Now, my sense is that we are dealing with a non sequitur, but Krugman uses those a lot. However, I'm not going to debate the merits of SS today, but rather deal with one statement that Krugman has made regarding the "trust fund." He writes:
About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.Here is the problem: the "special account" is nothing more than short-term government paper that matures every six months. At the present time, most government debt is paid via...more government debt -- plus interest. Now, this looks nice, officially-speaking, but the problem is that the mechanism for turning this bond-laden "trust fund" into cash is for the government to sell the bonds.
But neither of these potential problems is a clear and present danger. Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come. (Emphasis mine)
Now, if I know Krugman, he would say (as would James K. Galbraith) that this is no problem, because the Federal Reserve System can buy the bonds. (He has not said this, I know, but I suspect that would be in his arsenal of answers.) In other words, the ultimate "backing" for Social Security is a glorified and "sophisticated" mechanism of printing money.
So, I would not exactly call this a sound system of "investment." My sense is that Krugman is trying to score ideological points, not promote good finance.
“Here is the problem: the "special account" is nothing more than short-term government paper “
ReplyDeleteNo, there is no ‘special account’. This so called trust fund is nonsense. Social Security is no different than any other transfer program in the federal budget. Politicians have done a fantastic job of tricking the general public into believing Social Security is different from any other line item in the federal budget, and as result, have tricked the general public into believing we are going bankrupt if it is not cut now, now now. It is no different than other line item in the federal budget, and it is not going to bankrupt anyone.
“At the present time, most government debt is paid via...more government debt -- plus interest”
So what. The government is not revenue constrained, and does not fund itself with debt. All government debt does is drain and add reserves to the banking system. That is all. End of story. Debt does not fund the US government. There is no solvency risk, as this statement implies.
“but the problem is that the mechanism for turning this bond-laden "trust fund" into cash is for the government to sell the bonds”
No. There is no problem. Do you think the government sells bonds before they send out SS checks? Of course not. Do you think we had to pull off a bond auction before we could invade Iraq? Of course not. All they do is credit the recipients’ accounts in the banking system. End of transaction.
“know Krugman, he would say (as would James K. Galbraith) that this is no problem, because the Federal Reserve System can buy the bonds”
James K Galbraith would never say such a thing, because James K Galbraith knows the Federal Reserve buying bonds only changes the composition of reserves in the banking system, and James K Galbraith knows that government bonds do not fund the US government. James K Galbraith also recognizes the US government does not represent a solvency risk, and that’s because James K Galbraith knows how the monetary system operates.
“In other words, the ultimate "backing" for Social Security”
There is no backing for Social Security. SS is a transfer payment. It’s redistributes income. As a transfer program, it does not need backing from anything.
“Social Security is a glorified and "sophisticated" mechanism of printing money”
No post would be complete without invoking fear mongering. I guess we should be delighted you did not try to compare SS to a Ponzi scheme, and start accusing Krugman of being a criminal this time.
“So, I would not exactly call this a sound system of "investment”
That’s because it’s not a system of investment.
Here’s what a ‘real’ economist, James K Galbraith really believes.
http://www.newdeal20.org/2010/06/30/why-the-fiscal-commission-does-not-serve-the-american-people-13742/
FYI - 10 year note yielding 2.58%. Clearly, the market believes bankruptcy and/or hyperinflation is just around the corner.
It may be time to rethink this Austrian ideology.
AP Lerner is of course entirely correct that the government is not revenue constrained in a floating rate fiat currency system. All the talk of trust funds and "running out of money" is pure ideological smokescreen. If you don't like social security systems on ideological grounds, do not be such a coward Mr Anderson and come out and say so. You are entitled to your ideology. But do not try to wrap up your ideology in fictitious accounting and revenue constraints that do not exist.
ReplyDeleteThe government is not revenue constrained
ReplyDeleteWhat a load of nonsense. Since the Federal government is constrained to 17 specific enumerated powers, social security not being one of them, it's revenue constrained. Since nothing but gold and silver coin can be legal tender and fractional reserve banking is fraudulent, it's quite constrained.
Further, there is no Federal power to simply go into debt for the sake of "stimulating" the economy, so it's further constrained.
"Since nothing but gold and silver coin can be legal tender and fractional reserve banking is fraudulent, it's quite constrained."
ReplyDeleteYou're arguing within the frame work of how your ideology thinks things should be, not within the frame work of how the government works in reality. Doesn't matter how "immoral" you think it is because we're living in that immoral world.
"there is no Federal power to simply go into debt for the sake of "stimulating" the economy,"
Didn't congress just do this? Again, are you willing to ignore reality for the sake of living in your fantasy land?
Doesn't matter how "immoral" you think it is because we're living in that immoral world.
ReplyDeleteYou said it.
Bob Roddis: I wish we were living in a gold standard world. I wish we had free banking. I wish that the powers were reserved to the states like they should be. I wish that Chris Dodds and Barney Frank were in jail where they belong. I despair of the corrupt system we have evolved.
ReplyDeleteBut this does not give Mr.Anderson the right to misrepresent the reality of the situation we have. In our monetary system, the government is not revenue constrained.
So not only do chartalists reject the laws of economics but apparently they dismiss the Supreme Law of the Land, AKA the U.S. Constitution, because it is "not within the frame work of how the government works in reality." How unsettling.
ReplyDeleteAnonymous said...
ReplyDeleteSo not only do chartalists reject the laws of economics but apparently they dismiss the Supreme Law of the Land, AKA the U.S. Constitution, because it is "not within the frame work of how the government works in reality." How unsettling.
The government does not work "in reality." It works in a world of rainbows and Skittle-pooping unicorns. That's the problem.
I think I'm starting to get it. The government isn't revenue restrained. Kinda like the government isn't Lebensraum restrained. Is that what you mean?
ReplyDeleteThis is nonsense about government not being "revenue constrained." I guess he means that the Zimbabwe "solution" really is a solution. Or, maybe government can use force to seize whatever "revenues" it wants.
ReplyDeleteThis almost is hilarious.
" I guess he means that the Zimbabwe "solution" really is a solution. Or, maybe government can use force to seize whatever "revenues" it wants."
ReplyDeleteGood job. Setup another strawman and knock it down. Your debate skills are impeccable.
I guess we should repeal the extremely popular and helpful Social Security? So many poor Americans rely on it. There really is no serious problems- I don't care what you say- Social Security will be solvent probably forever!
ReplyDelete"This is nonsense about government not being "revenue constrained.""
ReplyDeleteNope. Operational fact. I know it's a hard concept to accept when your ideology claims the government is heading for bankruptcy or hyperinflation. Did you see where 10 yr. JGB's closed today? How about 10 yr. UST's?
If you put ideology aside for a moment and accept we live in a country that is the monopoly issuer of its currency, it becomes clear revenue is not a constrain, and solvency is not a concern. Just look at the bond markets.
Or you could just read Beardsley Ruml, or Mosler, or Wray. 'Real' economists that understand the monetary system.
http://home.hiwaay.net/~becraft/RUMLTAXES.html
"I guess he means that the Zimbabwe "solution" really is a solution."
When in doubt, play the fear mongering card. Do you honestly not know the difference between the US and Zimbabwe? If not, then the Economics department at Frostburg needs to be informed.
"This almost is hilarious"
No, it's operational fact. It's not hilarious - it's unfortunate. Unfortunate for the students that paid good money to get a misunderstanding of the monetary system of a sovereign country.
I‘ve previously posted links of Mises eviscerating Knapp and, thus, Wray.
ReplyDelete"Kinda like the government isn't Lebensraum restrained. Is that what you mean?"
ReplyDeleteGodwin's law? so soon?
Comments here are getting more ridiculous by the day. How can these chartalists accuse austrians of interpreting events using the austrian framework but they do exactly the same. Chartalist should start trying to convince austrians why macro is different than micro, why money equals wealth, why GDP and related figures are GOOD indicators of economic growth, etc. Otherwise they're just trolling this blog.
ReplyDelete"How can these chartalists accuse austrians of interpreting events using the austrian framework but they do exactly the same."
ReplyDeleteBecause some people here are still talking about our monetary system as if we're still in the gold standard. There is no Charlitist monetary framework. It's simply how the monetary system operates.
"why macro is different than micro"
Go back and read your intro to econ textbook. Here's what mine said.
http://i.imgur.com/jan7S.jpg
"why money equals wealth"
Nobody thinks that. It's a strawman regurgitated by people like Mr Anderson here.
"GDP and related figures are GOOD indicators of economic growth"
Again, nobody has claimed this. GDP is simply a measure economic output. It doesn't distinguish whether the output is bad or good and nobody is trying to hide this fact. In general though, in good times GDP tends to go up and in bad times GDP goes down. It doesn't tell the whole story, but it's good to know.
There is no Charlitist monetary framework. It's simply how the monetary system operates.
ReplyDeleteWithout an understanding of subjective value and catallactics, Chartalists have no clue as to how anything "operates".
> some people here are still talking about our monetary system as if we're still in the gold standard.
ReplyDeleteNow, that's a strawman! Nobody here believes that they just mention in an attempt that you think about wealth and what motivates people's actions.
> Go back and read your intro to econ textbook.
I can say it LOUDER but not clearer, the reason's exposed there are non-sense for us. Just because a book says it it doesn't make it true! Economic thought is more than just economy-wide aggregates. Differentiation is important to us as are relative prices, capital structure, regime uncertainty etc.
> "why money equals wealth"
Nobody thinks that. It's a strawman regurgitated by people like Mr Anderson here.
Asserting that its ok for govt. debt to be paid via more govt. debt is in fact stating that wealth can be created by adding to the monetary debt, i.e creating material wealth from accounting transactions. You may argue that its ok because US. Govt. has a monopoly in fiat currency but even if that were true it is only a temporary condition and therefore unsound econimic policy. I do believe the US can get more indebted for many years to come but that simply means you'll have a bigger bubble to bust when such monopoly ends.
> GDP is simply a measure economic output. It doesn't distinguish whether the output is bad or good and nobody is trying to hide this fact.
Chartalist keep citing Y = C + I + G + (X—M) as though its a mantra, as though its an undeniable universal truth. It is not. AP Lerner here has used it to try to justify all (or at least most) his claims. I said "good" indicator but what I should have said is an effective or trustworthy measurement. Thing is we don't believe it is and see many flaws in it. So before trolling us with your mantra you should at least try to convince us that it is indeed a worthy measurement.
“I‘ve previously posted links of Mises eviscerating Knapp and, thus, Wray”
ReplyDeleteThat essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.
“Asserting that its ok for govt. debt to be paid via more govt. debt is in fact stating that wealth can be created by adding to the monetary debt”
Nobody said this. Nobody said government debt creates wealth. What you, and Prof. Anderson do not understand, is that US government does not ‘fund’ itself like a household or a corporation. The US balance sheet is not similar to a household balance sheet. Government ‘debt’ does not fund anything. China does not fund the US. All government ‘debt’ does is add and drain reserves to the banking system. That is all. End of story. How come, despite all the ‘borrowing’ and all the ‘printing’, are rates on government securities falling? Why is the two year note at an all time low? Maybe. Just maybe because the US government is not a household, and does not represent a credit risk. Try thinking about this locically instead of letting a narrow minded ideology cloud the picture. Everything so called Austrians claimed would happen like bankruptcy and hyperinflation is not happening. Not even close. Did Peter Schiff get on TV and admit his error and apologize for losing his investors money? Of course, because he, like Prof. Anderson, is so married to a nonsense ideology, they can not let go even when reality and empirical evidence is stacked against them.
If you continue to believe the US government represents some sort of credit risk, and as long you continue to believe the US government represents solvency risk, you’ll never understand the monetary system of the US.
“Chartalist keep citing Y = C + I + G + (X—M) as though its a mantra, as though its an undeniable universal truth. It is not. AP Lerner here has used it to try to justify all (or at least most) his claims”
I have used this as framework to explain the financial balances of an economy. It’s not theory. It’s basic accounting and math. If you want to add more variables to it that is just fine, the math and accounting still holds. But if there is another financial sector balance to the economy other than public, private, and external, by all means educate us. Btw, I’m not the only one that recognizes this fact. So does Paul McCulley:
http://seekingalpha.com/article/214585-paul-mcculley-does-modern-monetary-theory
And here’s another article that pretty much sums up what Prof. Anderson preaches as utter nonsense.
http://www.ft.com/cms/s/0/e8a3cc8c-a958-11df-a6f2-00144feabdc0.html?ftcamp=rss
and btw, for those that think China ‘funds’ the US government by buying our debt, well, China has been selling US securities in mass, and, well, you can go see what rates have done the last quarter. Why aren’t rates higher?
http://www.businessweek.com/news/2010-08-17/china-reduces-long-term-treasuries-by-record-amount.html
Sorry, but Prof. Anderson and others are completely wrong in regards to the US monetary system, and as I have pointed out repeatedly, the US government is operationally never revenue constrained, does not fund itself with debt, and does not represent a credit risk. And until he and others realize this reality, much of what Prof. Anderson has to say about the monetary system of the US will continue to be all wrong, and I feel deeply sorry for his students if this is what he teaches. The last thing we need is another generation of mis-educated economics students. Unfortunately, Prof. Anderson is adding to that mal-investment.
AP's refusal to call default by inflation an actual default, shows how little he cares about economics. He'll continue to play his trump card that Austrians don't understand the U.S. monetary system, when they do and recognize that money printing=default (see algebraic fact).
ReplyDelete> Government ‘debt’ does not fund anything. China does not fund the US. All government ‘debt’ does is add and drain reserves to the banking system.
ReplyDeleteSo what? Are reserves infinite? Maybe they are infinite in the sense that govt. can always issue more money (fiat currency) but the purpose of money is to represent the value of goods and services. I don't believe the US is near bankrupt or that hyperinflation is just around the corner, but that doesn't mean its impossible and it certainly doesn't mean govt. spending is a sound economic policy.
What I wonder is what do you (and Chartalist actually consider to be a sound economic policy. If all the govt. needs to do is add or drain an (infinite) reserve of money then did the past crisis took place? Why is there unemployment? Its not like govt. is not willing to drain reserves for bailouts, etc.
> I have used this as framework to explain the financial balances of an economy. It’s not theory. It’s basic accounting and math. If you want to add more variables to it that is just fine, the math and accounting still holds.
You're missing the point. If you have a formula like that and move values around of course you will get sound results. The point is that we don't believe that mantra accurately represents reality. Its not a matter of adding variables because that formulation is (in our view) over simplistic. It treats all services and products as if they're interchangeable. It means next to nothing for us because we believe that what, where, when and how goods & services are produced is what really matters. We also believe that capital structure is a key element in economics. Your mantra takes nothing of that into account so you can chant it all you want, to us it represents next to nothing except, perhaps, an interesting figure for some thought experiments.
I think this link sums it up pretty well: http://www.independent.org/newsroom/article.asp?id=2448
AP Lerner,
ReplyDeleteWhat Austrians (and Prof. Anderson) teach is that a statist monetary system that artificially creates money and credit will constantly cause a misallocation of resources and subsequent 'boom and bust' cycles. Why in the world you and other chartilists think you can convince Austrians to accept a debt based fiat monetary system run by the state without explaining how their theories are wrong about the chronic problems such a system creates is puzzling.
The Fed issues currency usually by purchasing U.S. gov't bonds. Let's forgive Chartalists that small detail and say that the gov't issues the currency when it spends the new dollars. This is merely a digital transaction on a computer (no longer constrained by a gold standard), so the dollar supply is infinite. This is why AP says that gov't is not revenue constrained. Operationally speaking, the gov't doesn't need to raise any revenue and can just print the dollars. However, if the gov't were to just print every dollars it spends, dollar holders would actually notice the decrease in their purchasing power, evident in rising prices (Charlalists use Keynes definition of general price increases, while the classical/Austrian definition of inflation is an increase in the money supply). This is why AP says the gov't is only inflation constrained.
ReplyDeleteIf the gov't ran a balanced budget all the new money spent would be recovered with tax receipts and none of the new money would stay in the private sector. When the gov't spends more new money than it recovers in taxes the difference remains in the private sector accounts. This is why AP says that public deficits equals private savings. So AP, how do we not understand the monetary system?
Here come's a big ol' dump truck of reality. Because this is all just paper transactions, no new economic goods have been created. The economy (gov't included) is resource constrained. Real savings is the result of underconsumption or producing more than one consumes. First, the gov't doesn't produce anything. So every dollar spent consumes scarce resources. When gov't taxes it basically transfers private resources from one account to another, essentially replacing a goods already purchased with new money with goods confiscated from the private sector. With public and private money chasing the same resources goods are consumed. All the while, the accounting definitions and equations may balance in terms of paper dollars. A public deficit consumes resources and is not balanced by underconsumption in the private sector. If fact, when the money supply is artificially increased, both the public and private sector consume resources, because the new money sends a false signal that there are more goods in the economy that have actually been produced.
“AP's refusal to call default by inflation an actual default, shows how little he cares about economics”
ReplyDeleteI have never said such a thing. I have said, repeatedly, that the US does not represent solvency risk, and that deficit spending is constrained by inflation, not credit risk. Inflation is the ultimate limitation to deficit spending, not funding a bond auction. Bond auctions will always be completed in the US under the current monetary system. Once you recognize this, then the policy discussion and analysis will only be focused on inflation impacts, and not some made up credit concerns.
“Are reserves infinite? “
The banking system is never reserve constrained. And the US government creates reserves when it deficit spends, thus creating the reserves to ‘buy the bonds’
“I don't believe the US is near bankrupt or that hyperinflation is just around the corner”
Agreed.
“it certainly doesn't mean govt. spending is a sound economic policy”
I never said it was. And deficits are created two ways, by spending and tax cuts. People seem to forget that little tid bit.
“what do you (and Chartalist actually consider to be a sound economic policy”
Allow the private sector to determine its desired level of savings. If the private sector demands savings (as it does now to deleverer) then don’t implement austerity or raise taxes to prevent that from happening. Allow the deficit to be maintained or rise. But saying we need to cut the deficit now, now, now as Prof. Anderson and many Austrians believe we need to would only drain savings from the private economy. Think about what happens if you had a tax increase tomorrow.
In the MMT framework I am discussing, the government will not raise taxes, and it will allow the private sector to delever as it desires. The deficit shrinks when the private sector has recovered. Cutting the deficit because you think the US represents a credit risk is not only bad analysis, it prevents the private sector from getting what it is currently demanding: more savings. Imagine that, a free market solution.
“Its not like govt. is not willing to drain reserves for bailouts, etc”
The government does not drain reserves to fund anything. Think about this, as a condition of TARP passing, did the government have to pull off a bond auction? Of course not. The government spends first, taxes and ‘borrows’ second. That’s just an operational fact.
“we don't believe that mantra accurately represents reality”
It does. Here it is in $$$ format.
http://static.seekingalpha.com/uploads/2010/7/15/saupload_pimcos_double_entry_bookkeeping.png
and you can re-create this with data from the BEA website.
“What Austrians (and Prof. Anderson) teach is that a statist monetary system that artificially creates money and credit will constantly cause a misallocation of resources and subsequent 'boom and bust' cycles”
That may be so, and for the most part I would agree with you and Prof. Anderson. But that’s not the point. The point is the US government is the monopoly supplier of its currency. I may not like or agree with it, but it’s an operating fact. My criticisms of Prof. Anderson and many others on this blog is what he teaches is an ideology, and you can not apply that ideology to the reality of monetary system of the US. Under his ideology, the US government can go bankrupt because he does not believe in “a statist monetary system that artificially creates money and credit”. In that system, he is correct. But we do not live in that world. And in the world we live in, the US can not go bankrupt, so claiming we need austerity now, now, now despite the demands of the private sectors is wrong, baseless, and lacks understanding of the reality we live in. His commitment to his ideology, like many other economists (including Krugman) lead to bad analysis.
unfunded liabilities from social security ponzi, medicare, medicaid, and now the government sponsored failures of fannie & freddie blowing up as we speak...... just think, you will be able to tell your kids, or your grandchildren, that you were around before a meltdown (created by ARROGANT ivy leaguer central planners such as krugman) destroyed our country.
ReplyDelete> The banking system is never reserve constrained. And the US government creates reserves when it deficit spends, thus creating the reserves to ‘buy the bonds’.
ReplyDeleteThis is circular logic, for all practical purposes there is no need for production and you're implying that the govt. is auto-sufficient, all factories and businesses can close down and it doesn't matter because the govt. just needs to create reserves when it deficit spends, thus creating the reserves to ‘buy the bonds’, see govt. doesn't actually needs people.
> deficits are created two ways, by spending and tax cuts. People seem to forget that little tid bit.
Austrians are not against deficits per se, we're against market intervention by the government because it distorts the signals market participants receives thus giving false information about the current state of affairs. Same reason we don't think Y = C + I + G + (X—M) represents any real information about the economic state of a nation, again for us its what, where, when and how goods & services are produced that really matters not how much have people (and govt.) spent in total.
> Cutting the deficit because you think the US represents a credit risk is not only bad analysis, it prevents the private sector from getting what it is currently demanding: more savings.
The reason for cutting the deficit and stop spending is to allow the liquidation of malinvestments and the restructuring of capital. If the govt. keeps spending then it keeps sending the wrong signals to the market and delays capital restructuration from bad investments to good ones. Why? Because by spending its creating artificial supply!
> Think about this, as a condition of TARP passing, did the government have to pull off a bond auction? Of course not. The government spends first, taxes and ‘borrows’ second. That’s just an operational fact.
Yes, its an operational fact but what does it translates into in the real world? Its spending money (wealth/capital/goods) from the future assuming there will always be some money (wealth/capital/goods) in the future where it can borrow from but monopolies don't last forever and continuous misallocation of resources (malinvestment) without proper capital restructurization (due to the creation of artificial demand) is a recipe for self-destruction (if you allow me a little literary exaggeration).
> It does. Here it is in $$$ format.
No, it say's nothing! Remember: for us its a matter of what, when, where and how its created. An increase in GDP through the building of condos in Palm beach means little to unemployed silver miners in Idaho (to cite Higgs). Your graph tells me nothing capital structure or the type of goods and services being created. It doesn't tell me if the private sector was financed (i.e. via bailouts) by the government or if it was responding to govt. created incentives. It simply shows that there may be some correlation (which doesn't imply causation) between Private and Public Sector balances. I don't even know how they calculated the balances, how was such data collected in the first place? What theory of human action explains such correlation?
“I‘ve previously posted links of Mises eviscerating Knapp and, thus, Wray”
ReplyDeleteThat essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.
I declare Mises the winner!
Polylogism anyone? Except here, the logical structure of the human mind changes OVER TIME and not between different races.
I think this says it all about the type of people we are dealing with.
AP Lerner,
ReplyDeleteSetting aside your criticisms of Dr. Anderson's statements about the possibility of gov't bankruptcy for the moment, I do not understand how the opposition to deficit spending by the gov't is only 'ideological' if one agrees with the Austrian theory of business cycle.
How does supporting deficit spending with a system that happens to be 'the reality' solve our problems if continuing to do so will only cause more resource misallocation? The market cannot re-allocate resources according to real preferences of consumers as long as such a system is in place whether it is 'deficit spending' or not.
Hi Jason – thanks for the thoughtful response that does not reference Zimbabwe or some article written in 1917 when the gold standard was still prevalent.
ReplyDeleteBefore I respond specifically to your post, I want to clarify one thing. I have never criticized the Austrian view on the business cycle. I am often accused of ignoring the factors of production and capital structure and other things, but all of that is missing the point of my posts, and is off topic. My criticisms have been strictly focused on Prof. Anderson’s ignorance regarding the monetary system of the US, and how financial balances shift between the private, public and external sectors. I think there is little to critique in regards to ATBC. My focus is on the monetary system, and the relationship between public deficits and private savings. The irony of Prof. Anderson and other Austrians view that we need to implement Austerity and balance the budget now, now, now is that iausterity is actually a massive form of government intervention. If we try to implement austerity now, the public sector is working against the demands of the private sector to run surpluses and delever. Does that kind of intervention sound very Austrian to you?
I also want to make it clear that deficits can be run in two ways: spending or cutting taxes. I happen to disagree with Krugman in regards to favoring spending over cutting taxes, but that’s not the point, and not the focus of MMT. If we build a road to no where for $100M, that adds to the deficit. But if we cut, say, pay roll taxes by $100M, that also adds to the deficit. Which would you prefer? Is cutting taxes such a misallocation of resources? Of course not. This is why I said in a previous post I agreed 100% w/ the Bush tax cuts. I may not have agreed with how they were allocated (that’s a political decision) but I agreed with the cuts, in principle, and do believe they warded off a much deeper recession in the early 2000’s.
It all comes back to public balance + private balance + external balance = 0
This is simple double entry bookkeeping, and there is no correlation as some claim. It’s math and if it no longer holds, thousands of years of mathematics has been turned upside down. You can recreate this by using the NIPA tables at the BEA website, or you can let Paul McCulley do it for you:
http://seekingalpha.com/article/214585-paul-mcculley-does-modern-monetary-theory?source=feed
As the chart on this essay shows, the math holds over time. So this is either the greatest correlation known to man, or double entry bookkeeping actually exists. I’ll go with the later. I know it’s painful for many that subscribe to the Austrian theory to believe there is any kind of relationship between the public and private sector, but it exists, and there is no way around it in our current monetary system. It’s the reality of the situation.
So when you say:
ReplyDelete“I do not understand how the opposition to deficit spending by the gov't is only 'ideological' if one agrees with the Austrian theory of business cycle”
My response is once you realize how financial balances flow through the economy, it’s not possible to just be opposed to deficit spending, end of story. If you want to make a case the current deficit is not efficient (too much spending, to high taxes) I’m with you. But to claim we can eliminate the deficit, maintain an external deficit (the US must do to its petro balance) AND have the private sector run surpluses so they can de-lever, it’s not possible. No way around it.
The discussion should not be if we should be running a deficit. The discussion should be centered around what is the appropriate sized deficit to meet the demands of the private sector. This changes over time, and there is no one size fits all solution. The private sector demands will change over time with the business cycle. Once the discussion turns to the appropriateness of maintaining the deficit (vs. fearing the invisible bond vigilantes) then we can have an honest discussion on the composition of the deficit.
Now, some will jump to the incorrect conclusion that what I am saying is we need the public sector to create wealth. This is false. The public sector provides the ingredients since they are the monopoly supplier of those ingredients. It’s up to the private sector to make the meal (I know, silly analogy!)
It continues to amaze me that despite all the recent evidence that the private sector is demanding higher deficits (bond rates have fallen, deleveraging has slowed, China has sold UST’s, and rates still fell massively) that anyone can be calling for austerity in this environment. It’s nonsense, and is a fundamental misunderstanding how the monetary system operates and ignores the simple reality that the US government does not represent a solvency risk. Never under the current monetary system. Those that claim we need to cut the deficit now, now, now are letting their ideology cloud the picture.
“How does supporting deficit spending with a system that happens to be 'the reality' solve our problems if continuing to do so will only cause more resource misallocation?”
To be clear, I do not support deficits per say. I, and others that understand MMT, support the deficit being determined by the demands of the private sector. The market determines this. If you implement austerity during a period when the private sector demands high surpluses, then really you are supporting government intervention with the private sector. And deficits do not cause resource misallocation per say. Does inappropriate public sector capital spending? Yes. Will a cut in the corporate tax rate? No. I have never commented on the appropriate composition of the deficit, just the reality that deficits are appropriate, and the size should be determined by the private sector.
“The market cannot re-allocate resources according to real preferences of consumers as long as such a system is in place whether it is 'deficit spending' or not.”
Yes it can. And it will if the public sector stays out of the way. My biggest concern and criticism with Prof. Anderson and Austrians is they automatically believe a public deficit is evil, it will rob our grandkids and blah, blah, blah. It’s all nonsense, and ideologically driven. This is what I mean when I say Austrians do not understand the monetary system and how the financials balances shift in a country like the US. And repeated comparisons to Zimbabwe and Greece just prove my point. Again, I have not, and will not criticize other aspects of the so called Austrian theory or the business cycle or capital structure etc. Only there misunderstanding of the monetary system.
Uh, sorry..meant Hi Richard, not Jason h. My apologies. Thank you Richard for the thoughtful post.
ReplyDeleteMy biggest concern and criticism with Prof. Anderson and Austrians is they automatically believe a public deficit is evil, it will rob our grandkids and blah, blah, blah. It’s all nonsense, and ideologically driven.
ReplyDelete1. The gist of Mises' article is that the Chartalists have never even thought about individual money exchanges, subjective value and economic calculation. The gist of the Austrian school is acting man and his limited knowledge. Chartalists were and are oblivious to Mises' point which is valid at all times and under all systems.
Goods and services trade for other goods and services (aka "stuff"). Money is a medium and measure of exchange. All value is subjective. The Chartalists' constant proposed injections and withdrawals of "chartal" funny money will make economic calculation impossible. The impossibility of economic calculation under a fiat money regime is the ultimate cause of the boom bust cycle. Mises' article is just as definitive today as it was in 1917. It is the Chartalists who don't know how things "work".
2. So, the laws of scarcity have been abolished? Isn't "economics" the study of scarce resources? If the government borrows money, doesn't it divert scarce resources that would be otherwise employed? If the government promises X amount of stuff for retirees, where does the stuff come from?
When the government diverts resources through borrowing for its nefarious schemes, explain again how this makes the private sector wealthier than in the absence of the nefarious government scheme where people are free to do what they want with their lives and property. DON'T USE KEYNESIAN ACCOUNTING IDENTITIES IN YOUR ANSWER. Whether those identities are correct or not, they are merely a reference guide for what goes on and has gone on in the real world at the human level.
3. The only valid point I will concede that the Chartalists have made is that the government is generally able to fool some of the people some of the time into thinking that fiat money has value. This depends, however, on a mass program of deception and enforced intellectual sloth (aka "the public schools"). Slavery depends on two things, either the obliviousness of the slave or the bigger guns of the slaveholder.
To clarify part of my prior question...
ReplyDeleteThe government has promised retirees $X over their lifetimes, which they see as $X worth of real stuff. The Austrian position is that there isn't enough stuff laying around to transfer to them because there have been no savings. At some point, this will become clear and the government will be forced to either default or to pay the retirees in diluted dollars, which is substantively a form of default and/or fraud.
Why is that scenario wrong? If wrong, where does the stuff come from to satisfy the promises made to the retirees?
the retirees wont survive the coming food crisis, therefore the govt. wont NEED to give them anything.
ReplyDelete