Hurricane COVID-19: GOP’s Fiscal Restraint Pisses into the Winds

[NB: Check the byline, thanks. /~Rayne]

Before going further, let’s take a look at the weather by the numbers.

COVID-19 confirmed cases: 5,064,072 — new cases confirmed at a rate of 55,000/day

COVID-19 deaths: 162,623 — new deaths at a rate of 1,000/day

Unemployed: 31.3 million people were receiving some form of unemployment compensation as of Friday.

Evictions: 23 million people nationwide are at risk of being evicted or are now at some state of eviction.

This is Hurricane COVID-19, continuing to wreak havoc not on any one or two coastal states but the entire nation.

Imagine an enormous hurricane wiping out the lives of more than 162,000 Americans spread across every state.

Imagine a storm so big it destroys housing for AT LEAST 23 million Americans — at least, because this number may not include the affected family members.

Imagine a hurricane wiping out food for millions of children, many of whom rely on getting at least one meal a day from school.

This is not a single three-day blow with a limited range and a one-time demand for economic resources.

This ongoing hurricane will require everything we can throw at it for the next 12 to 18 months — until a vaccine and/or drug therapy can be developed, tested, approved, and distributed.

Concerns about fiscal restraint have NO place in the face of this rolling disaster. This is not a situation where reflexive conservative retrenchment to anti-tax small government will work.

Reflexive conservative decision-making has already failed this nation.

This includes stupidity like Sen. Ted Cruz’s nasty sarcasm on Twitter demeaning the most vulnerable in our society, the working poor and the dwindling middle class, tweeting, “Why be so cheap? Give everyone $1 million a day, every day, forever. And three soy lattes a day. And a foot massage.

Say that to the faces of families who’ve lost love ones, families wondering how they’ll keep a roof over their heads, or parents who wonder how they’ll feed their kids today and tomorrow — honest, hard-working Americans who’ve lost their jobs only because Trump and his political party have failed to take action necessary to stem COVID-19.

~ ~ ~

We’ve had more than a day to digest the White House’s feeble attempt to change the subject and redirect attention away from the GOP-led Senate’s refusal to meet to hammer out a rational economic aid package.

The Democratic Party-led House made a good faith effort to project what Americans would need based on conditions they saw and passed the HEROES Act in mid-May.

It has been sitting, waiting for the GOP-led Senate to catch up; it took TEN WEEKS to come up with a counter in the form of the HEALS Act, offering only a third of the aid HEROES Act offered while stuffed with gifts to donors and spending pork.

Democrats have been able to see this pandemic for what it is, with clear eyes. If they’ve failed it’s for lack of imagination when it comes to the obstinacy of the opposition party when it comes to facing reality.

If Democrats have failed it’s for assuming Republicans would hit bottom and eventually do the right thing.

But they haven’t. The Republicans have ensured that aid to date has been corrupted with lack of oversight and accountability, doled out to political supporters.

~ ~ ~

The White House knows things are going to get worse. They are not only unwilling to deal with the challenges accumulating over the last two months under Hurricane COVID-19, they are unwilling to plan ahead for a worsening crisis they have fomented.

Instead, inadequately qualified chief of staff Mark Meadows thinks more PR will fix the COVID crisis.

The administration has refused to work toward an effective national strategy though one is possible as other countries have proven. Their refusal is deepening the emergency.

Instead of working in good faith, they let their Bronx Colors boss spew more lies — Trump told reporters last evening that the Democrats had called, “…They’d like to get together” — when the truth is neither Nancy Pelosi or Chuck Schumer called.

Today Mnuchin indicated he wants a deal:

… Treasury Secretary Steven Mnuchin, on a conference call with governors on Monday, said action by Congress remains the administration’s “first choice.”

Mnuchin and Vice President Mike Pence urged the governors to reach out to congressional leaders and push for legislation, according to audio of the call obtained by AP. …

Mnuchin needs to get on the phone and call his GOP peeps in the Senate, not state governors. The governors are over a barrel and need the money the House Democrats have already allocated $915 billion in direct federal aid to state and local government in the HEROES Act they passed more than two months ago.

It’s NOT the Democrats who are the problem and the states know it.

Jesus Christ, what a bunch of hacks working for this administration. They just don’t get it; they are unable to lead in the face of this massive ongoing catastrophe.

~ ~ ~

This is the threshold of an economic depression the likes of which this country has never seen. We don’t have anywhere near as much agriculture as we had in the 1930s during the Great Depression; many families simply eked by if they could keep their farms (though they did have different forms of federal assistance from a more competent government).

We are a service economy now and people can’t afford services which aren’t absolutely essential. They can’t afford the risk of services which put them in contact with other people too closely. Re-opening businesses like gyms and hair salons and restaurants doesn’t make the risks go away, nor does it change the fact most of us have had to reduce our spending because we may or have already lost our jobs.

Invest in the care of the Americans who need it. They will plow that money back into the economy. It keeps the rest of the economy moving until a vaccine or a drug therapy is available.

Failing to do this simple thing — take care of the American people by ensuring domestic Tranquility, providing for the common defense of their homes, promoting the general Welfare until we can beat back the disease — is like failing to heed the forecast of this massive Hurricane COVID-19 once again.

Parody of NOAA Hurricane Dorian map marked in Sharpie by Trump. Used here under Fair Use.

This is an open thread.

Social Security And Other Entitlements

Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out
MMT On International Trade

Chapter 6 of Stephanie Kelton’s The Deficit Myth discusses the perennial conservative effort to cut entitlements. [1] Kelton defines entitlements as statutory determinations that people who meet certain criteria are entitled to certain defined payments. She discusses several of the most widely used entitlements, Social Security, Social Security Disability, Medicare, Medicaid, SNAP and welfare.

Kelton describes the history of these programs, beginning with Franklin Delano Roosevelt. FDR saw Social Security as the first step towards a comprehensive array of programs that would insure that the citizens would be truly free. He specifically chose to fund Social Security with a tax, so that people would feel ownership, making it harder for politicians to vote to take away those benefits. it worked. People are firmly attached to the program. The money is put into a “trust fund”, which holds it in the form of special non-negotiable US Treasury notes.

Politicians, goaded by their rich donors, try to weasel around this powerful attachment. They start with basic debt hysteria: the Trust Funds are Going Bust! [2] They base this on the reports of the Trustees of the trust funds, who are directed to estimate the date on which the Social Security Trust Fund will run out of money. If that happens. under current law, Social Security payments will be cut. They then claim that all they want to do is put Social Security on a firm financial footing. But they have to act now. Now! And somehow the only possible actions are benefit cuts and tax hikes for working people.

This worked the last time the deficit hawks of both parties tried it. Under Ronald Reagan both parties agreed to cut benefits, raise the retirement age, and increase FICA taxes. This increase in tax revenues was then used as cover for tax cuts for the filthy rich. The effort was led by Alan Greenspan, an Ayn Rand devotee, and no friend of working people.

Medicare is also funded with specific taxes which are put into a special Treasury account, and has a board of trustees. But there’s a big difference. Under Medicare statutes, the Treasury is directed to make all payments, regardless of the state of the trusts. So, every report of the Trustees says that Medicare is just fine. We could do the same for Social Security, and all other entitlements. That simple change would solve the problem. That’s what Kelton recommends, and it makes perfect sense under Modern Monetary Theory.

Liberals offer other solutions. We could raise the cap on the wages subject to FICA taxes. We could have a millionaires tax that would fund Social Security and other entitlements. We could impose a tiny tax on securities transactions and direct the funds to the various trust funds. I don’t think Kelton is opposed to funding social programs with dedicated taxes, and I don’t think she would object to any of these ideas or to the idea that paying dedicated taxes adds to a sense of ownership. The issue is that people think it must be this way. It doesn’t. MMT teaches us that we have the money to do what we want to do.

Taking the pressure off of funding sources does two things. It relieves the anxiety of the older people, the group Enzi is trying to frighten. But it also frees us to focus on the actual needs of the future and to plan for them. As people get older, their needs change. They need more medical care, more help at home, more and different kinds of medicine, different furniture, different living arrangements, and so on. Their desires change, too. They want to do more travel, to spend more time with their spread-out families, and to enjoy more varied kinds of entertainment, restaurants, and other kinds of get-togethers.

Kelton, writing before the pandemic hit, calls for the expansion of Social Security. She points out that it was originally intended as one leg of a “three-legged stool” of retirement planning. The other two were personal savings and pensions from employment. The latter two are disappearing.

Before the pandemic, 40% of us didn’t have savings of $400 for emergencies. Once upon a time, employers provided defined-benefit plans, which promised to pay retirees a specific amount based on pay and length of service. [3] Most of those plans are gone. Kelton cites a particularly ugly case where McDonnell-Douglas closed a plant in Tulsa and terminated a defined-benefit plan in part because so many workers were approaching retirement age when they could collect a full pension with terrible results for older workers. [4] Congress established the Pension Benefit Guarantee Corporation to cover a portion of the lost benefits when companies terminate plans. The benefits guaranteed are absurdly low.

Employers now establish defined-contribution plans like 401(k)s. The track record of these plans shows that they are an inadequate substitute for most people. They are expensive, as members pay administration costs as well as management fees to Wall Street. The national average all-in fee is 2.2%. The Center for American Progress estimates that “… the typical American worker who earns a median salary starting at age 25 will pay about $138,336 in 401(k) fees over their lifetime.” Median account sizes vary substantially by age. For those over 50, the median is around $66K. The average is much higher, around 200K, showing that these plans primarily benefit the wealthy.

Taken together, these facts show a critical need for a stronger Social Security system, not the cuts sought by conservatives.

Other entitlement programs are under attack from the deficit hawks. There are constant efforts to make it more difficult to enroll in Medicaid, like work requirements or co-pays. Fifteen states haven’t implemented Medicaid expansion as permitted by Obamacare; Missouri just added a constitutional amendment requiring implementation. SNAP benefits are under constant assault by Republicans in the name of frugality, as if these $68 billion in a 4$ trillion budget was meaningful compared to the needs of the population served.

Kelton’s point is that we have the money. We need the will to establish priorities that match our moral values, and a Congress that will legislate those priorities.

=====
[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] It’s one of the more bizarre conservative demands. Social Security is a crucial element of the financial lives of a very large number of older Americans; approximately 40% of retirees would have incomes near or below the poverty line without it. That’s about 21 million voters who are more likely to vote for conservatives. To protect themselves from voter anger, conservatives explicitly call for the “I’ve got mine, screw you Jack” approach: their proposals always exempt today’s older crowd, as if the younger citizens won’t notice that their parents are safe but they aren’t and neither will their parents.

[2] We are currently getting a heavy dose of this from Republicans as they try to avoid passing a pandemic rescue bill that will primarily benefit ordinary Americans. Here’s Senator Mike Enzi, from the metropolis of Wyoming, where he ran a shoe store, insisting that Social Security is the problem. Kelton has a story about Enzi. P. 41 et seq.

[3] The strange locution “defined benefit plan” comes from the Employee Retirement Income Security Act of 1974. Its counterpart is defined contribution plans, which don’t promise any specific payment on retirement. It just requires the employer to pay a specific amount into some kind of plan with whatever vesting rights and investment possibilities the employer chooses.

[4] McDonnell-Douglas eventually merged with Boeing. Here’s a story connecting its executives to the 737 Max disaster.

GOP Senate Walked Out of DC for a Reason: Voter Foreclosure, 2020 Edition [UPDATE-1]

[NB: Check the byline, thanks!  Updates at bottom of post. /~Rayne]

Come on, media. You’re still screwing up coverage of BOTH the pandemic economy and the general election.

The bothsides-ism the media clings to so desperately as a norm does not work when one party consistently makes bad choices, or no choices with the same effect as bad choices. There is no bothsides when one side acts in bad faith.

Think about it: making no choice is a choice. Taking no action is a choice. The outcome from no-choice/no-action can be very bad; making no decision to rescue a drowning person yields the victim’s death.

In the case of the stimulus and aid bill, it’s NOT the Democrats in Congress who are the impediment. Stop portraying that way.

Start digging into the why behind the White House and the GOP senators resistance to the economic aid in the bill — money which would be plowed back into the economy and ultimately into their donors’ pockets as profits.

Sen. Elizabeth Warren has a bead on one reason: a portion of the investor class wants real estate values to crash so they can sweep in and buy distressed properties.

… The Wall Street Journal recently reported that investors are “preparing for what they believe could be a once-in-a generation opportunity to buy distressed real-estate assets at bargain prices.” This profiteering is far from “once-in-a-generation” though: It’s straight out of private equity’s playbook during the 2008 financial crisis. We all know what happened then: Homeowners targeted by predatory mortgages lost their homes to foreclosure, and private equity swept in to buy those homes at depressed prices. Communities of color were hit fastest and hardest. Just a handful of years after Black homeownership hit its highest point, the devastating waves of foreclosures wiped out nearly all of the growth in Black homeownership since the Fair Housing Act repealed Jim Crow redlining in 1968. …

“Once-in-a generation opportunity”? Meaning an even more dramatic plummet of property values compared to the 2008 crash a dozen years ago?

We can see the crash coming with an impending 30-40 million Americans on the verge of eviction but neither the White House nor the GOP senate feel a sense of urgency. This is NOT bothsides but one, and one which is and has been comfortable with vulture capitalism.

One side led by a man who claimed to be a billionaire based in no small part on his real estate development business.

This no-choice/no-action is intended to both evict roughly 12% of Americans from their homes, forcing their relocation or homelessness, while a small segment of the investor class reaps benefits.

The rest of the investor class which relies on stability in order for consumption to remain constant or increase won’t benefit. Their values will drop off as they did in 2008 during the crash.

Why are the White House and the GOP senate proceeding as if it doesn’t matter if they come to an agreement on the aid and economic stimulus package?

We’ve seen this before, though; the difference was that the crash hadn’t yet been fully set in motion as it is this time with the pandemic.

~ ~ ~

In 2008 with an evenly split Senate, the 110th Congress faffed around from June to early September, happy with irrationally high oil price which were hurting consumers badly while paying inadequate attention to investment banking and credit markets. Congress threw crappy legislation at the problem of subprime mortgages while the financial sector floundered.

When consumers had to choose between paying for gasoline to get to work or paying their crappy adjustable rate mortgage, they paid for the former rather than the latter hoping to catch up on the latter at a later date. But for many consumers there wasn’t a later date — they were foreclosed upon and evicted.

The Housing and Economic Recovery Act of 2008 passed in late July 2008 did far too little, far too late, and for the wrong end of the economic food chain.

Congress should have learned from this experience. Some of the GOP senators were in office when the 2008 crash happened. They know better.

In September 2008 as the crash loomed days away, a GOP county party chairman in Michigan admitted to a reporter that the GOP was going to use a list of foreclosed homes and addresses to “make sure people aren’t voting from those addresses.

The Obama campaign and the Democratic National Committee sued the GOP; the Republican National Committee, Michigan Republican Party, and Macomb County Republican Party settled, acknowledging the existence of an illegal scheme by the Republicans to use mortgage foreclosure lists to deny foreclosure victims their right to vote.

At the time the Department of Justice’s Civil Rights Division told Congress it would monitor for the use of foreclosure records to contest voters’ ballots though it wouldn’t dispatch DOJ personnel to the polls.

But everything is different under the Trump administration. The GOP may try to use foreclosure records this election because they may be able to get away with it after setting a foreclosure crisis in motion.

The DOJ’s Civil Rights Division is helmed by a Trump appointee; can we be certain they will see the use of foreclosure records the way the Civil Rights Division did in 2008?

A Trump appointee may be the U.S. attorney for each state most at risk — they may be more loyal to Trump and the GOP than to the law.

A Trump appointee may be the judge overseeing any case brought to them about voter foreclosure.

And the GOP is desperate, more so than it was in 2008 because both the White House and the Senate are now at risk if a blue wave sweeps them as a rejection of Trump and his policies.

They’re planning ahead for something, because the GOP has amassed a $20 million legal fund for the election. For what do they need such a big legal fee kitty?

It’s right there in their selection of no-choice/no-action toward economic aid and stimulus.

The entire GOP, from Trump on through the GOP congressional caucus, want to foreclose on Americans’ homes and then their votes.

~ ~ ~

If the media was to stop bothsides-ing their reporting, was to stop treating the GOP’s bad faith as if it were legitimate, the GOP might reverse its position.

Might — don’t hold your breath, though.

For some Americans it’s already too late. They are already behind on rent or mortgage payments, and/or their household isn’t getting enough to eat. Innocent children are suffering for this. Their parents feel compelled to send them to schools which can’t handle COVID-19 conditions because it may mean a meal for their kids they might not get at home.

But the GOP continues to walk away from doing what it takes to ensure American families get the care they need, let alone that the public is able to safely ride out the time between now and an effective vaccine while socially distanced and masked.

The GOP senate caucus has chosen since May to load up their bill with funding for military equipment the public can’t eat or use to pay their mortgage, and let protections against evictions expire without replacement.

The reason is evident in the results, and the media needs to do a better job of holding the one party accountable for them.

Why isn’t there protection against evictions?

Because the GOP — from White House to the Senate — wants evictions and foreclosures.

Why isn’t there financial aid for Americans who have lost their jobs, are behind on their rent, need food?

Because the GOP wants these particular Americans to suffer enough that they are disenfranchised.

Why doesn’t the GOP save the person from drowning?

In the absence of acting to reach for their hand and pull them from the water, we can only assume it’s because the GOP wants the flailing victim dead.

The media needs to stop bothsides journalism and get the GOP on the record. Ask them why they are clinging to funding military spending instead of financial and food aid, why the GOP isn’t preventing evictions and foreclosures with a moratorium.

Ask the GOP whether they are going to attempt to foreclose on voters to save Trump’s ass this November.

.

UPDATE-1 — 08-AUG-2020 12:25 P.M. EDT —

Three lies in three minutes. The lie about COVID-19 was bad enough on a day when over 1200 Americans died of the disease. The other two lies though…the GOP senate hadn’t budged yesterday. These two issues, both unemployment benefits and an eviction moratorium, can’t be resolved with an executive order which he doesn’t even claim he’ll try to use.

 

Call it what it is: gaslighting the American public.

I don’t know why his Bedminster course members are willing to pay hundreds of thousands for memberships so they can be gaslighted in person, but rich people do all kinds of stupid shit.

.

This is an open thread.

Three Things: Look Over There, Not at Trump’s Failures [UPDATE-1]

[NB: Updates will appear at the bottom of this post. /~Rayne]

Trump’s Thursday morning tweet stirred up people more than his average tweets do — which is saying a lot since his average tweets are pretty annoying.

But this one crossed a line by suggesting a potential violation of the Constitution.

This tweet could be taken in isolation, but it really shouldn’t be. There were other things which Trump wanted us to ignore so he lobbed a massive turd in the punch bowl.

From what was he trying to redirect our attention?

~ 3 ~

You probably already know these two facts about COVID-19:

— The U.S. passed the 150,000 benchmark this week; Americans are 23% of the total COVID-19 deaths globally;

— Herman Cain, business man, Tea Party activist, and 2016 GOP presidential candidate died of COVID-19 today after more than a month in ICU. Cain had attended Trump’s Tulsa rally and did not wear a mask.

All these deaths including Herman Cain’s are due to Donald Trump’s gross negligence and malfeasance.

A Vanity Fair article published today also suggests that Trump did nothing about COVID-19 because it initially impacted blue states most heavily.

In other words, Trump committed and continues to commit political genocide.

Herman Cain was collateral damage.

Is it possible that Trump had been informed of Cain’s death before the public was notified, and wanted to get out in front before the public focused heavily on Cain’s death by COVID-19?

~ 2 ~

Economic data released Thursday showed a dramatic -10% drop in quarterly GDP, equivalent to -32.9% annualized rate. It’s the worst drop ever recorded in U.S. GDP.

The unemployment rate tracks with this plummet, with 47.2% Americans unemployed as of the end of June.

None of this had to happen. It was entirely preventable had Trump dealt effectively with COVID-19 beginning in Jan-Feb but killing off blue state voters and blaming their governors was more important to him for his re-election prospects than protecting the country’s economic well being.

~ 1 ~

After multiple repeated attempts to delay or obstruct their release, the Ghislaine Maxwell papers were released as ordered by Judge Loretta Preska on Thursday evening.

Papers can be found via this link to Courtlistener.

Courthouse News’ Adam Klasfeld made a first pass through the documents and filed a report.

In two separate tweets, Klasfeld noted the documents are not entirely new material.

… Multiple documents in the #MaxwellFiles data dump tonight are either old documents or previously released, making the rounds as though new. …

… Some old documents have nuggets of newly unsealed information contained within them, but the files themselves are being rediscovered as though new. …

Also noted: Maxwell lied to the court.

There will be more analysis and more bullshit thrown in the air by the White House and proxies to obscure details in the papers apart from content further compromising former president Bill Clinton and other Democrats like former governor Bill Richardson. You can bet those points will be boosted to fuzz the links between Trump, Mar-a-Lago, Trump’s lawyer Alan Dershowitz, Jeffrey Epstein, and Ghislaine Maxwell.

Some of the obscuring may already have begun with Trump’s fascistic tweet.

~ 0 ~

Trump doesn’t have the power to delay elections. We went all through this back in April when it came up. What should happen now — and we should look for it and insist on it — is that journalists should get every Republican on record about Trump’s election delay tweet.

We as citizens should be asking them as our congressional representatives where they stand on the election delay suggested by Trump, since Congress and not the Executive Branch has the power to delay the election.

We should also check with our state election officials since they can mess with the conduct of the elections. Recall after delaying their primary because of COVID-19, Kentucky shut down all but one voting place for its primary in the most populated portion of Louisville, attributing the change to pandemic safety.

States could do this for the general election which will already have been affected by the U.S. Postal Service’s Trump-crony slow down of first class mail.

Work on this now before the tangerine hellbeast in the White House tweets out something outrageous to throw us off our mission to ensure a safe, secure, and timely general election.

This is an open thread.

UPDATE — 10:00 A.M. ET —

Hearing now underway this morning:

NIAID Director Dr. Fauci along with CDC Director Dr. Redfield & HHS ADM Giroir will appear before Select Committee on COVID Oversight beginning at 9:00am ET to discuss the urgent need for a National Strategy to contain COVID-19.

Live stream at https://youtu.be/YkP1t_2u5B0

Joe Biden must be watching the hearing:

Republicans are doing their best to whitewash Trump’s failures — nauseating, I must say. I do feel for Rep. Walorski (Republican, IN-02) who is trying to discourage anti-vax propaganda with her line of questioning, might be the only GOP questioning of late which hasn’t been intended to prop up Trump.

MMT on International Trade

Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big
The Wonkish Myth Of Crowding Out

Chapter 5 of Stephanie Kelton’s The Deficit Myth takes up international trade. Trump thinks the US is losing at trade simply because we import a lot more than we export. He promised to bring manufacturing jobs back to the US. This won him votes in many states where corporations closed US operations and moved production offshore. But it’s a lot more complicated than just the dollars. I’m only going to address a few of the points Kelton raises.

1. Trade has good and bad results

It’s true that for a number of years the US has run a trade deficit with the rest of the world. We import more than we export. This means we send other people dollars and they send us stuff we want, like oil, computers, cars and cars with computers in them that run on oil. That seems like a good trade.

Many poorer countries do not produce enough food, drugs and advanced equipment to meet their needs. [1] Their currencies are weak, so they need dollars to pay for those shortfalls. Giving them dollars for their goods is a partial fix. Also, it means their workers have jobs and can hope for better lives.

It’s a fact that we have lost a lot of good jobs, those with benefits and middle-class pay, and replaced them with poor jobs. Supposedly we get lower prices as a result, though people buying iPhones might wonder. However, most of the benefits from trade go to the richest among us, corporations and their top executives and the lawyers, accountants, and consultants hired to minimize their costs, taxes, personnel, and unions. [2]

Maybe someday foreign holders of US dollars will want stuff themselves, instead of dollars. They might buy stuff from us. If that means increasing our exports of goods and services, then it seems good. If they buy up our land, buildings and equipment, that might not be so good. If they buy our oil and export it to their countries, we might not like that. Its complicated.

2. What about the money?

This seems to bother Trump a lot. He seems to think sending dollars abroad is bad, even if we get useful stuff in exchange, which sounds stupid when you write it down. One real problem is that money spent abroad doesn’t circulate in the US. Your spending is someone else’s income. If American Airlines buys jets from AirBus, that’s money not spent in the US, and less money for Boeing employees to spend here. The result is lowered economic activity here. Kelton has an answer for this.

Let’s start with the two-bucket accounting system from the previous post. Deficit spending by the Federal Government creates a surplus in the hands of Everybody Else. So, if the FG spends $100 and taxes back $90, then FG has a negative balance of $10. EE has a surplus of $10, which is available to increase demand for goods and services.

Let’s now split the EE bucket into two pieces: US and Other Countries. Now suppose people in the US spend $5 on goat cheese from France, part of OC, and French people spend $3 on US movies. The US surplus drops by $5, and increases by $3, for a loss of $2, leaving $8. Those 2 dollars won’t be available to buy stuff in the US, reducing economic activity.

Trump’s solution to this problem is tariffs on imports from OC. Tariffs are taxes. They put money in the FG bucket, and remove it from the funds available to support domestic demand. Suppose the FG imposes $1 in tariffs on imports. The US bucket drops by $1, to $7. If the problem was reduction of demand, that’s perverse.

The real solution is more deficit spending by the FG on US goods. If the FG spends another $2 buying US goods, those two dollars add to the US surplus, returning it to $10. Problem solved, especially for people who like Crottin de Chavignol. [3]

3. It’s the jobs, not the dollars.

The real problem is not the dollars, but the good jobs that disappeared. Kelton doesn’t say so, but in fact sending jobs overseas is the result of corporate decisions, made solely in search of profits. The federal government does not explicitly support this corporate decision, but its policies do not discourage shipping jobs overseas, and in many ways support offshoring of jobs. For example, modern trade treaties contain provisions designed to protect US businesses in foreign countries, and the government is often willing to use force to protect US assets abroad which can cost the lives of our military people to protect the interests of the rich.

Mainstream economists have always praised trade deals as benefiting Americans, despite the fact that the benefits of trade for the most part flow to the rich while the burdens fall mostly on the poor and the middle class. The middle class is shrinking. Part of that is due to the loss of well-paying jobs. The response of Congress has been worthlesss, mostly job retraining and minimal recompense. [2]

Kelton once again offers the job guarantee as a solution. The proposals for legislation contemplate that all jobs will pay at least $15 per hour with benefits, which will keep people reasonably safe. But these are not an adequate replacement for good middle-class jobs. We need more effort put into solving that problem.

I’ll offer one idea. The pharmaceutical business model is to raise the price of their drugs at least annually, so as to increase profits, and thus the price of the stock. As part of the jobs guarantee, the federal government could build plants to manufacture drugs and compete directly. There would be no problem doing this with generic drugs, but the government could also do it with other drugs bearing extortionate prices, like insulin and coronavirus treatments like Remdesivir. Also see this.

The expertise is out there, and the government can buy it. People can be trained to operate these plants, and make an enormous contribution to their fellow citizens. I see this an an illustration of one of Kelton’s normative policy assumptions: the point of the economy is to make our lives better. This is a political choice. It’s not a choice we should abandon to the rich and powerful.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1]Kelton knows this is a problem. In short, it’s the result of a number of factors, including weak or corrupt governance. The Washington Consensus perpetuates this problem. With better governance and careful attention to some of the ideas in this book, that problem might be slowly corrected. See p.141 et seq.

[2] This entire problem was the result of a consensus among economists on the benefits of trade, a consensus that supported the desires of capitalists and giant corporations. Both liberal and conservative economists and politicians joined the chorus of assent. I discuss the impact of this disaster in four posts you can find here, beginning with The Problem Of The Liberal Elites. TL;dr: liberal elites squandered their influence pushing a bad economic theory. We have no reason to trust their judgment after the damage their advice created.

[3] Alternatively we could try to reduce the trade deficit. Kelton discusses this, but it raises several complicated issues, and I’ll just refer interested readers to pp. 135-6.

The Wonkish Myth of Crowding Out

Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big

Chapter 4 of Stephanie Kelton’s The Deficit Myth takes up the theory that federal government deficits increase the cost of borrowing by the private sector. Here’s Kelton’s typically incisive description:

In its most common form, the crowding-out myth says that fiscal deficits require government borrowing, which forces Uncle Sam into competition with other would-be borrowers. As everyone competes for a limited supply of available savings, borrowing costs move higher. With interest rates on the rise, certain borrowers — especially private businesses — won’t be able to secure funding for their projects. This causes private investment to fall, leading to a future where there are fewer factories, machines, and so on. With a smaller stock of capital goods, society ends up with a less productive workforce, slower wage growth, and a less prosperous economy. It does sound ominous! P. 101-102.

Given the amount of capital floating around in the world, much of it US dollars, it’s hard to see why this makes sense. The big problem is not the availability of capital for US businesses, but the insistence of the rich that they not be exposed to any risk of loss. What could be a better solution for that than Treasury securities? But the crowding-out theory requires a chain of reasoning, and so it appeals to the self-regard of our wonk class. [1]

Kelton first addresses the idea that there is a limited pool of savings. As she does throughout the book, Kelton uses this myth to discuss the overall picture of money as explained by mainstream economists. They claim that private savings are the ultimate source of the funds that are available to lend. [2] If the government borrows from that limited amount, there is less for others. As you can see, it’s a pinched view of government spending. It seems to mean that government spending is lost somehow, instead of going into businesses and our own pockets, in the US and elsewhere when the government buys from businesses in other countries.

Kelton asks us to consider the flow of dollars in our economy from an accounting perspective. She starts with a two-bucket system: the Federal Government is one bucket, and Everyone Else is the second. Any dollar that leaves the FG bucket goes to the EE bucket. There is no where elso for it to go. Taxes take money out of the EE bucket and put it into the FG bucket. That leads to our first equation:

FG balance + EE balance = 0

So, if there is a FG deficit then there is an EE surplus of like amount.

FG deficit = EE surplus

Deficit spending has a good side! That’s something that seems to elude the practitioners of deficit scare-mongering. On the other hand, if the government runs a surplus, we get

FG surplus = EE deficit.

That seems bad. It means we are losing some of our wealth. Where does that wealth go? Well, it’s cash. Remember that cash is a debt on the government’s books, so the cash it collects in taxes just offsets the debt, and disappears. That might be bad! That’s something else the deficit scare-mongers never mention.

Kelton emphasizes that it’s the net that counts. So, if the FG spends $100 and taxes $90, there is a surplus of $10 in the EE bucket. That’s money in our pockets, increased savings. The federal government can just issue Treasuries in that amount, converting the green dollars into yellow dollars in Kelton’s parlance. So contrary to the myth of crowding out, FG deficits don’t eat up our existing savings, they actually increase the amount of savings. It’s not an opinion, it’s just simple accounting.

At this point we might ask if there was ever any real danger of a shortage of loanable funds. The Fed publishes a weekly summary of the balance sheets of all commercial banks in the US. As of July 1, total loans were $10.6 T and total deposits were $15.6 T. [3]. The Treasury has issued trillions of dollars of securities to cover deficit spending to date and there are still $5 T in available bank credit, and with the multiplier effect [2], there’s much more. There’s plenty more where that came from. Money Market funds have a total of about $4.6 T, all of it short-term, and much of that is available for longer-term investment if there were reasonable returns for the perceived risk. But there aren’t any decent returns to cash right now. Why?

That’s Kelton’s second point. Step 2 in the reasoning chain for this myth is that competition to borrow money drives up interest rates. Not so, says Kelton. She explains that interest rates are a policy choice. The Fed has always been able to control interest rates, both short and long term. In the past, it has done so extensively. During WWII, the Fed kept interest rates at specific levels to help control the economy during the war. That continued until 1951. We have had other bouts of serious control, including immediately after the Great Crash, though that didn’t last long. The Fed is currently keeping interest rates low for both short-and long-term loans.

At other times, the Fed has controlled short-term rates and allowed the private market to affect longer-term rates. Kelton explains how the Fed controls both long- and short-term interest rates, which I’ll skip over. It’s enough to say that this puts the nail in the idea of crowding-out.

Deficits have their good side, but they can create problems, like inflation or politically-driven mis-allocation of resources. MMT doesn’t argue for deficits or surpluses. It argues that we should pay attention to the state of the economy and pick policies that maximize our political desires. I think the government should do more to take care of our citizens. I think everyone should have a job, good schools, decent transportation, clean water and clean air, a planet that isn’t catching fire, and a world not ravaged by Covid-19. MMT supports those goals. Others think we should buy more tanks and guns and do nothing else, just let the market fix things. There are MMT prescriptions for that too.

Finally, it’s worth noting something Kelton doesn’t discuss: keeping interest rates low hurts savers, whether they are saving for a rainy day, for college for the kids, for a down-payment on a home, or retirement. These are funds that people mostly don’t want to put at significant risk. But if interest rates are low, there is a real danger that inflation will slowly erode those savings. For example, health care costs are one reason people save for a rainy day. It’s likely that inflation in that sector is higher than the overall inflation rate. Low interest rates will hurt those savers. Similarly, college costs are rising faster than overall inflation, and in some cities, house prices and rents rise faster. In each case, the saver is a loser.

We should be thinking about that if we want to see progressive uses of MMT achieve their full potential.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] That’s my view, not Kelton’s. She says there is some evidence that crowding-out can be a problem for non-sovereign currencies, but not for sovereign currencies.

[2] This is accompanied by the idea that bank lending results in deposits, and those deposits fund another round of lending, etc. Each round of lending is smaller because banks are required to hold a percentage of all deposits in their reserves at the Fed. I was taught that this is the multiplier effect; it’s now called the money multiplier. We can ignore it for these purposes, because it leads to a larger number, but still one defendant on savings.

[3] Respectively, H.8, P. 2 Line 9 and H.8 P. 3, line 34.

The National Debt Is Sooooooo Big

Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth

Chapter 3 of Stephanie Kelton’s The Deficit Myth addresses the National Debt. It’s a very big number, and politicians use it to terrorize voters. Kelton tells a story about Senator Mike Enzi, R-WY, complaining about a CBO budget outlook report, saying it should put in the zeros instead of using the word “trillion”. And that’s how seriously we should take the problem. Remember what we learned in the last post: money is a debt on the books of the US government, but it’s also an asset in the hands of a currency user. That means that the National Debt tells us how much we collectively have received in assets from the Treasury.

Kelton says that fear of the National Debt is shared by everyone in and near government across the ideological spectrum, politicians, staffers, wonks and think-tankers. When she was Chief Economist for Bernie Sanders on the Senate Finance Committee, Kelton questioned the myth.

One of the most eye-opening things I learned came from a game I would play with members of the committee (or their staffers). I did this dozens of times, and I always got the same incredible reaction. I’d start by asking them to imagine that they had discovered a magic wand with the power to eliminate the entire national debt with one flick of the wrist. Then I’d ask, “Would you wave the wand?” Without hesitation, they all wanted the debt gone. After establishing an unflinching desire to wipe the slate clean, I’d ask a seemingly different question: “Suppose that wand had the power to rid the world of Treasuries. Would you wave it?” The question drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand. P. 77. [1]

Wiping out the National Debt means eliminating Treasuries, and that exposed the contradiction at the heart of the myth of the Very Scary Debt. We can’t get rid of Treasuries! But the raw number scares voters so many people continued to rant about the National Debt. They never asked why voters were scared, or questioned their role in creating that fear.

Intuitively, if deficits aren’t a problem unless they cause inflation, then the national debt isn’t a problem unless it causes inflation. In the same way interest on the national debt isn’t a problem unless it causes inflation. Kelton acknowledges that there may be limits on the size of the national debt, usually discussed in terms of the ratio between the national debt and the GNP. The US is nowhere near the size of the debt to GNP ratio of Japan, for example, so there’s no immediate problem. Assuming there is some limit, Kelton turns to the various ways we could eliminate the national debt.

One way would be to run government budget surpluses, as we did when Bill Clinton was President. We could easily do that by raising taxes on the rich and their corporations, slowly depleting their total wealth. That’s a good idea on its own terms, because it would reduce their political and economic power. Kelton says that in the past when the government has run surpluses for several years the result was depressions. I would add that if we did raise taxes we’d be destroyed in the shrieks of the rich saying that their money was being used to pay for social programs like Social Security.

Or, the Fed could get rid of all of the Treasuries with just a few clicks on a keyboard, by reducing the number in the Treasury Securities account and increasing the numbers in the bank account of the holders of the Treasury securites. Economists call this monetizing the debt.

Or, we could do it by continuing to spend as we see fit subject to the inflation constraint, but stop issuing new Treasuries. As the old ones mature, the Fed pays them by crediting the accounts of the holders with green dollars. We could stop that at any time we reached a level of debt that wouldn’t frighten even the most fearful Americans. or at some higher level. [2]

Once getting rid of Treasuries would have caused a problem, because the Fed used the market in Treasuries to control interest rates. That is no longer the only control mechanism available to the Fed. [3] But then what? Kelton discusses an article by Eric Lonergan, an economist and fund manager. Lonergan asks what would happen if Japan monetized all its bonds. I quote his analysis in full:

First, let’s go through the balance sheet effects: 1. The government now has no debt. 2. The value of the Japanese private sector’s assets is unchanged – they used to hold JGBs [Japanese Government Bonds], now they hold the same value in cash. So overnight, the government’s debt is eliminated, and the private sector’s net wealth is unchanged.

The income effects are also interesting: 1. The government’s budget position improves. 2. The income of the private sector falls because bonds paying interest have been replaced with cash holding none.

So what happens to the economy?

Most people tend to say, “hyperinflation”, but that makes little sense. Why on earth would the Japanese household sector rush out and buy things when their interest income has fallen, their wealth is unchanged, and they are used to falling prices. The private sector already has a high wealth to GDP ratio and are spending less than they produce (which is precisely why the government runs a deficit).

The Yen might weaken because the yield on overseas assets has risen relative to Japanese assets, but this spread is hardly offering much compensation for exchange rate risk. My conclusion is that nothing would change in Japan if you had 100% monetization of the stock of JGBs!

The takeaway is that getting rid of Japanese government debt wouldn’t affect the economy at least in the short term. Two possible problems: a) less spending because bond income disappears from the economy; and b) weakening of currency in international markets because there are higher return available on the bonds of other countries. In the case of the US, we can add that cash previously held as Treasuries suddenly isn’t producing any return, so its owners look elsewhere for returns. That might mean an increased purchases of assets by foreigners; purchase of the debt of other countries; or something else. But that’s not all bad, and I don’t know enough to work it out.

Kelton accepts Lonergan’s logic. Paying off US Treasury Securities is possible and likely would have minimal short-term effects. Late in the Clinton Administration the US ran budget surpluses, to the point that White House economists prepared a draft report titled Life After Debt. Here’s a discussion by David Kestenbaum of Planet Money. This report got labeled PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY”, and Planet Money got it through FOIA. Then the Republicans cut taxes for the rich, with the usual pennies for the rest of us, so the problem evaporated.

In sum, the national debt isn’t a problem as long as it doesn’t lead to inflation. A lesser constraint might be the impact on the value of the dollar, which might affect international trade in unpredictable ways.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] This is a good example of Kelton’s style. As you can see, it’s clear, simple, and direct English prose, the highest praise my high school English teacher, Brother Daniel, ever bestowed.

[2] Here’s a recent tweet from Scott Fullwiler, an MMT economist:

The core point is it should be done by the [Central Bank]—there’s no reason why the appropriate (for mkt conditions) change in risk-free, liquid securities should equal size of govt debt/surplus, & no reason for appropriate maturity structure to be same as what cost-minimizing [Treasury] chooses.

[3] For example, the Fed began to pay interest on the reserves commercial banks are required to keep at the Fed. There is a full explanation starting at P. 117.

[4] There are, of course, distributional issues for both Treasury Securities and for the interest they pay. This is a normative issue best dealt with by politicians, and not economists. One consideration is that many people benefit indirectly from interest on Treasuries through money market funds, investments by pension plans and direct purchase, because Treasuries are absolutely safe.

Reflections on The Deficit Myth

Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation

The first three posts in this series address the Introduction and the first two chapters of Stephanie Kelton’s The Deficit Myth. In this post I add her definition of money and some of my thoughts, and invite readers to do the same, either questioning points she made or applying her ideas to our society.

1. Modern Monetary Theory starts by asking one question: how does money work in a fiat currency nation. Kelton defines money in her first published paper: The Hierarchy of Money. This is a very readable discussion of the range of opinions on this subject, focused on the argument between the Metalists and the Chartalists, which began over 400 years ago. [1] Kelton starts with a definition of money. [2]

Money represents a debt-relation or promise to pay that exists between human beings. It cannot be identified independently of its institutional usages, because money represents a social relationship. … The creation of money, then, is simply the balance sheet operation that records this social relation. (Emphasis in original.)

According to Kelton, the Chartalists called money any token representing a debt relationship. Thus, a postal stamp is a money: it represents an asset to the owner and a debt to the Post Office which is satisfied by delivering a letter. A plane ticket is money: it represents the obligation of the airline to fly the holder to a particular place at a particular time. Bank deposits are money: they are a liability of the bank which must deliver money at the direction of the account holder. The rule for creation of money is the agreement by one person to hold the debt of another. [2]

Now consider the dollar. The dollar is a creation of the federal government. Kelton writes:

Thus, State money is created when the public agrees to hold (as an asset) state-created money (a liability to the State) which is required in payment of taxes.

This explains why currency and other forms of dollars (bank deposits, treasury securities, and bank reserves at the Fed) are liabilities of the federal government. We users agree to hold these dollars as assets. We can use them to acquire different forms of assets from sellers, obtain services from providers, and pay taxes. When the government collects taxes, it matches that asset with a corresponding liability and clears to zero.

The point of this exercise is to demonstrate that money is a balance sheet representation of the debt/asset relations between human beings, a social relationship. That understanding is crucial to the arguments advanced in The Deficit Myth.

2. Kelton calls for a Copernican Revolution in the way we think about money. This, of course, is a reference to the Copernican Theory, which said that the earth revolves around the Sun, and not vice versa, despite what we see with our own eyes. The ramifications of the Copernican Revolution eventually led to a complete change in our understanding of the nature of reality. [3] The revolutionary change she describes is that US government spending is not constrained by its ability to tax and borrow, but by the actual resources available, labor, material, and the organization of production. One important part of The Deficit Myth is the description of the kinds of changes we have to make in our own thinking. But there are many more revolutions. Here are three.

a. Congress ducks policy arguments by turning them into discussions of budgets or into political games. That never made sense, because all budgeting is about priorities. Games like pay-fors or one-upmanship on military spending were always perverse, but both parties pretended these were real arguments. They aren’t. MMT strips away one more layer of pretense.

b. Mainstream economists refuse to look honestly at MMT. Marion Fourcade and her colleagues at Berkeley published a paper examining the economics profession titled The Superiority of Economists, a devastating critique of their pretensions. Among other things, economists tell us that markets should make our decisions about allocation of resources, and that anything that interferes with the operations of markets is harmful to society. When government spending is between 35 and 45% of GNP prior to the pandemic, it’s stupid to argue that markets are the best form of allocation of resources. When capitalists exercise outlandish control of government spending priorities, it’s stupid to argue that markets should determine what we can and can’t have.

Many economists hold themselves out as experts on all sorts of things, including the pandemic. In the MMT world, as Kelton points out, economists would concentrate on predicting the inflationary effect of spending choices, and get completely out of the business of telling us how we should make decisions about allocation of resources.

c. Historically, people thought that the most important problem facing an economy was to accumulate capital and turn it to productive use for the benefit of society. The chosen solution was Capitalism, and to encourage capitalists to invest, we allowed them to reap outlandish profits through monopoly, grants from the Crown, and other favors, while ignoring the fraud and corruption those policies entailed. This continued in the US, with gigantic giveaways to railroad and mining companies, ludicrous levels of patent protection, and grotesquely unfair tax rules, while mostly ignoring or even praising graft, corruption and fraud. The results of coddling capitalists are rubbed in our faces every day.

MMT gives us space to think about the way society could operate to make our lives better. It allows us to make decisions about what we need and want. We do not have to accept whatever is on offer from Capitalists. We can decide based on our principles, morals, values and dreams. MMT puts us in charge, and frees us from the domination of the rich. It opens the door to the “euthanasia of the rentier”, as Keynes calls it in The General Theory of Employment, Interest and Money.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Fun fact, Adam Smith may have held Chartalist views. Kelton quotes him thus:

A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money.

[2] Kelton doesn’t go into the history of money, but this BBC article is a fascinating picture of trade in Ancient Sumeria, and gives a tantalizing hint about the origin of money in record-keeping and accounting for trade.

[3] For a fascinating and occasionally comprehensible discussion of this new understanding, see Reality Is Not What It Seems, by Carlo Rovelli.

MMT On Inflation

Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth

The second chapter of Stephanie Kelton’s The Deficit Myth deals with inflation. In Chapter 1, Kelton explains that the deficit is not a constraint on government spending. Instead, inflation is the important constraint. A deficit does not prove that the federal government is overspending. Only an increase in inflation proves Congress is overspending. Kelton says Congress shouldn’t tax and spend so as to deliver a balanced budget. Congress should spend and tax so as to deliver a balanced economy, one that serves all of us. She says that historically we have not done this, that we have chosen to focus of deficits and in so doing our economy has not served us well.

Definition and Description of Inflation

Inflation means a continuous rise in the price level. A bit of inflation is considered harmless and even something economists like to see in a healthy, growing economy. But if prices start rising faster than most people’s incomes, it means a widespread loss of purchasing power. Left unchecked, this would mean a decline in society’s real standard of living. In extreme cases, prices can even spiral out of control, gripping a country in hyperinflation. P. 44.

The danger of eroding incomes explains why everybody worries about inflation, and explains why politicians can use the threat of inflation to terrorize voters. It works, even though the problem for more than a decade hasn’t been too much inflation, it’s been too little. Ever since the Great Crash inflation has been less than 2% annually despite efforts of the Fed.

Kelton says that economists think of inflation as either cost-push or demand-pull. Demand-pull inflation occurs when consumer spending rises faster than the economy can produce goods and services. That hasn’t been a problem for a long time. Cost-push inflation can arise from disasters, which reduce the supply of something; from pricing power, as in the case of Big Pharma with its patents and trade secrets; or from workers gaining market power and demanding higher wages which businesses pass on to consumers. That last one is the only fear mainstream economists suffer, as far as I can tell.

The dominant theory of inflation stems from Milton Friedman’s monetarism:

According to Friedman, “inflation is always and everywhere a monetary phenomenon.” What he meant was that too much money is the culprit in any inflationary episode. If prices weren’t stable, it was because the central bank was trying to force the economy to create too many jobs by allowing the money supply to increase too rapidly.

The early neoliberal Friedman insisted that the Fed must never interfere with the workings of the market. Specifically, the Fed should not try to reduce unemployment below a certain level, which came to be called NAIRU, the non-accelerating inflationary rate of unemployment. Friedman thought there had to be some minimum level of unemployment in the economy. [1] The Fed bought into this view, as did politicians of all stripes. They all agreed that to keep prices stable, the US has to accept a certain level of unwanted unemployment. And to be on the safe side, maybe a bit higher level of unemployment. In practice, Congress dumped the problems of inflation and unemployment on the Fed.

But problems arose. The NAIRU isn’t visible or measurable. It can only be seen in retrospect. And now we are pretty sure there isn’t a clear relationship between inflation and unemployment, as the Fed assumed. [2] The Fed Chair, Jerome Powell, freely admitted to Rep. Alexandria Ocasio-Cortez that the Fed has been wrong about NAIRU, but defended its use on the grounds that “We need to have some sense of whether unemployment is high, low or just right.” P. 53.

2. The Problem of Unemployment

It turns out that the Fed used the purported correlation between inflation and unemployment as its primary tool for controlling inflation, ignoring all other causes of inflation. When the economy heated up and unemployment dropped, workers gained market power, and their share of national income increased. That led the Fed to raise interest rates leading to a tightening of the economy and usually a recession, as the following chart shows.

Gray bars indicate recessions.


Kelton calls this a “human sacrifice”, forcing some people out of the workforce when they want to work and can be productive. She thinks we are asking too much of the Fed. It can’t spend money into the system; only Congress can do that. All the Fed can do is change the cost of borrowing. If unemployment is too high, the Fed can make borrowing cheaper, but it can’t force anyone to borrow. Usually when unemployment is high, no one wants to borrow. I note that this was what happened after the Great Crash. The Fed cut interest rates to zero and lowered bank reserve requirements, hoping to increase money going into the economy. It didn’t work.

3. The Job Guarantee

Kelton argues that a better way to deal with unemployment is a job guarantee. Every person who wants to work should be able to get a decent job with decent pay and decent benefits. If the private sector won’t provide those jobs, the government should. [3] Kelton discusses this idea and its foundations.

It would probably be impossible for Congress to monitor the economy closely enough to manage full employment by tweaking taxes and spending. A job guarantee would act as a safety-valve and an automatic stabilizer for the economy and help solve this problem, leaving the Fed free to focus on inflation. If the private sector needs all the workers it can find them. If not, the government hires people to do jobs that need doing. There is plenty of work that needs doing, and, as Kelton pointed out elsewhere, we can always use more flowers in our parks and boulevards.

4. Preventing Inflation

So how should Congress budget knowing that the only effective constraint on spending is inflation? What would change? The way Congress currently works is that every bill that calls for expenditures gets a score from the Congressional Budget Office that assesses the impact of the expenditure on the deficit over a ten-year period. If inflation were the constraint, then the CBO would offer a score based on the probable impact of the expenditure on inflation. If the economy is, as now, operating well below its capacity for producing goods and services, the possibility of inflation would be low.

If the economy is close to capacity, either as a whole or in part related to the area of expenditures, then Congress has to make hard calls. How important is the expenditure? Can we create “fiscal space” for the expenditure with taxes? For example, in the case of the entire economy humming along, a general income tax hike would take money out of most people’s hands so they would not be buying as much, leaving room for the government to buy more. If there is a bottleneck, a more focused tax or some other step might be necessary.

Conclusion

MMT recognizes that inflation is a crucial problem. It shows how it arises and how we should protect ourselves from it.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Marx said that the reserve army of labour is a necessary part of capitalism. Hmmm.

[2] This relationship is embodied in the Philips Curve. I discuss it here.

[3] Other economists favor a universal basic income. Both have the added benefit of freeing workers from abusive or irritating employers. Your family won’t starve if you walk out on a bad situation.

Debunking The Deficit Myth

Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index

The first chapter of Stephanie Kelton’s book The Deficit Myth takes up the biggest myth about federal government finances, the idea that federal budget deficits are a problem in themselves. The deficit myth is rooted in the idea that the federal government budget should work just like a household budget. A family can’t spend more than its income will support. The family has income, and may be able to borrow money, and the sum of these sets the limit on household spending. Those who propagate the deficit myth say government expenditures should be constrained by the government’s ability to tax and borrow. First the government has to find the money, either through taxes or borrowings, and only once it has found the money can it spend. The way things actually work is different.

In the real world, it goes like this. Congress votes to direct an expenditure and authorize payment. An agency carries out that direction. The Treasury instructs the Fed to pay a vendor. The Fed makes the payment by crediting the bank account of the vendor. That’s all that happens. It turns out that the real myth is that the Treasury had to find the money before the Fed would credit the vendor. That’s because the federal government holds the monopoly on creating money. U.S. Constitution Art. 1, §§8, 10. In practice this power is given to the Treasury, which mints coins, and to the Fed, which creates dollars. [1]

It also turns out that for the most part, the Treasury does cover the expenditure by taxing or borrowing, but because the government is an issuer of dollars, it isn’t necessary. [2] In the last few months, the Treasury has been selling securities and the Fed has been buying about 70% of them. Here’s a chart from FRED showing Fed holdings Fed holdings of treasury securities. The Fed may or may not sell those securities to third parties. If it doesn’t, they will be held to maturity and remitted as a dividend to the Treasury.

The recognition that spending comes first, and finding the money comes second is one of the fundamental ideas of MMT. Kelton describes her meeting with Warren Mosler who introduced her to these ideas; the stories are amusing and instructive. I particularly like this part:

[Mosler] began by referring to the US dollar as “a simple public monopoly.” Since the US government is the sole source of dollars, it was silly to think of Uncle Sam as needing to get dollars from the rest of us. Obviously, the issuer of the dollar can have all the dollars it could possibly want. “The government doesn’t want dollars,” Mosler explained. “It wants something else.”

“What does it want?” I asked.

“It wants to provision itself,” he replied. “The tax isn’t there to raise money. It’s there to get people working and producing things for the government.” Pp. 24-5.

Put a slightly different way, people accept the government’s money in exchange for goods and services because the government’s money is the only way to pay taxes imposed by the government. Kelton says she found this hard to accept. She spent a long time researching and thinking about it, and eventually wrote her first published peer-reviewed paper on the nature of money. [3]

The monopoly status makes governments the issuers of money, and everyone else is a user. That fundamental difference means that governments have different financial constraints than households, and that it certainly isn’t constrained by its ability to tax and borrow. Kelton offers several interesting and helpful analogies that can help people grasp the Copernican Revolution that this insight entails.

Once we understand that government doesn’t require tax receipts or borrowings to finance its operations, the immediate question become why bother taxing and borrowing at all. Kelton offers four reasons for taxation.

1. Taxation insures that people will accept the government’s money in exchange for goods and services purchased by the government.
2. Taxes can be used to protect against inflation by reducing the amount of money people have to spend.
3. Taxes are a great tool for reducing wealth inequality.
4. Taxes can be used to encourage or deter behaviors society wants to control. [4]

She explains borrowing this way: government offers people a different kind of money, a kind that bears interest. She says people can exchange their non-interest-bearing dollars for interest bearing dollars if they wish to. “… US Treasuries are just interest-bearing dollars.” P. 36. Let’s call the non-interest-bearing dollars “green dollars”, and the interest-bearing ones “yellow dollars”.

When the government spends more than it taxes away from us, we say that the government has run a fiscal deficit. That deficit increases the supply of green dollars. For more than a hundred years, the government has chosen to sell US Treasuries in an amount equal to its deficit spending. So, if the government spends $5 trillion but only taxes $4 trillion away, it will sell $1 trillion worth of US Treasuries. What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars. P. 36-7.

It might seem that there are no constraints, but that is not so. Congress has created some legislative constraints on its behavior, including PAYGO, the Byrd Rule, and the debt ceiling, but these can be waived, and always are if a majority of Congress really want to do something. They also serve as a useful way of lying to progressives demanding public spending on not-rich people, like Medicare For All. We have to pay for it under our PAYGO rules, they say, while waiving PAYGO for military spending (my language is harsher than Kelton’s).

The real constraints are the availability of productive resources and inflation. The correct question is not “where can we find the money”, but “will this expenditure cause unacceptable levels of inflation” and “do we have the real resources we need to do this” and “is this something we really want to do. As Kelton puts it, if we have the votes, we have the money.

In my next post, I will examine some of these points in more detail. Please feel free to ask questions or request elaboration in the comments.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Art. 1, §8 authorizes the federal government to create money; §10 prohibits the states from issuing money. That leaves open, for now, the possibility that private entities can issue money. Banks and from time to time other private entities play a role in the creation of money, but I do not see a discussion of this in the book.

For those interested, here’s a discussion of the MMT view from Bill Mitchell. I may take this up in a later post. In the meantime, note that every creation of money by a bank loan is matched by a related asset. Thus, bank creation of money does not increase total financial wealth. In MMT theory this is called horizontal money. It is contrasted with vertical money representing the excess of government expenditures over total tax receipts, which does increase financial wealth. Here’s a discussion of this point.

[2] There are, of course, constraints on government spending, especially inflation and resource availability. We’ll get to that in a later post.

[3] Kelton cites the paper in a footnote: The Role Of The State And The Hierarchy Of Money.

[4] Compare this list to the list prepared by Beardsley Ruml, President of the New York Fed, in 1946.

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