Further, it set up the conditions for a major recession in 2001-02 with unemployment rising sharply and the automatic stabilisers pushing the budget back into deficit. So the stupid graph serves to illustrate some of that which was not mentioned at all in the article.<\/p>\n

But consider my version of the graph which follows and begins in 1948 not 1997. It also scales everything to GDP and includes a lower panel showing the evolution of the federal budget balance over time alongside the unemployment rate. All data is available at US Office of Management and Budget<\/a> (budget statistics) and the US Bureau of Labor Statistics<\/a> (unemployment data).<\/p>\n

\"Budget_UR_1948_2009\"<\/a><\/p>\n

<\/div>\n

Now that should set things in a totally different context. The things to note are obvious. First, Federal deficits have been the norm in the US since 1948. Everytime the federal government has tried to achieve a budget surplus (or succeeded in doing so) the economy has faltered and unemployment has risen. The deficits that followed were driven by the automatic stabilisers – falling revenue and rising welfare outlays.<\/p>\n

Second, the Clinton surpluses only endured for as long as they did without unemployment rising significant immediately because spending in the US economy was driven by the credit-binge. This unwound for consumers around the end of 2001 and as noted above the flight back to saving resulted in a serious recession – the one before this one. This is a very similar tale to the surplus period in Australia where the conservatives were only able to maintain them for a decade because the household sector went increasingly into debt. In both countries this was an unsustainable growth strategy. We are now living through the damaging aftermath of the folly – some are more damaged than others.<\/p>\n

Third, the deficits in the past have been inversely related to the unemployment dynamics and during the 1982 recession were large (around 6 per cent of GDP) and persisted at those levels for as long as spending had to be supported. Even so, a case can be made that Reagan should have pushed the deficits much higher given the huge jump (and persistence) in the unemployment rate. If the US Government had have been serious about maintaining full employment (US style!) then the deficits would have been much higher than 6 per cent in 1983.<\/p>\n

Fourth, the current deficits are the highest as a percentage of GDP but include extraordinary measures to stabilise the financial system which the neo-liberal deregulation had allowed to take the world economic system to the brink. You don’t nationalise (or do the same thing and not call it that) major banks and insurance companies and help underwrite a great proportion of minor banks, without some serious outlays. (Scott: care to comment on what is included in the outlays figure which is atypical and push the deficit\/GDP figure up?).<\/p>\n

You can also see the depth of the crisis by noting the fall in revenue relative to movements in the past. The current decline in revenue is very large (as a % of GDP) and so the unusually high automatic stabilisers are driving much of the budget dynamics in the US at present.<\/p>\n

All that makes sense to me and doesn’t scare me for a moment. The lower panel of the chart – the grey shaded part – the dynamics of the unemployment rate is what scares me. With a federal government that is not revenue-constrained the budget deficit should be even higher than it is now given the rapid deterioration in the US labour market.<\/p>\n

Which brings me to the point of the blog? I get sent a lot of E-mails every day – many are complimentary or inquisitive and some are hostile and vindictive (more than I care think about). I also get snail mail hate letters from punters who hear me on radio or read my Op Eds and now my blog. I also get sent messages telling me that other blogs allow commentary that significantly criticises my viewpoint in a fairly personal way (that is waxing lyrical about my sanity and political ambitions).<\/p>\n

This has been going on for years and I am used to it. If you have a public profile that is what you might expect. Water off a duck’s back!<\/p>\n

But the hostility reflects a real ignorance and fear of new ideas and that is the worrying aspect of all the communications. It means that the levels of comprehension about how the economy actually works among the lay persons and many mainstream economists is very low. In seems that the best defence of that ignorance, is to launch a personal attack on anyone who dares to think differently (and might just know what they are talking about). The hallmark of these attacks are that all sorts of economic concepts and technical terms that sound authoritative but are not are mashed into the one incoherent wall of words.<\/p>\n

So here are some of the more obvious elements that are used by those who are struggling to understand what is going on to discredit modern monetary theory. They will be familiar themes to regular readers but some of them still amaze me – if only for the breathtaking audacity of the vehemence that is displayed given the level of ignorance that is endemic. They are only a slice of the sort of things that are out there.<\/p>\n

Modern Money Theorists are fanciful left-wing nutters<\/strong><\/p>\n

There is a view among the deficit terrorists that the fiscal situation for the current period depicted in the graphs above is unsustainable and that rising interest rates will choke of the capacity of the US Government to spend. <\/p>\n

In my blog – Twisted logic and just plain misinformation<\/a> I said:<\/p>\n

\n… this analysis does not apply to a sovereign government. Its capacity to spend in the future is not reduced if it holds debt no matter if the economy is growing or in decline. It can never be insolvent even if its tax revenue declines signficantly. Its balance sheet can never become precarious in the same way that a household balance sheet can.\n<\/p><\/blockquote>\n

You might also like to go back to first principles – Deficit spending 101 – Part 3<\/a><\/p>\n

So my judgement is an economic one not a political one. We had a very interesting discussion recently about the importance of that distinction in the blog – Debates in modern monetary macro …<\/a> – which might be considered a useful companion to this blog.<\/p>\n

The voters might get scared and push the US Government into cutting back spending much earlier than they should – when assessed from a modern monetary perspective which says that if the non-government sector desires to net save then aggregate demand must be supported by the government sector for output and employment levels to remain high. All throughout the period shown in my graph above – those deficits were supporting a solid private saving ratio. And it is typical for the private sector to save a proportion of their income (in aggregate).<\/p>\n

So if the political reality sees the US Government start contracting before the non-government sector spending has risen again then they will simply worsen their already parlous situation. A fair proportion of the deficits will be wiped away as the automatic stabilisers go into reverse on the back of economic growth. The best thing the US Government can be doing is supporting spending and inspiring confidence among private investors to get capacity building spending back on track and start employing people again.<\/p>\n

Now the recognition of the national accounting relationships which underpin modern monetary theory are not matters of opinion. These include (but the list is not exhaustive):<\/p>\n