Democracy vs. deficit-hawkery: fiscal sustainability and you

Background

Today (really, yesterday) I attended the Fiscal Sustainability Teach-in (or counter-conference, or counter-summit) held at George Washington University in DC.  It was held partly in protest of another conference being held by a right-wing think tank, also in DC, about how to gut the remaining pillars of the US welfare state: Social Security and Medicare.  This counter-conference presented an alternative vision based on full employment as the primary target of all economic policy and unemployment as a massive ongoing cost that dwarfs most other costs, including particular consequences of moderate inflation, if there even are any.  This is particularly relevant in light of the recent and obvious failures of some highly prevalent economic dogmas.  We heard talks from a group of heterodox economists of what is known as the Modern Monetary Theory (MMT) school of thought.

I liveblogged or took notes about it variously depending on wifi connectivity, and they're all posted in their original form at this category.  However, they're out of order on this blog since the offline notes were posted after the conference.  The right order is: Mitchell, Kelton, Mosler, Auerback, and Wray and Tcherneva.

So why did I go?

Is "because it's there" not enough?  Well, no it isn't.  It was at an ungodly hour of the morning---are academic economists really awake enough to talk at 8am?  No wonder they let the one from Australia speak first.  

I went because I have the strong conviction that the massive upward wealth transfer we have seen---in the US, in Canada, and elsewhere---not just recently but over decades now threatens the human race's very capacity for survival, because it has crippled our ability to respond to the decay of our institutional and physical infrastructures and made it nearly impossible to deal meaningfully with the interlinked environmental and social crises which grow increasingly dire as time goes on.  

The scalpel that has been used to slice away the tendency towards socioeconomic equality/social justice needed to deal with our crises is, for many of us including me, neoliberal economic ideology.  To me, the primary manifestation of this has been the use of trade policy to undermine the bargaining power of labour in developed countries.  However, it's arguable that the cutting of the welfare state is also partly or primarily responsible for this trend.  In the USA, the pillars of social solidarity are Social Security and Medicare; and that is exactly what the American economic right has always had in its sights. 

So I came to see six academic economists, some of them relatively well-known bloggers (more than me, at least) present another academic concept that views greater social equality as both desirable and even achievable within existing political frameworks.  I am not an economist by profession, but I've been reading about it for years, and the remainder of this is what I understood from the talks and what I think about it.  My opinions are at the end; I attempt a back of the envelope explanation of the ideas first.

The ideology of scarcity

According to the panelists, the analytical tools of right-wing economics are founded on a false analogy of money to the resources that can be acquired with money.  Therefore, money is treated as a finite resource itself, and the question becomes how to slice up the money pie.   Government budgeting essentially becomes household spending writ large; governments must raise taxes or borrow to acquire money-resources to spend thereafter.  A government becomes insolvent when it can do neither---it must cut spending.  In this view, like a household, surpluses are prudent and desirable.

Some of this made sense back in the days of the gold standard, when money effectively really *was* a scarce resource.  But it doesn't apply in the days of a fiat, nonconvertible currency (such as the USD, the CAD, and so on---but NOT the Euro, more on that).  We aren't about to run out of electrons to store the large numbers of money we transfer around constantly. 

The assumption of money scarcity is ideological and political, not *real* in any economic sense.  If we make money less scarce, we are presumed to destroy value through inflation.  Alright.  (The panelists probably would not agree.) But making it more scarce destroys aggregate demand.  So even if we accept the assumptions of mainstream economics, it's still a question of whom we want to hurt.  A political question.

In that sense, pension reform guided by the idea that Social Security will run out of money---is a political decision.  It can't run out of money---if the USA decides that it doesn't want it to run out of money. What can happen is a misallocation of resources---for example, pensions may be too generous relative to other sectors of the economy.  When we reach a world in which senior citizens as a whole are overcompensated and not eating cat food, we can worry about this; but it's not a matter of the money supply.

Fiscality and sovereignty

So what *is* this "Modern Monetary Theory"?  According to Stephanie Kelton, it's a misnomer.  It's not a theory, but a methodology or analytic approach.  It's an approach that dispenses with the ideology of monetary scarcity in the pursuit of economic policy at a macro level.  That doesn't mean that MMT holds that resources are somehow infinite. All it means is that with a fiat, nonconvertible currency backed by a sovereign government, the government is able to generate funds in the service of reallocating resources.  Essentially, money is abstracted away from resources, and resource allocation is relativized to the way in which the government distributes funds---once again, a political decision.

Conventional economics, under monetary scarcity, presumes (and designs entire experimental and theoretical engines around) the idea that money achieves its value by the belief that individuals have about their ability to buy resources with it---and fiat money is just an extension of barter or gold where the citizenry has politely decided to ignore the fact that there isn't any actual gold.  MMT, on the other hand, grounds the value of money in the power of a sovereign government to levy tax---essentially, a social participation fee.  If we must pay this fee in the currency prescribed by the government, then we in turn must be paid in that currency.  The ultimate receiver is the government; but the government is also the ultimate payor, as it distributes the currency.

(The Euro is a fiat currency but it is not backed by sovereign spending power.  This explains why Greece actually can go bankrupt, as can any country that does not really fully control the power of taxation and spending.  Like US states, except they are more likely to get bailed out without too many strings.)

Learning to love deficits

So what does it mean when the government distributes currency?  It means that the central bank increases the value of the accounts it holds on behalf of financial institutions, like a scorekeeper.  (One of the panelists suggested that a sovereign government running out of money was like a sports stadium running out of points.)  When a bank increases the value of your own account, you become its creditor and it your debtor.  Just so with the government.  But the government is the Original Debtor, which also forces you to accept "repayment"/taxes.

In fact, every cheque the government writes has exactly this characteristic.  And the government can write as many cheques as it wants.  That doesn't mean that inflation does not exist; it just means that inflation is simply another instrument of reallocation, subject, once again, to our political and social mores.  Is there catastrophic hyperinflation?  Yes, and the obvious examples are Weimar Germany and Zimbabwe; but in either case, there was a deliberate, large-scale destruction of productive capacity.  In the latter case, hyperinflation staved off immediate mass starvation.  The USA is not in danger of hyperinflation. 

The deficit, therefore, represents investment in the economy whose repeated application fuels aggregate demand.  Surpluses, especially when accrued by cutbacks and regressive tax hikes, are actually a disinvestment.  Taxation is not required for the government to spend (it can run a deficit, simply by saying it is running a deficit); it is simply necessary to valuate money and to disinvest from undesirable things.

So what does this mean? It means that we have no need for unemployment.

Guaranteeing a minimum quality of life

"Bwuh?" you ask.  "How does fiat money from a sovereign government get us out of unemployment?" 

Consider, first of all, why we would want to make full employment our primary economic goal.  Not only are the unemployed idle productive capacity, but they also impose long term and growing social costs the longer they remain unemployed.  In fact, for society as a whole, they impose at any given time such a huge cost that really dwarfs most other costs! The only reason why we would want unemployment is that it drives down the cost of labour, and who, pray tell would want to punish workers that way?  (Heh.)

So the solution to unemployment?  Give people jobs!  Yep, just give them money.  Money at a living wage, to do things that keep their employable skills available for private sector employment when such becomes available.  Money allocated to doing jobs of social benefit that the market has failed to provide, but we know are necessary or desirable through our political decision-making processes.  This sets a floor on the quality of life all wage-earners will live, but at the same time, it doesn't waste human resources in the most costly way possible.

Is this inflationary? *shrug* Could be.  This is not a license to run deficits without limit; it's merely to run *enough* deficit to absorb the reserve army of the unemployed.  It's possible to limit the inflationary effect through judicious taxation.  It's also possible simply to live with a reasonable rate of inflation; other countries have done it and had full employment and lived well.

This is exactly the opposite of what mainstream economic policy makers seem to believe is the correct approach.  Unemployment and interest are used as instruments to control inflation.  But as inflation is not necessarily toxic, it is, yet again, a political choice.  Worrying about the solvency of Social Security is another political choice; it's as solvent as the government says it is.  Far better to worry about the well-being of labour and real people, and to worry about the environment and the scarcity of real resources directly through laws, rather than by cockamamie currency schemes.

What I like about this idea

Believe me, as a Canuck, I'm no friend of deficit-hawkery, and all too familiar with it.  The Canadian Liberals have been pressing a deficit-hawk line long before the US Democrats, and they only got away with it because they had surpluses due to high growth.  It's long been known on the left side of the political spectrum that inflation control is used as an excuse to grow unemployment, which reduces the bargaining power of labour---and that deficits are flaunted as another ideological tool used to squeeze public spending, further hitting employment.

So I like this idea of putting economic policy back where it belongs: in political choices.  The fiat currency controlled by a sovereign government allows us to decouple the actual resources from the resource allocation.  This is the opposite of what governments currently tell us: that monetary policy must be insulated from politics, and that the government is constrained because it is constrained by by its scarcity of money, which in turn is constrained by resources.  

It reorients the purpose of economic policy towards supplying the needs of people, rather than abstract claims of economic soundness.  It doesn't deliberately protect property accumulation.

My problems with it

While I mostly liked it, I had a couple of niggling concerns.  Not enough time was spent during the talks on what I thought was an elephant in the room: trade and trade deficit issues and foreign investment.  Right now, foreigners have invested in the USA and are tied (particularly China) to the USA in deep economic ways.  If the government uses its deficit power to reorient the economy to full employment, this is a reallocation of wealth, in a sense.  But foreign investors made their investments under radically different assumptions.  How does the transition to full employment affect this?  If the USA de-emphasizes inflation targets, doesn't that mean the value of their investments goes down?  Do they respond by devaluing their currency even further?  I think this was asked once during a Q&A and I didn't understand the answer.  For all I know, it's not an issue..

At another point, someone asked about resource shocks.  A panelist said that this would have very little permanent inflationary effect.  So say the price of oil rises dramatically...then the government does what?

Another problem is my usual one with some lefty bloggers and policy wonk types: political marketing.  Some of the panelists suggested that they had experience even with convincing right-wing crowds that this form of job guarantee/full employment is actually more optimal than paying welfare or incurring the long-term costs of unemployment and poverty.  You can convince crowds to support a lot of nice ideas.  But can you get the crowd to actually vote for your candidate?  I've come to think that a leftist conceit is the belief that if you convince enough people of the efficacy of a policy, they'll actually put it into place.

And so?

I write a blog that's really only read by a few (of course highly valued) readers, at least partly because I don't update very often---I had a choice a few years ago to be a bit more prolific and thus higher profile, but I let life take me somewhere else.  Nevertheless, by writing it out, I clarify my own thoughts on a matter I consider of central importance to our survival: economic inequality.  

Whatever is incomplete about this MMT approach---if there is any I've identified---the very discussion allows us to recenter economic arguments on the politics of human well-being, and to view artificial limitations on government policy as just that: self-imposed restrictions for ideological satisfaction.  Hopefully, I've left down some notes in the previous posts that other people can use (and find via web searches), even though the talk slides may come online at some point, for all I know.

Final disclaimer:

This was my first close encounter with MMT, so if anyone feels I've misunderstood something, please feel free to correct me in the comments!

Comments

[Ebenezer Scrooge]

Apart from aggregate demand, I don't see any inconsistency with what you are talking about and balanced budgets. It's just a matter of willingness to tax.

[Mandos]

Yes, you can tax it back and achieve a balanced budget, but you have to ask yourself: is 0 deficit the correct target. What do we get from a 0 deficit? The theory doesn't deny that there are circumstances where you would want to run a balanced budget or a surplus, just that there's no reason to be afraid of a deficit when you need one to do actual productive things.

[Joe S.]

I'm not sure we disagree.

An increase in deficit does actual productive things when you need to goose up aggregate demand. And you sometimes need to do that. But it's not sustainable forever--there's a point beyond which you cannot continue increasing deficits above GDP growth. And aggregate demand is, I think, the only actual productive thing done by a deficit. Wealth redistribution can be done with a balanced budget.

But you don't even need a deficit to goose up aggregate demand. You can tax the savers and redistribute the wealth to the spenders. Again, you reach a point of diminishing returns.

The point I'm trying to make is that sufficiently large deficits have costs, and one can do progressive macroeconomics without deficits. (The Petersen people exaggerate the costs, and don't like prog macro.)

Now of course you can argue that I'm out there in pony land. In the real world, rich people will refuse to be taxed, and any kind of deficit neutrality predicated on taxing the rich is unrealistic. You might be right.

[Mandos]

I too have a little inkling of skepticism, but they made a really good case.

However, I guess their response would be like this: they don't want to increase aggregate demand to infinity, merely to the point where full employment is achieved. If there's unemployment, chances are that there's room for GDP growth, almost by definition. So deficits can be run to the level required to maintain full employment.

I don't think they'd categorically reject redistribution by tax. But spending doesn't come out of tax revenue: at its base, all government spending is de novo. Once you've reached full employment, if further wealth redistribution is necessary (I suspect, quite likely), then you can burn the wealth of the rich through taxation.

I guess where they would disagree is on the balanced budget front. Unless you're already at full employment, you have to destroy demand on one side to increase demand on the other. The actual effect on employment is not predictable then. What is predictable: creating money and giving it to the unemployed in exchange for valuable work.

[Matt Franko]

Mandos,
I was there as well. I have been "on Board" with the MMT for sveral years now (Im not an economist) but perhaps here are a few points where youve asked ?:

elephant in the room: trade and trade deficit issues and foreign investment. Right now, foreigners have invested in the USA and are tied (particularly China) to the USA in deep economic ways. If the government uses its deficit power to reorient the economy to full employment, this is a reallocation of wealth, in a sense. But foreign investors made their investments under radically different assumptions. How does the transition to full employment affect this?

Try to think this way: China has decided to "net save" in US dollar denominated financial assets" ie Treasury Bonds for some time now, not invest. Per Moslers presentation, these bonds can be considered time deposits with the US govt instead of a regular "checking account". China sends us goods, we pay in USD, they take the dollars and put them in Treasuries to earn a little interest.

If the USA de-emphasizes inflation targets, doesn't that mean the value of their investments goes down?

Their bonds are mostly short term, they are redeemed in full by the Treasury when they mature, and China just rolls the proceeds into new bonds.

Do they respond by devaluing their currency even further? CHINA MAINTAINS A PEGGED (FIXED) EXCHANGE RATE

I think this was asked once during a Q&A and I didn't understand the answer. For all I know, it's not an issue..

At another point, someone asked about resource shocks. A panelist said that this would have very little permanent inflationary effect. BILL MITCHELL MADE THE POINT THAT A 'ONE TIME' SUPPLY SHOCK (IE OIL EMBARGO, ETC) IS NOT BY DEFINITION INFLATION, THE TECHNICAL DEFINITION OF INFLATION REQUIRES A LONG TERM STEADY DECLINE IN THE VALUE OF A CURRENCY

So say the price of oil rises dramatically...then the government does what?

GOVT CAN USE FISCAL POLICY (DEFICITS) TO REBATE TAXES TO CITIZENS TO PAY FOR THE INCREASE IN THEIR GASOLINE BILLS, THIS IS WHAT THE GOP EFFECTIVELY DID WITH THEIR $650 REBATE IN THE SUMMER OF 2008 WHN OIL WENT TO $150.

Another problem is my usual one with some lefty bloggers and policy wonk types: political marketing. Some of the panelists suggested that they had experience even with convincing right-wing crowds that this form of job guarantee/full employment is actually more optimal than paying welfare or incurring the long-term costs of unemployment and poverty. You can convince crowds to support a lot of nice ideas. But can you get the crowd to actually vote for your candidate? I've come to think that a leftist conceit is the belief that if you convince enough people of the efficacy of a policy, they'll actually put it into place.

POLITICALLY YES WE HAVE LONG HARD SLOG AHEAD OF US.

Resp,

[lambert strether]

Nice summary. Thanks for the link to the bloggers who did the grunt work of organizing it.

[lambert strether]

Audio and slides for the entire teach-in are now available here.

[lambert strether]

In policy terms, the Jobs Guarantee (JG) -- the final item on the agenda -- looks like a winner. As Mandos summarizes:

So the solution to unemployment? Give people jobs! Yep, just give them money. Money at a living wage, to do things that keep their employable skills available for private sector employment when such becomes available. Money allocated to doing jobs of social benefit that the market has failed to provide, but we know are necessary or desirable through our political decision-making processes. This sets a floor on the quality of life all wage-earners will live, but at the same time, it doesn't waste human resources in the most costly way possible.

And as Mitchell says, the unemployed are already in the public sector; that's where unemployment checks put them! So... Why not give them a job and then a check, instead of just a check?

And in political terms, I can't help but think JG is a winner, too. Maybe 20% real unemployment is going to be enough to shorten the political slog. Optimism of the will...

[Mandos]

Matt Franko:
GOVT CAN USE FISCAL POLICY (DEFICITS) TO REBATE TAXES TO CITIZENS TO PAY FOR THE INCREASE IN THEIR GASOLINE BILLS, THIS IS WHAT THE GOP EFFECTIVELY DID WITH THEIR $650 REBATE IN THE SUMMER OF 2008 WHN OIL WENT TO $150.

Alright, but as oil becomes more and more dear (a steady process past Peak Oil), where does it go after that? Do we keep using fiscal policy to make oil affordable, or do we let it become scarce in the form of real physical shortages?

[Mandos]

Also Matt: what it seems you are effectively saying is that a full employment policy in the USA would have only neutral effects on the export-orientation of China. I'd have to think about that.

[Mandos]

lambert: You're welcome. I think that to rely on unemployment to shorten the political slog will require the "official" unemployment to be at 20%, not the real unemployment (which would presumably be up at 35% or something like that).

[ifthethunderdontgetya™³²®©]

Oil, and thus gasoline, costs a lot more than just the price listed at the pump. There's all are wars and occupations, along with the huge standing army cost to be added in as well.

Keeping it artificially cheap has had the effect of damping the search for alternatives, as well as encouraging stupid behavior like indulging ourselves in giant S.U.V.s for no real reason.
~

[Cammie Novara]

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[David H.]

Thanks so much for this post. MMT makes so much sense, it's no wonder it's not considered mainstream (!)

I just wish it was called MM(something else) because, as you said, the part regular folks like me need to understand is how our modern monetary system works, and the word "theory" can distract from that mission.

Something like Modern Monetary Excitment, or something less silly. MMT needs a re-branding. Ugh, what a horrible word!

Keep up the good work.