More on the Upside-Down World of MMT
I ran across a post by Robert Murphy over at the Mises Institute blog on Modern Monetary Theory. Since I have been pushing the idea that the centrality of secular debt accumulation makes some ideas from MMT and Austrian Economics compatible, it was interesting to see a Mises scholar work over MMT.
Murphy is sceptical about stressing the idea that government deficits are exactly one-for-one non-government sector surpluses. He calls it the upside down world of MMT. I, on the other hand, see the logic. This is something I covered in a post called Economics 101 on government budget deficits. But here’s what Murphy had to say:
When I first encountered such a claim — that the government budget deficit was necessary to allow for even the mathematical possibility of net private-sector saving — I knew something was fishy. For example, in my introductory textbook I devote Chapter 4 to "Robinson Crusoe" economics.
To explain the importance of saving and investment in a barter economy, I walk through a simple numerical example where Crusoe can gather ten coconuts per day with his bare hands. This is his "real income." But to get ahead in life, Crusoe needs to save — to live below his means. Thus, for 25 days in a row, Crusoe gathers his ten coconuts per day as usual, but only eats eight of them. This allows him to accumulate a stockpile of 50 coconuts, which can serve as a ten-day buffer (on half-rations) should Crusoe become sick or injured.
This is an admittedly simple story, but it gets across the basic concepts of income, consumption, saving, investment, and economic growth. Now in this tale, I never had to posit a government running a budget deficit to make the story "work." Crusoe is able to truly live below his means — to consume less than his income — and thereby channel resources into the production of more capital goods. This augments his future productivity, leading to a higher income (and hence consumption) in the future. There is no trick here, and Crusoe’s saving is indeed "net" in the sense that it is not counterbalanced by a consumption loan taken out by his neighbor Friday.
As Murphy rightly says, "of course you don’t need the government in order to save." Here’s the problem, though. There are no transactions involved in Murphy’s example.
When we talk about GDP as a measure of the size of the economy, we are talking about a statistical measure of transactions as measured by the money unit of account. I don’t really think this is very complete picture of the economy. It’s an income statement measure, when the balance sheet and cash flow statements are more telling. The balance sheet is very important – or as I have said in the past: It’s the debt, stupid.
But GDP is all about measuring transactions in currency volumes. GDP really is a sum of net financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account. I know that sounds like a bunch of mumbo jumbo, but what I am really saying is this: If no transaction occurred, as far as GDP goes it doesn’t matter. If no money changes hands, as far as GDP goes, 99 times out of 100 it didn’t happen.
For example, Kate is a housewife, who, despite her busy schedule at home, is able to grow coconut trees in the back yard to make coconuts for food or barter. Now, Kate is unpaid despite the value of the work she is doing. So, none of her work at home is recorded in GDP because there were no money transactions to measure.
Then, what about her coconuts? Well, for 25 days in a row, Kate gathers her ten coconuts per day to feed her family as usual, but the family only eats eight of them. This allows her to accumulate a stockpile of 50 coconuts, which can serve as a ten-day buffer (on half-rations) should the family become sick or injured. Kate is saving. But this saving has nothing to do with GDP or national income and product accounts that are used to measure economic activity. Now if Kate took her 50 coconuts and sold them to her uncle, Sam, for $5 each, she would have $250. And if she gave Sam $230 in return for his goods and services, she would have saved $20 as measured in GDP. She would be net saving $20 and Sam would have a net deficit of $20. That’s how it works.
In fact, I explained exactly this in the government deficits post:
Imagine you and I are the only two people in an economy. For the sake of argument, say we use sea shells as a currency and we trade with no one else but each other. So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth. From an accounting perspective, it’s a wash; if you buy my goods, I get the sea shells and lose the goods of equivalent value and if I buy from you, you get the shells and I get the goods of equivalent value. So far, so good.
Now, let’s bring a third person into the mix, Harry. Harry is a foreigner with whom we agree to do business. Where he’s from, he uses silver as his currency. No matter; in trading with Harry, we agree to an exchange rate between our sea shells and his silver and we are ready to go. Now, we can trade with each other and with Harry. If Harry buys from either of us, we get silver and he gets an equivalent value of goods. If we buy from Harry, he gets sea shells and we get the goods, also equivalent in value to the shells…
Now, let’s introduce some deficits and debt into the scenario. For the sake of argument, let’s say that year in, year out we produce the same amount, the same value of stuff. However, in one particular year, you produce a lot of stuff – and I want to buy it. The problem is that I produce less stuff that you want to buy. What do we do? I could issue you an I.O.U. and tell you I will pay you back sometime later. You accept the deal and now I have received the goods and services and you have received an equivalent value from the two sources, currency and the I.O.U. Again, it is a wash from an accounting perspective. I have a deficit in this particular year and you have a surplus.
Now, even if we add Harry and his silver and foreign goods into the mix, it’s pretty much the same. For example, if you bought some of Harry’s services but didn’t have enough sea shells to pay for it, you could issue an I.O.U. to him for the shortfall. You would have a deficit with Harry for the year and Harry would have a surplus with you for the year. So, even when we introduce debt and deficits into an economy, the accounting is the same; there is no value leakage…
What holds in my little example for three people also holds for three groups of people too. You could have 100 million people in a group that you represent that does trade with my group and Harry’s group and the accounting would be identical. So, let’s give our groups names. I am the government, you are the non-government sector and Harry is the foreign sector. The sea shells are the domestic currency and the silver represents foreign currencies…
Notice I haven’t talked about government as the creator of currency and the private sector as the user of currency. I haven’t focused on any misallocation of resource or malinvestment issues. I haven’t raised the spectre of inflation or currency depreciation. I have simply presented the economics and accounting of budget deficits.
I wouldn’t poo-poo these accounting tautologies. They are real. They have value and they help you understand what’s happening in the economy. The reality is the non-government sectors cannot net save unless the government is deficit spending. The only way the private sector can pay down it’s debt burden is through a net negative shift in trade or government balances. The other way to reduce debt burdens is through debt forgiveness and default. With the U.S. household sector highly indebted, these are the choices. (Of course, the real debt burden can be inflated away – that’s what is happening right now in Vietnam for example. But that’s a topic for another day).
So what about government deficits. This is where it gets ideological. Here’s where Murphy is onto something. He says: "Not All Spending and Income Are Created Equal" – meaning private sector allocates capital better than the public sector. Clearly, if the government sector allocated capital well, we would all be looking to the Soviet model for pointers and China would still be a strictly communist country instead of the increasingly market-based economy it has become. Even the Cubans understand this.
So when you think of government deficits as the primary way to reduce private sector debt burdens, you really should also be thinking about the malinvestment and future slow GDP investment that a misallocation of resources would create. That’s where MMT has work to do.
For example, regarding the US stimulus, did cash for clunkers increase long-term economic growth or reduce it? Did the first time homeowner’s tax credit increase long-term productivity or reduce it? How about this one: did the bailouts of AIG, Citigroup, and Bank of America make America a more efficient global financial powerhouse? If you answered yes, the spending in those examples was good, to all of those questions, then you are going to want to see a lot more of that going forward. Most people would answer no, government is misallocating resources, to those questions.
So, the right question for policy makers then is: If we think private sector allocates capital better, in what measure, if any, is stimulus warranted to arrest a recession like the one we have had? What are the objectives of that stimulus: preventing a deflationary spiral, returning the economy to full employment? How do we prevent the Predator State from siphoning off that stimulus into crony capitalist boondoggles and bridges to nowhere? Can we? Who provides the oversight for these measures and how? And how long into a recovery should this deficit spending continue, and by what measure?
My take: the stimulus we have seen up until now has been ineffective. Too much of it was engineered to bail out reckless allocators of capital in favoured industries in the private sector. And too little of it was designed to help deleverage and return the economy to full employment. This leaves me thinking that in future the only way to prevent malinvestment is to bolster automatic stabilizers and only use these and tax cuts in order to address the shortfall in demand. There are a lot of ways to shape these automatic stabilizers and tax cuts to get the job done but having the government craft specific programs to help specific sectors of the economy like housing only insures that the economy will not be able to readjust.
What do you think? Comments appreciated.
Update: 1555EDT – I made two slight edits, adding ‘net to ‘financial transactions’ and adding ’99 times out of 100′ to ‘it didn’t happen’.
Not sure if this is right. Barter is included in GDP. It may be tiny or it probably difficult to estimate but according to SNA2008, it has to be included.
9.49:”A barter transaction is one where one basket of goods andservices is exchanged for another basket of differentgoods and services without any accompanying monetarypayment. The values of the goods or services acquired inbarter transactions constitute imputed expenditures. Valueshave to be estimated indirectly for goods or servicesexchanged in barter transactions equal to their marketvalues. Thus, when the goods or services obtained throughbarter are used for household consumption their estimatedvalues must be recorded as household final consumptionexpenditure. When a good offered for barter is an existinggood and not newly produced output, negative imputedexpenditure must be recorded for the unit offering the good,in the same way that sales of existing goods are recorded asnegative expenditures.”Barter also attracts a tax https://www.irs.gov/taxtopics/tc420.html
On the other hand, not all financial transactions are counted in output. Most financial transactions are exchange of assets – such as purchases/sales of equities .. and the volume of these transactions is much higher than the GDP. In fact a 2-3 days’ volume is more than the annual GDP.
Barter is also included in the balance of payments.
At a more sophisticated level, barter is just a special case of a credit economy. The transactions are still debits and credits.
The barter transactions have to measured in units of account. Unless the transactions are recorded and then measured, they don’t exist. So barter transactions are basically negligible from a national income and product account perspective
Yes they have to be measured in units of accounts and its upto the national accountants to measure it. It does not mean its not included .. The volume of barter is low and it may not be worthwhile to measure them and it may be difficult to collect data.. they are however supposed to be included.
I quoted the System of National Accounts 2008 for you.
Here is the link … https://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf Check 9.49
I also provided the IRS link which says taxes have to be paid on the barter transactions.
“I also provided the IRS link which says taxes have to be paid on the barter transactions.”
Right. The IRS regards the barter exchange a a financial transaction for the purpose of taxation and if barter is not reported iaw prevailing prices, the IRS is on it. They do monitor significant barter and some years ago showed they mean business with a massive bust of barter club transaction. A lot of people were using barter and either not reporting or underreporting the value of the exchange.
Also, national accountants are just doing the job of estimation. They do not go into every nook and corner to measure output. Surely there are hundreds of transactions that go missing. If the government employs two agencies, they may come up with different numbers and this can be large.
Yes, GDP is just an estimation. In countries where there is a large black market or significant barter transactions because of distrust of government money or tax avoidance (Greece, Russia, etc), the official GDP numbers miss a lot of transacted value. But, in the US at present, barter is limited.
Again I said “GDP really is a sum of financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account.” And while i clarified this by saying ‘money must change hands, this was a simplification to make the previous sentence understandable to the layman. As it stands, barter simply isn’t that relevant here.
“”GDP really is a sum of financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account.”
Nope GDP is not really the sum of financial transactions! I can buy a stock from a seller and its not included in GDP.
Your post wasn’t specific to the US though (in conceptual matters). As per SNA2008, barter is supposed to be included in GDP!
Fair enough, ”
GDP really is a sum of the – net – financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account”
What’s your point? The arguments you are making are not germane to the larger point.
Its not even “net financial transactions”. Net financial transaction is the difference between the net accumulation of financial assets and net incurrence of liabilities – its “net saving”. For a closed economy as a whole it is zero and gdp is not zero for the US obviously!
My arguments are not germane.
The barter part .. is the point I picked up on .. that is not the right reply to the Austrian (I don’t like Austrian economists btw). So point #1 in your reply is not right IMO and I have given sufficient links to prove it.
The “Crusoe Economics” is just a way neoclassicals start arguing and building up things. Its a bit of nitpicking to stop them there and just stop them and say “you have only one person in your economy”.
I understand what you are saying and @tjfxh:disqus also made a point on this score regarding barter. I think the larger argument for making my point about transactions valued in the unit of account are still very much valid though. And so I am going to press this issue.
1. The transaction cannot be counted toward GDP unless it is measured in unit of account terms. That means the barter transaction is one which is circumventing the use of money for whatever reason (tax avoidance, distrust, closed communities, etc). But the transaction must still be valued in unit of account terms and that is what I stated.
2. Moreover, when I say ‘net financial transactions’ perhaps this phraseoology is not precise enough. However, it is clear that I mean a sum of the net balances from unit of account measurable individual transactions. That’s not particularly elegant wording. So I have reduced it.
There is some barter, yes. But, the point is that unless a transaction is made and unless it is done in a form that is measurable in the unit of account and can be taxed, it is as if it doesn’t exist for GDP purposes. And that is the point. When we discuss net balances for specific sectors of the economy, we are discussing a sum of the net balance of each individual transaction that is measurable in the unit of account that that specific sector has engaged in a definable space of time. Murphy’s example was outside the scope of these kinds of transactions: there WAS no transaction, through barter or otherwise. You have to be talking about the same premise in order. In my view this is the main flaw of Murphy’s argument.
The point, of course is that a neoclassical argument would be that you could have 1000s of Carusoes saving in this way, all individual economies of one and no government or government money is needed, yet the savings is still being done. Again, unless a transaction has occurred there is no netting, there are no deficits and no surpluses and that is the basic point.
Not sure if this is right. Barter is included in GDP. It may be tiny or it probably difficult to estimate but according to SNA2008, it has to be included.
9.49:”A barter transaction is one where one basket of goods andservices is exchanged for another basket of differentgoods and services without any accompanying monetarypayment. The values of the goods or services acquired inbarter transactions constitute imputed expenditures. Valueshave to be estimated indirectly for goods or servicesexchanged in barter transactions equal to their marketvalues. Thus, when the goods or services obtained throughbarter are used for household consumption their estimatedvalues must be recorded as household final consumptionexpenditure. When a good offered for barter is an existinggood and not newly produced output, negative imputedexpenditure must be recorded for the unit offering the good,in the same way that sales of existing goods are recorded asnegative expenditures.”Barter also attracts a tax https://www.irs.gov/taxtopics/tc420.html
On the other hand, not all financial transactions are counted in output. Most financial transactions are exchange of assets – such as purchases/sales of equities .. and the volume of these transactions is much higher than the GDP. In fact a 2-3 days’ volume is more than the annual GDP.
Barter is also included in the balance of payments.
At a more sophisticated level, barter is just a special case of a credit economy. The transactions are still debits and credits.
The barter transactions have to measured in units of account. Unless the transactions are recorded and then measured, they don’t exist. So barter transactions are basically negligible from a national income and product account perspective
Yes they have to be measured in units of accounts and its upto the national accountants to measure it. It does not mean its not included .. The volume of barter is low and it may not be worthwhile to measure them and it may be difficult to collect data.. they are however supposed to be included.
I quoted the System of National Accounts 2008 for you.
Here is the link … https://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf Check 9.49
I also provided the IRS link which says taxes have to be paid on the barter transactions.
“I also provided the IRS link which says taxes have to be paid on the barter transactions.”
Right. The IRS regards the barter exchange a a financial transaction for the purpose of taxation and if barter is not reported iaw prevailing prices, the IRS is on it. They do monitor significant barter and some years ago showed they mean business with a massive bust of barter club transaction. A lot of people were using barter and either not reporting or underreporting the value of the exchange.
Also, national accountants are just doing the job of estimation. They do not go into every nook and corner to measure output. Surely there are hundreds of transactions that go missing. If the government employs two agencies, they may come up with different numbers and this can be large.
Yes, GDP is just an estimation. In countries where there is a large black market or significant barter transactions because of distrust of government money or tax avoidance (Greece, Russia, etc), the official GDP numbers miss a lot of transacted value. But, in the US at present, barter is limited.
Again I said “GDP really is a sum of financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account.” And while i clarified this by saying ‘money must change hands, this was a simplification to make the previous sentence understandable to the layman. As it stands, barter simply isn’t that relevant here.
“”GDP really is a sum of financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account.”
Nope GDP is not really the sum of financial transactions! I can buy a stock from a seller and its not included in GDP.
Your post wasn’t specific to the US though (in conceptual matters). As per SNA2008, barter is supposed to be included in GDP!
Fair enough, ”
GDP really is a sum of the – net – financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account”
What’s your point? The arguments you are making are not germane to the larger point.
Its not even “net financial transactions”. Net financial transaction is the difference between the net accumulation of financial assets and net incurrence of liabilities – its “net saving”. For a closed economy as a whole it is zero and gdp is not zero for the US obviously!
My arguments are not germane.
The barter part .. is the point I picked up on .. that is not the right reply to the Austrian (I don’t like Austrian economists btw). So point #1 in your reply is not right IMO and I have given sufficient links to prove it.
The “Crusoe Economics” is just a way neoclassicals start arguing and building up things. Its a bit of nitpicking to stop them there and just stop them and say “you have only one person in your economy”.
I understand what you are saying and @tjfxh:disqus also made a point on this score regarding barter. I think the larger argument for making my point about transactions valued in the unit of account are still very much valid though. And so I am going to press this issue.
1. The transaction cannot be counted toward GDP unless it is measured in unit of account terms. That means the barter transaction is one which is circumventing the use of money for whatever reason (tax avoidance, distrust, closed communities, etc). But the transaction must still be valued in unit of account terms and that is what I stated.
2. Moreover, when I say ‘net financial transactions’ perhaps this phraseoology is not precise enough. However, it is clear that I mean a sum of the net balances from unit of account measurable individual transactions. That’s not particularly elegant wording. So I have reduced it.
There is some barter, yes. But, the point is that unless a transaction is made and unless it is done in a form that is measurable in the unit of account and can be taxed, it is as if it doesn’t exist for GDP purposes. And that is the point. When we discuss net balances for specific sectors of the economy, we are discussing a sum of the net balance of each individual transaction that is measurable in the unit of account that that specific sector has engaged in a definable space of time. Murphy’s example was outside the scope of these kinds of transactions: there WAS no transaction, through barter or otherwise. You have to be talking about the same premise in order. In my view this is the main flaw of Murphy’s argument.
The point, of course is that a neoclassical argument would be that you could have 1000s of Carusoes saving in this way, all individual economies of one and no government or government money is needed, yet the savings is still being done. Again, unless a transaction has occurred there is no netting, there are no deficits and no surpluses and that is the basic point.
The problems related to malinvestment arise from several sources. The first in inadequate risk assessment and pricing of risk. The private sector just failed this test miserably, so I don’t buy the argument the the private sector is definitionally superior to the public sector in minimizing malinvestment. This bill is not completely in yet and already it amounts to trillions, directly in losses and indirectly in contagion.
The entire stimulus package pales in comparison. Moreover, it would have been nice if the stim had resulted in investment, but the point at the time was to drop money from helicopters to prevent the system from collapsing and unemployment from rising higher than it has. Waiting to invest optimally would have been foolish under the circumstances. These circumstances arose because the private sector, when the financial sector melted down owing to its own overreach and mistakes, underlying which was a culture of fraud and malfeasance. This went viral and took down the automobile industry with it, as well as affecting other industrial companies with large financial components.
The present crisis was chiefly generated by cheating. Another simple answer is provided by Bill Black. Impose strict regulation, enforcement and accountability to eliminate all forms of cheating. Presently, major US institutions and politics are thoroughly corrupt.
Problems also arise from rent-seeking replacing productive investment. The US is deeply affected by this presently. A simple answer is provided by Michael Hudson. Tax away economic rent — land rent, monopoly rent, and financial rent to discourage rent-seeking and do not tax gains from productive investment. This discourages parasitism and encourages productive investment.
MMT, being based in Minsky, and the Austrian School do share some concerns and they offer a platform from debate and even cooperation. However, the two school differ normatively in ways that are probably impossible to reconcile, and they also have different theories of money that are incompatible.
Tom, I know of MMT’ers who think that more consideration has to be given to the government malinvestment issue. It is real. Again, we would be looking to the Soviet model if it were not. I don’t think we could make an a priori assumption that the private sector is always better at allocating capital. There are externalities, agency costs, and time horizon issues.
Clearly, it’s hard to separate the cronyism from the misallocation in this last recession so it’s really an ideological question as to whether the private sector misallocated resources.
I have said that credit cycles are endemic to capitalist systems. So I am saying misallocation is endemic to the private sector. That doesn’t mean that we want government dictating terms. it does mean we want government oversight and we do need government to sort out those misallocations.
Bottom line: some people are going to take an extreme ideological position on this issue. I think extremes are almost never good. In my view we have shifted too far toward thinking the private sector has magical qualities that must be protected from government interference. Yes, government can be a problem. But it can also be a help.
Good post. I especially appreciate your discussion of accounting identities and GDP. That’s the sort of thing to copy/paste in the future as we often hear that our focus on accounting is “trivial.”
Remember, though, MMT’ers were largely against the details of the stimulus and were in favor primarily of tax cuts and block grants to states on a per capita basis. We were completely against bailouts So, regarding cash for clunkers and homebuyers credits, etc., we were very clear in real time that those weren’t the best ways to try and stimulate, and way too small.
@google-ed009521acd7343788a58daa205305ce:disqus Cash for clunker and homebuyers credits were a waste that both Austrians and MMTers decried JUST as they did the bailouts. Exactly. This must be stressed. Witness Marshall’s last post:
https://pro.creditwritedowns.com/2011/05/the-myth-that-the-banks-are-solvent.html
Thanks, Scott.
We still have to remember that the cash for clunkers program and the housing tax credit were designed to put a floor under the automobile and housing markets, which were crashing at the time. It may be argued whether that was the best way to do this, but it was specifically targeted to prevent those sectors from crashing further.
Right, it’s about trying to end a potential deflationary spiral and finding the best way of dealing with it. Very difficult.
I do think those two sector examples are problematic because of the overcapacity. In autos in particluar, bailouts and cash for clunkers type of maneuvers were followed everywhere. I know Germany had cash for clunkers, for example. Globally, the auto sector needs to reduce capacity. When the next downturn comes, I think we’ll be faced with the same issue in that sector.
i think you are being disingenuous (or at least too dismissive) about alternative economic organizations besides capitalism. the soviet union was an intensely authoritarian that socialists pre 1917 would be appalled by. there are ways of allocating resources and giving local communities political control over how their community’s resources are developed that don’t devolve into central planning or authoritarian rule. by dismissing these schools of thought, you dismiss bodies of knowledge that MMT and austrian economics can learn from.
Great comment, but I’d take it just a bit further. It seems to me that the advance of various litigations of “campaign finance” laws has over the last thirty years codified a political marketplace. Before Buckley v Valeo, a bribe was a bribe: everyone did it, no doubt Joseph Kennedy was a master, but it was still a crime and in the end occasionally surfaced and ended careers. The legal codification of a political marketplace has created a class of political investors who have so corrupted the distinction between the government and the markets, or in platonic terms between citizens and guardians, to make the distinction meaningless. The rentiers have taken over the government and restructured the law to entrench their class. It is a sticky wicket!
The problems related to malinvestment arise from several sources. The first in inadequate risk assessment and pricing of risk. The private sector just failed this test miserably, so I don’t buy the argument the the private sector is definitionally superior to the public sector in minimizing malinvestment. This bill is not completely in yet and already it amounts to trillions, directly in losses and indirectly in contagion.
The entire stimulus package pales in comparison. Moreover, it would have been nice if the stim had resulted in investment, but the point at the time was to drop money from helicopters to prevent the system from collapsing and unemployment from rising higher than it has. Waiting to invest optimally would have been foolish under the circumstances. These circumstances arose because the private sector, when the financial sector melted down owing to its own overreach and mistakes, underlying which was a culture of fraud and malfeasance. This went viral and took down the automobile industry with it, as well as affecting other industrial companies with large financial components.
The present crisis was chiefly generated by cheating. Another simple answer is provided by Bill Black. Impose strict regulation, enforcement and accountability to eliminate all forms of cheating. Presently, major US institutions and politics are thoroughly corrupt.
Problems also arise from rent-seeking replacing productive investment. The US is deeply affected by this presently. A simple answer is provided by Michael Hudson. Tax away economic rent — land rent, monopoly rent, and financial rent to discourage rent-seeking and do not tax gains from productive investment. This discourages parasitism and encourages productive investment.
MMT, being based in Minsky, and the Austrian School do share some concerns and they offer a platform from debate and even cooperation. However, the two school differ normatively in ways that are probably impossible to reconcile, and they also have different theories of money that are incompatible.
Tom, I know of MMT’ers who think that more consideration has to be given to the government malinvestment issue. It is real. Again, we would be looking to the Soviet model if it were not. I don’t think we could make an a priori assumption that the private sector is always better at allocating capital. There are externalities, agency costs, and time horizon issues.
Clearly, it’s hard to separate the cronyism from the misallocation in this last recession so it’s really an ideological question as to whether the private sector misallocated resources.
I have said that credit cycles are endemic to capitalist systems. So I am saying misallocation is endemic to the private sector. That doesn’t mean that we want government dictating terms. it does mean we want government oversight and we do need government to sort out those misallocations.
Bottom line: some people are going to take an extreme ideological position on this issue. I think extremes are almost never good. In my view we have shifted too far toward thinking the private sector has magical qualities that must be protected from government interference. Yes, government can be a problem. But it can also be a help.
Good post. I especially appreciate your discussion of accounting identities and GDP. That’s the sort of thing to copy/paste in the future as we often hear that our focus on accounting is “trivial.”
Remember, though, MMT’ers were largely against the details of the stimulus and were in favor primarily of tax cuts and block grants to states on a per capita basis. We were completely against bailouts So, regarding cash for clunkers and homebuyers credits, etc., we were very clear in real time that those weren’t the best ways to try and stimulate, and way too small.
@google-ed009521acd7343788a58daa205305ce:disqus Cash for clunker and homebuyers credits were a waste that both Austrians and MMTers decried JUST as they did the bailouts. Exactly. This must be stressed. Witness Marshall’s last post:
https://pro.creditwritedowns.com/2011/05/the-myth-that-the-banks-are-solvent.html
Thanks, Scott.
We still have to remember that the cash for clunkers program and the housing tax credit were designed to put a floor under the automobile and housing markets, which were crashing at the time. It may be argued whether that was the best way to do this, but it was specifically targeted to prevent those sectors from crashing further.
Right, it’s about trying to end a potential deflationary spiral and finding the best way of dealing with it. Very difficult.
I do think those two sector examples are problematic because of the overcapacity. In autos in particluar, bailouts and cash for clunkers type of maneuvers were followed everywhere. I know Germany had cash for clunkers, for example. Globally, the auto sector needs to reduce capacity. When the next downturn comes, I think we’ll be faced with the same issue in that sector.
i think you are being disingenuous (or at least too dismissive) about alternative economic organizations besides capitalism. the soviet union was an intensely authoritarian that socialists pre 1917 would be appalled by. there are ways of allocating resources and giving local communities political control over how their community’s resources are developed that don’t devolve into central planning or authoritarian rule. by dismissing these schools of thought, you dismiss bodies of knowledge that MMT and austrian economics can learn from.
Great comment, but I’d take it just a bit further. It seems to me that the advance of various litigations of “campaign finance” laws has over the last thirty years codified a political marketplace. Before Buckley v Valeo, a bribe was a bribe: everyone did it, no doubt Joseph Kennedy was a master, but it was still a crime and in the end occasionally surfaced and ended careers. The legal codification of a political marketplace has created a class of political investors who have so corrupted the distinction between the government and the markets, or in platonic terms between citizens and guardians, to make the distinction meaningless. The rentiers have taken over the government and restructured the law to entrench their class. It is a sticky wicket!
I saw that Murphy article too, it struck me as way too quick to dismiss without really trying to understand. I maintain my premise that modern “conservatives” and Austrians in particular have convinced themselves that money grows on trees, it is the only way you can dismiss these “tautologies” as insignificant. Showing my age, Murphy reminded me of Harry Dean Stanton in “Repo-Man” driving through Los Angeles’ skid row in a rage at all the indigents there and saying “If there was only some way to make them pay!”
If you haven’t read Steve Randy Waldman’s review of Tyler Cowan’s ebook https://www.interfluidity.com/v2/1116.html it is worth the read and relevant here with regard to governmental growth being a necessary corollary to both market growth and growth of complexity: people do not get more complex as the things they depend on do, with the consequence that complexity can always be used to exploit those who fail to understand it. But my real problem with Austrians and self styled “conservatives” is with their notion of freedom that is about corporate and capital freedom, not that of individual humans, though they’ll never admit that in public.
The last three years have left no doubt that corrupt government, beholden to both capital and corporations freed of regulation is capable of mal-investment. None the less the need for government investment in both infrastructure and education is so glaringly obvious even libertarians agree!
(I keep putting “conservative” in quotes because I’m still trying to figure out what they conserve)
Good comments John. When it comes to Libertarians, we really should be thinking of them as liberals. The name derives from the same base as liberals and libertarians are often called classical liberals. In what way is a defense of individual liberty conservative? I see liberty and conservatism as not at all optimally aligned.
The problem with the Libertarian movement is the one you just mentioned, namely that we have shifted too far toward thinking the private sector has magical qualities that must be protected from government interference. This is an extremism that turns liberty into corporatism:
https://pro.creditwritedowns.com/2011/02/corporatism-masquerading-as-liberty.html
I wrote on this precisely. Corporations are not individuals. And it is the defense of corporate liberty which has aligned the Libertarian movement with conservatives. This is a faux liberty, a fake libertarianism that I reject. it allows the coercive power of private actors – corporations – to battle with the greater coercive power of the state. That’s a battle in which individual liberties are lost.
My problem with Libertarians is that the all seem to be Liberals who really really liked The Fountain Head and Atlas Shrugged: they bought both the idea that altruism is a vice and that the infrastructure of civilization is a product of nature.
The former bias flies in the face of all of the behavioral, anthropological and archaeological research of the last thirty years (incidentally if you’ve not picked it up, Ian Morris’ “Why the West Rules for Now” is really great on this stuff). This latter bias makes them stubbornly refuse to look at the deep technicalities that underpin something as apparently simple and ancient as “money”, what is in fact an incredibly complex system that MMT (Fulwiler and Wray come to mind) have explained much more clearly than the Fed papers, statements and documents they base their analysis on.
Right. When reading ‘classical liberalism at Wikipedia, it says “Classical liberalism is a philosophy committed to the ideal of limited government, liberty of individuals including freedom of religion, speech, press, assembly, and free markets.” It is that last bit – free markets – which is the issue.
How does a society ensure that markets are free? The Randian approach revolves around rational self-interest and n government interference. But clearly that favors those who have monetary (and political) power. It is naive to think that people will not use whatever power they have to promote their rational self-interest in a way which is deeply unfair and societally inefficient. The reason we have rules and regulations and enforce them is to prevent this kind of situation. There is no perfect solution but it seems to me that allowing private actors to run amok only einvites coercion by the biggest and most dishonest players in the private sector. Is that not exactly what we have witnessed this past decade?
Classical liberalism is John Stuart Mill etc.
I remember reading an account of how the term got turned on its head in the USA and came to mean the opposite of what it means in the rest of the anglosphere. I think it occured sometime around the great depression. So now in the USA “liberal” is a pejorative term taken to be the exact opposite of its definition in e.g. the oxford dictionary.
I saw that Murphy article too, it struck me as way too quick to dismiss without really trying to understand. I maintain my premise that modern “conservatives” and Austrians in particular have convinced themselves that money grows on trees, it is the only way you can dismiss these “tautologies” as insignificant. Showing my age, Murphy reminded me of Harry Dean Stanton in “Repo-Man” driving through Los Angeles’ skid row in a rage at all the indigents there and saying “If there was only some way to make them pay!”
If you haven’t read Steve Randy Waldman’s review of Tyler Cowan’s ebook https://www.interfluidity.com/v2/1116.html it is worth the read and relevant here with regard to governmental growth being a necessary corollary to both market growth and growth of complexity: people do not get more complex as the things they depend on do, with the consequence that complexity can always be used to exploit those who fail to understand it. But my real problem with Austrians and self styled “conservatives” is with their notion of freedom that is about corporate and capital freedom, not that of individual humans, though they’ll never admit that in public.
The last three years have left no doubt that corrupt government, beholden to both capital and corporations freed of regulation is capable of mal-investment. None the less the need for government investment in both infrastructure and education is so glaringly obvious even libertarians agree!
(I keep putting “conservative” in quotes because I’m still trying to figure out what they conserve)
Good comments John. When it comes to Libertarians, we really should be thinking of them as liberals. The name derives from the same base as liberals and libertarians are often called classical liberals. In what way is a defense of individual liberty conservative? I see liberty and conservatism as not at all optimally aligned.
The problem with the Libertarian movement is the one you just mentioned, namely that we have shifted too far toward thinking the private sector has magical qualities that must be protected from government interference. This is an extremism that turns liberty into corporatism:
https://pro.creditwritedowns.com/2011/02/corporatism-masquerading-as-liberty.html
I wrote on this precisely. Corporations are not individuals. And it is the defense of corporate liberty which has aligned the Libertarian movement with conservatives. This is a faux liberty, a fake libertarianism that I reject. it allows the coercive power of private actors – corporations – to battle with the greater coercive power of the state. That’s a battle in which individual liberties are lost.
My problem with Libertarians is that the all seem to be Liberals who really really liked The Fountain Head and Atlas Shrugged: they bought both the idea that altruism is a vice and that the infrastructure of civilization is a product of nature.
The former bias flies in the face of all of the behavioral, anthropological and archaeological research of the last thirty years (incidentally if you’ve not picked it up, Ian Morris’ “Why the West Rules for Now” is really great on this stuff). This latter bias makes them stubbornly refuse to look at the deep technicalities that underpin something as apparently simple and ancient as “money”, what is in fact an incredibly complex system that MMT (Fulwiler and Wray come to mind) have explained much more clearly than the Fed papers, statements and documents they base their analysis on.
Right. When reading ‘classical liberalism at Wikipedia, it says “Classical liberalism is a philosophy committed to the ideal of limited government, liberty of individuals including freedom of religion, speech, press, assembly, and free markets.” It is that last bit – free markets – which is the issue.
How does a society ensure that markets are free? The Randian approach revolves around rational self-interest and n government interference. But clearly that favors those who have monetary (and political) power. It is naive to think that people will not use whatever power they have to promote their rational self-interest in a way which is deeply unfair and societally inefficient. The reason we have rules and regulations and enforce them is to prevent this kind of situation. There is no perfect solution but it seems to me that allowing private actors to run amok only einvites coercion by the biggest and most dishonest players in the private sector. Is that not exactly what we have witnessed this past decade?
Classical liberalism is John Stuart Mill etc.
I remember reading an account of how the term got turned on its head in the USA and came to mean the opposite of what it means in the rest of the anglosphere. I think it occured sometime around the great depression. So now in the USA “liberal” is a pejorative term taken to be the exact opposite of its definition in e.g. the oxford dictionary.
Your stimulus examples are not examples of government spending money into existence, but government meddling with incentives and simply moving demand up (e.g. Cash for Clunkers and the F.T. Homeowner’s Tax Credit). Intelligent infrastructure spending would have been much more effective IMHO.
Agreed. But the purpose of the stimulus was to add to demand quickly. This can only be done by tax breaks (which has the net effect of spending money into existence by diminishing the ‘un-creation’ of money) or via stimulus that can be done up quickly. Obama wanted a quick hit and tax breaks certainly get you that.
Your stimulus examples are not examples of government spending money into existence, but government meddling with incentives and simply moving demand up (e.g. Cash for Clunkers and the F.T. Homeowner’s Tax Credit). Intelligent infrastructure spending would have been much more effective IMHO.
Agreed. But the purpose of the stimulus was to add to demand quickly. This can only be done by tax breaks (which has the net effect of spending money into existence by diminishing the ‘un-creation’ of money) or via stimulus that can be done up quickly. Obama wanted a quick hit and tax breaks certainly get you that.
Two comments –
1. Just because Kate retained $20 in currency doesn’t mean Sam is somehow out $20 in a deficit. If I purchased gold, for instance, instead of holding cash, I’m still saving and the person who sold me the gold can hold onto the cash. We’re both saving and neither one of us is in a deficit. Savings is not measured in how many pieces of currency scrip we’re holding onto, but how many resources we’re retaining for some expected future use. Only if you arbitrarily deign money as the means of saving is there any kind of “deficit”. One can never create “net savings” because the underlying resources that money is being traded against can neither be created nor destroyed, only changed in form. This is basically the Law of Conservation of Mass. Economics isn’t immune to the physical sciences, no matter how badly the economist wants his model to work. Reality doesn’t bend to our will, we bend to its will.
2. Government doesn’t provide savings nor does government debt create net savings even as defined by MMT. If giving up money to another person creates a net deficit and holding onto the money creates a net asset, then buying a Treasury creates a net deficit on the one who purchases it, not on the government. In other words, the only way to expect government to provide this mythical net asset is if we arbitrarily exclude a Treasury bond from the investment end of the equation G-T=S-I. Only via this arbitrary massaging of definitions can that equation even work. All government debt has the same features as any other debt sold by private companies or individuals. Government debt is selling a promise of par value plus interest on that par value. This is no different than a bond or a mortgage. Since government tends to immediately spend whatever it takes in, there is no saving going on at all. What happens is that the purchaser of the Treasury instrument is now either going into a net deficit or placing the full amount into investments, depending on how you want to arbitrarily designate a Treasury note, and transferring the net cash to some other actor in the economy, typically without any expectation that it is returned at all, making that person a “net saver”.
You can call this movement a net savings because one individual is engaging in investing and another is now considered saving via government entering into debt. However, government is completely unnecessary to do this because any other actor borrowing money will create this feature. There is an investor providing money (I) a borrower selling a bill (D-T), and the recipient as the net saver (S). Since the borrowing party isn’t going into a deficit at all because the amount of cash he has from before and after the transaction remains unchanged, unless deficits are conveniently redefined in this situation only, then we just “net saved” by converting assets into an investment via an intermediary and transferred them into savings.
Even if we take the formula at face value, shifting currency through a Treasury makes little sense in creating this mythical “net savings”. Mainly because it assumes government somehow exists outside the laws of the universe (Law of Conservation of Mass noted above) and is literally capable of creating something out of that which previously was a vacuum. However, since government doesn’t exist in its own dimensional paradigm, there is nothing being saved on net because government MUST obtain all resources from the private sector to operate. As such, the private individuals and organizations of the nation in whole “collectively” own all the assets and liabilities of the government. There is no such independent entity called government, it’s merely an imaginary device that is utilized to funnel money around based on political decision. It creates nothing of its own to be able to be classified as such, it merely confiscates (even if it confiscates land and labor to operate a factory). As such, any Treasury bill doesn’t create anything on net because the deficit is now obligated on the taxpaying population to repay at some point in the future. All that’s being done is the creation of a promise that money at some point in the future will be shifted around in the economic system to repay whoever is currently holding the Treasury note. No resources were created in this arrangement as the same amount of resources that existed prior to the deficit spending exist afterward. The only thing “created” was the expectation that those existing resources will be utilized to repay the debt, merely shifted and moved into different avenues than had that debt not existed.
MMT is nothing more than an exercise in using words with positive associations to justify government debt. If you sit back and understand what is going on, nothing is really being created or saved, apart from a sense of feel-good by certain parties who actually buy into MMT. The only thing that can be created by any transaction is the subjective and intangible “value” attribute. The materials and their objective uses always remain constant, it’s that the user is ever reaching a more and more optimal mix of those available uses under his control is where any real value is created.
There can be no “net savings” because there is a fixed volume of matter in the universe.
Two comments –
1. Just because Kate retained $20 in currency doesn’t mean Sam is somehow out $20 in a deficit. If I purchased gold, for instance, instead of holding cash, I’m still saving and the person who sold me the gold can hold onto the cash. We’re both saving and neither one of us is in a deficit. Savings is not measured in how many pieces of currency scrip we’re holding onto, but how many resources we’re retaining for some expected future use. Only if you arbitrarily deign money as the means of saving is there any kind of “deficit”. One can never create “net savings” because the underlying resources that money is being traded against can neither be created nor destroyed, only changed in form. This is basically the Law of Conservation of Mass. Economics isn’t immune to the physical sciences, no matter how badly the economist wants his model to work. Reality doesn’t bend to our will, we bend to its will.
2. Government doesn’t provide savings nor does government debt create net savings even as defined by MMT. If giving up money to another person creates a net deficit and holding onto the money creates a net asset, then buying a Treasury creates a net deficit on the one who purchases it, not on the government. In other words, the only way to expect government to provide this mythical net asset is if we arbitrarily exclude a Treasury bond from the investment end of the equation G-T=S-I. Only via this arbitrary massaging of definitions can that equation even work. All government debt has the same features as any other debt sold by private companies or individuals. Government debt is selling a promise of par value plus interest on that par value. This is no different than a bond or a mortgage. Since government tends to immediately spend whatever it takes in, there is no saving going on at all. What happens is that the purchaser of the Treasury instrument is now either going into a net deficit or placing the full amount into investments, depending on how you want to arbitrarily designate a Treasury note, and transferring the net cash to some other actor in the economy, typically without any expectation that it is returned at all, making that person a “net saver”.
You can call this movement a net savings because one individual is engaging in investing and another is now considered saving via government entering into debt. However, government is completely unnecessary to do this because any other actor borrowing money will create this feature. There is an investor providing money (I) a borrower selling a bill (D-T), and the recipient as the net saver (S). Since the borrowing party isn’t going into a deficit at all because the amount of cash he has from before and after the transaction remains unchanged, unless deficits are conveniently redefined in this situation only, then we just “net saved” by converting assets into an investment via an intermediary and transferred them into savings.
Even if we take the formula at face value, shifting currency through a Treasury makes little sense in creating this mythical “net savings”. Mainly because it assumes government somehow exists outside the laws of the universe (Law of Conservation of Mass noted above) and is literally capable of creating something out of that which previously was a vacuum. However, since government doesn’t exist in its own dimensional paradigm, there is nothing being saved on net because government MUST obtain all resources from the private sector to operate. As such, the private individuals and organizations of the nation in whole “collectively” own all the assets and liabilities of the government. There is no such independent entity called government, it’s merely an imaginary device that is utilized to funnel money around based on political decision. It creates nothing of its own to be able to be classified as such, it merely confiscates (even if it confiscates land and labor to operate a factory). As such, any Treasury bill doesn’t create anything on net because the deficit is now obligated on the taxpaying population to repay at some point in the future. All that’s being done is the creation of a promise that money at some point in the future will be shifted around in the economic system to repay whoever is currently holding the Treasury note. No resources were created in this arrangement as the same amount of resources that existed prior to the deficit spending exist afterward. The only thing “created” was the expectation that those existing resources will be utilized to repay the debt, merely shifted and moved into different avenues than had that debt not existed.
MMT is nothing more than an exercise in using words with positive associations to justify government debt. If you sit back and understand what is going on, nothing is really being created or saved, apart from a sense of feel-good by certain parties who actually buy into MMT. The only thing that can be created by any transaction is the subjective and intangible “value” attribute. The materials and their objective uses always remain constant, it’s that the user is ever reaching a more and more optimal mix of those available uses under his control is where any real value is created.
There can be no “net savings” because there is a fixed volume of matter in the universe.
Reading Murphy’s critique was very irritating. He seeks to review the
accounting relationships but eventually gives way and adds layers of
his ideology that by definition are not present in the accounting
relationships. e.g:
“So the accounting tells us that the right-hand side must get bigger
too. It may happen partially because people cut down on consumption and
save more (due to higher interest rates and their expectation of higher
tax burdens in the future), but it may also happen because
private-sector investment goes down. In other words, as the government
borrows and spends more, the equation tells us we might see lower
private consumption, rising interest rates, and real resources being
siphoned out of private investment into pork-barrel spending projects. I
can tell my “story” of the dangers of government deficit spending with
that equation just fine”
higher interest rates, pork barrelling, tax burdens, blah blah blah. This is just ideology not analysis. If your starting position is that all government by definition is bad then you cannot reasonably be expected to assess any contrary argument.
Reading Murphy’s critique was very irritating. He seeks to review the
accounting relationships but eventually gives way and adds layers of
his ideology that by definition are not present in the accounting
relationships. e.g:
“So the accounting tells us that the right-hand side must get bigger
too. It may happen partially because people cut down on consumption and
save more (due to higher interest rates and their expectation of higher
tax burdens in the future), but it may also happen because
private-sector investment goes down. In other words, as the government
borrows and spends more, the equation tells us we might see lower
private consumption, rising interest rates, and real resources being
siphoned out of private investment into pork-barrel spending projects. I
can tell my “story” of the dangers of government deficit spending with
that equation just fine”
higher interest rates, pork barrelling, tax burdens, blah blah blah. This is just ideology not analysis. If your starting position is that all government by definition is bad then you cannot reasonably be expected to assess any contrary argument.
Comment: The key item that the Mises fellow is missing in his coconut example is that he assumes they are a limited natural resource and uniformly available to everyone, and (implicitly) in limited quantity.
In a modern fiat system, the central bank controls the number of coconuts out there to be picked up and their price. In other words, it has to put them out there first. Where these coconuts come from is the key to understanding MMT properly.Don’t get me wrong, i think the modern system is tyranny and not true money. But for what we have today, MMT provides the best description of how things actually work. I fear the day that the populace really understands how our system works. The majority of the population doesn’t understand that we have centrally planned money and they are puppets exchanging “Republic Credits”. Once they figure out it’s not what is in the US constitution, they’re gonna be pissed….
Comment: The key item that the Mises fellow is missing in his coconut example is that he assumes they are a limited natural resource and uniformly available to everyone, and (implicitly) in limited quantity.
In a modern fiat system, the central bank controls the number of coconuts out there to be picked up and their price. In other words, it has to put them out there first. Where these coconuts come from is the key to understanding MMT properly.Don’t get me wrong, i think the modern system is tyranny and not true money. But for what we have today, MMT provides the best description of how things actually work. I fear the day that the populace really understands how our system works. The majority of the population doesn’t understand that we have centrally planned money and they are puppets exchanging “Republic Credits”. Once they figure out it’s not what is in the US constitution, they’re gonna be pissed….
Nice post Ed, you have a gift for story telling, I hope we get to see more of it in the future.
I was so tempted to write a continuation of the Robinson Crusoe economy, but you beat me to it! So many things wrong, so many places to take the story. For starters you could say if the coconut tree is government and coconuts are the money, the only way for Crusoe to save money is for the government to lose it. Or maybe we could ask how good of a store of value real assets can possibly be, I mean it’s hard to save coconuts, fish and meat or cars for retirement. How does Robinson Crusoe ensure that prices (in coconuts) are stable? In 2002, a mt of coconut oil would buy you 1.269 toz of gold (to use an Austrian demigod). Today that same mt of coconut oil buys 0.798 toz of gold. By my math coconuts have been debased 37% in a decade!! (data source: World Bank Commodity Price Data)
Nice post Ed, you have a gift for story telling, I hope we get to see more of it in the future.
I was so tempted to write a continuation of the Robinson Crusoe economy, but you beat me to it! So many things wrong, so many places to take the story. For starters you could say if the coconut tree is government and coconuts are the money, the only way for Crusoe to save money is for the government to lose it. Or maybe we could ask how good of a store of value real assets can possibly be, I mean it’s hard to save coconuts, fish and meat or cars for retirement. How does Robinson Crusoe ensure that prices (in coconuts) are stable? In 2002, a mt of coconut oil would buy you 1.269 toz of gold (to use an Austrian demigod). Today that same mt of coconut oil buys 0.798 toz of gold. By my math coconuts have been debased 37% in a about a decade!! (data source: World Bank Commodity Price Data). Or if coconut money really got their value from their material content, why is it that small and large coconuts are accepted as equals for payment on the island?
I agree especially with the premise that risk pricing/assessment and malinvestment/rent seeking along with fraud or moral hazard are the root issues. So that QE’s, stimulus, bailouts and industry specific incentives produce suboptimal outcomes whether they are crony or cost push inflationary via asset investing, etc poor job creation, optimism and economic growth. Assuming then that automatic stabilizers are important to maintaining spending and why wouldn’t a policy of full employment in the production of public goods be optimal. Conservatives are happy that people have to work for the dole and bonus public goods and work experience. For all the money that has been wasted this solutions seems to me like a no brainer. The wage would obviously be low enough not to crowd out private employment, or well importantly even, elevate private employment wages since that is also a root cause on the other side of the issue of debt and income. I think we do a disservice when we forget all the incredible public infrastructure we have as a result of WPA projects and updating we need. Even before then public projects paved the way for growth and regeneration in countless spots all over the country. Seems like a great solution and opportunity to what is otherwise a series of continually straining long term issues and liabilities. Seems like building a foundation for DEMAND instead of continually inflating supply–housing, commodities, stocks, who know what will be next. That is a strategy to pursue
I agree especially with the premise that risk pricing/assessment and malinvestment/rent seeking along with fraud or moral hazard are the root issues. So that QE’s, stimulus, bailouts and industry specific incentives produce suboptimal outcomes whether they are crony or cost push inflationary via asset investing, etc poor job creation, optimism and economic growth. Assuming then that automatic stabilizers are important to maintaining spending, why wouldn’t a policy of full employment in the production of public goods be optimal. Conservatives are happy that people have to work for the dole and bonus public goods and work experience. For all the money that has been wasted this solutions seems to me like a no brainer. The wage would obviously be low enough not to crowd out private employment, or well importantly even, elevate private employment wages since that is also a root cause on the other side of the issue of debt and income. I think we do a disservice when we forget all the incredible public infrastructure we have as a result of WPA projects and updating we need. Even before then public projects paved the way for growth and regeneration in countless spots all over the country. Seems like a great solution and opportunity to what is otherwise a series of continually straining long term issues and liabilities. Seems like building a foundation for DEMAND instead of continually inflating supply–housing, commodities, stocks, and who knows what will be next(let me know if you do undoubtedly there will be money in it). That is a strategy to pursue we might get some income multipliers and tax payers out of it as well.
This is exactly right. The private sector is just as capable of making bad investment as the public sector. Minsky talks about this in Stabalizing an Unstable Economy.
This is exactly right. The private sector is just as capable of making bad investment as the public sector. Minsky talks about this in Stabalizing an Unstable Economy.
Thanks for posting Ed. However is there a missing player? The unseen owner of the electric seashells who gets to play in both the private and public market depending on which has the savings? The Fed exists in my understanding so that the banking system gets to create money as credit using the promised obligations of the tax payer the foundation of monetary system. The owner owns the money the government uses in times of fiscal stimulus and owns the output of the what peoples productivity is denominated in while remaining invisible.
Thanks for posting Ed. However is there a missing player? The unseen owner of the electric seashells who gets to play in both the private and public market depending on which has the savings? The Fed exists in my understanding so that the banking system gets to create money as credit using the promised obligations of the tax payer the foundation of monetary system. The owner owns the money the government uses in times of fiscal stimulus and owns the output of the what peoples productivity is denominated in while remaining invisible.
I’m puzzled as to how (or if) the issue of credit creation complicate this accounting identity?
It seems to me that the magnitude of private sector debt is the result of a bubble in credit creation, e.g., the money created/loaned by private sector banks to purchase a house stopped reflecting (in terms of wages/shells?) the ability to repay the loan. In fact this went so far as to become a Ponzi scheme requiring ever increasing asset valuations.
So where does this fit in the model. Haven’t I.O.U’s stopped reflecting real value and if so wouldn’t the increase in government I.O.U’s just be perpetuating this distortion?
I’m puzzled as to how (or if) the issue of credit creation complicate this accounting identity?
It seems to me that the magnitude of private sector debt is the result of a bubble in credit creation, e.g., the money created/loaned by private sector banks to purchase a house stopped reflecting (in terms of wages/shells?) the ability to repay the loan. In fact this went so far as to become a Ponzi scheme requiring ever increasing asset valuations.
So where does this fit in the model. Haven’t I.O.U’s stopped reflecting real value and if so wouldn’t the increase in government I.O.U’s just be perpetuating this distortion?