However, eventually $9 trillion deficit will catch up to you. Krugman’s suggestion that GDP will be $20 trillion is reasonable, but does anyone know if he’s referring to nominal or real GDP?

I appreciate the clarification in all its density, Marshall. I think I
know the answer to this question in advance but I’ll pose it anyway: How would
you feel about the implimentation of WPA or CCC type jobs programs in the
present circumstances?

Not surprisingly, I would support this, but I would go further. I would
like to see the government offer a permanent Job Guarantee (JG) program.
This sort of program would remain a permanent feature of our economy, in
effect acting as a buffer stock to put a floor under unemployment, whilst
maintaining price stability whereby government offers a fixed wage which does not
“outbid” the private sector, but simply creates a stabilizing floor and
thereby prevents deflation. The JG program would allow for the elimination
of many existing government welfare payments for anyone not specifically
targeted for exemption, and would command greater political legitimacy, as
society places a high value on work as the means through which individuals
earn a livelihood. Minimum wage legislation would no longer be needed as it
would be established via the JG. Labor would welcome the safety net of a
guaranteed job, and business would recognize the benefit of a pool of available
labor it could draw from at some spread to the government wage paid to JG
employees. Additionally, the guaranteed public service job would be a
counter- cyclical influence, automatically increasing government employment and
spending as jobs were lost in the private sector, and decreasing government
jobs and spending as the private sector expanded. So it would represent an
expansion of WPA or CCC type programs.

Of course, whenever I (and others) suggest this, invariably the charge of
“socialism” arises. But the free market has not proved itself able to
provide full employment and it seems to me that this would actually help the
economy function better.

Well spoken, Marshall. Thanks.

My understanding is that fiscal deficits yield lower interest, because a
fiscal deficit is an injection of cash into the private sector. More money
=> cheaper money. This has certainly been the experience of Japan…

That is correct.

Here’s a link to a piece done by Stephanie Kelton of UMKC, which explains
the mechanics perfectly:

_http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-governme
nt-debt-doom-us_17.html_
(http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-government-debt-doom-us_17.html)

“So while there is no operational constraint on government because of the
electronic printing presses, there is an effective constraint in the form
of debt and currency revulsion and price instability (large measures of
deflation or inflation).”

What say, Ed. Does Marshall Auerbach take this principle under
consideration sufficiently in his usual discussions about the deficit? One gets the
sense with him that almost any level of government indebtedness is
acceptable, that there are no such constraints and neither is there any inherent
risk. Help me here if you will, kindly.

No, I don’t think that any level of government indebtedness is acceptable.
That’s the usual caricature of my position. You want government spending
to be neither “too hot” nor “too cold”. We shouldn’t construct policy on
the basis that a government faces NO CONSTRAINT in terms of spending, but
that many of the “constraints” that people normally discuss are not
identified in an honest manner – which is to say that these commentators import
nonsensical notions of “affordability” and “national solvency” (we’re getting
a lot of this sort of talk today in regard to the US and Japan), when they
have no applicability in a post-gold standard world in which government
alone creates currency and extrinsically confers value on it via the
imposition of a tax liability.
The public would not give up goods and services to the government in return
for otherwise worthless coins or paper notes unless there were good
reasons to do so. The primary reason the public accepts what we call “fiat money”
is because it has tax liabilities to the government. If the tax system
were removed, the government would eventually find that its fiat money would
lose its ability to purchase goods and services on the market. In the words
of Abba Lerner (one of the architects of “Chartalism”):

“The modern state can make anything it chooses generally acceptable as
money…It is true that a simple declaration that such and such is money will not
do, even if backed by the most convincing constitutional evidence of the
state’s absolute sovereignty. But if the state is willing to accept the
proposed money in payment of taxes and other obligations to itself the trick is
done.”

Once we accept the reality that the government creates new net financial
assets exogenously, it renders notions of “solvency” to be nonsensical. It
also means that the household analogy is totally fallacious, given that a
household does not have the power to create currency or tax and therefore
faces an external constraint unlike a government. Which brings us to the second
point of chartalism. Again, as Lerner argues: “The central idea is that
government fiscal policy, its spending and taxing, its borrowing and
repayment of loans, its issue of new money, and its withdrawaal of money, shall all
be undertaken with an eye only to the results of these actions on the
economy and not to any established traditional doctrine about what is sound or
unsound.” So we look at the EFFECTS and IMPACTS of government spending.
When we reach full employment and inflationary pressures are beginning to
develop, this is the constraint faced by a government and it should reduce its
spending and/or increase taxation to diminish demand. We’re interested in
full employment and economic prosperity; we’re not auditioning for the role
of finance minister in Zimbabwe, as many of our critics allege.

On the first point, I readily acknowledge that one possible consequence of
increased government spending might be a weaker currency but only on the
basis of changing private preference portfolio shifts. And, as I’ve argued
several times before (_http://www.newdeal20.org/?p=5425_
(http://www.newdeal20.org/?p=5425) )
It unclear what a government should do about that. What would you have the
Fed do? Should they raise rates to defend it? It is unclear that this
would work. The relationship between a given level of interest rates offered by
the central bank and the external value of a currency is tenuous. Consider
Japan as Exhibit A. The BOJ has been offering virtually free money for 15
years and yet the yen today remains a strong currency (much to the chagrin
of the likes of Toyota or Sony).
Of course, higher rates can have an offsetting beneficial income impact
(what Bernanke calls the “fiscal channel”), but it does not follow that a
decision to raise rates would actually elevate the value of the dollar (and
the benefits of higher rates from an income perspective could just as easily
be achieved via lower taxation).
The reality is that private market participants could well view the move as
something akin to a panicked response by the Fed, and the decision could
well trigger additional capital flight, which could weaken the value of the
dollar.
So it is unclear to me what the Tsy or Fed should be doing about the
dollar. My view is that this is a private portfolio preference shift and I don’t
think central banks should be responding to every vicissitude of changing
market preferences. The US government should simply ignore the market
chatter and idle threats from the Chinese and do nothing.

What say, Ed. Does Marshall Auerbach take this principle under consideration sufficiently in his usual discussions about the deficit? One gets the sense with him that almost any level of government indebtedness is acceptable, that there are no such constraints and neither is there any inherent risk. Help me here if you will, kindly.

You were talking about the deflationary pressures. One has to be reminded, that STILL, nobody knows how big the hole was, or is, or how big it gets.

These unknown numbers in a global scale + the concerted effort to plug that hole, yet to be judged if they succeeded + the problem of mis-allocation of government (“Die Regierung ist zu nichts zu gebrauchen!”) spending to kick-start the economy = double-dip & sovereign debt failure.

Thanks for all your posts…

So, no, I’m not rejecting the MMT argument that government deficits are normal and good. I don’t believe that is the case (in part for ideological reasons – distrust of big government), but this is not a rejection of that notion.

I am making the case that large 10%+ deficits in North America or Western Europe are unsustainable as nominal GDP could never grow at that rate in those areas.

So far, I haven’t seen any good rebuttals to the MMT. For example, Japan has run huge government deficits for years, but hasn’t suffered from inflation. The U.S. just used Quantitative Easing to liquidate $300 billion, and there are no signs of inflation. So why not continue to increase the deficit to bring the economy back to full employment? No money need be borrowed to do this. If inflation becomes a bigger problem than unemployment, then we can reverse the program.

Certainly, there is a lot of work that needs doing — cleaning up the environment, policing our cities, et cetera…