Spare Me the “Middle Ground” Please!
June 10, 2011 - 8:06pm ET
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In a debate at FiredogLake about Modern Monetary Theory (MMT) perspectives on the so-called deficit/debt crisis and the idea that there is no long-run deficit problem, powwow, a perspicacious commenter and occasional blogger at MyFDL, suggests that while MMT offers useful perspectives on how the monetary system works, and he also agrees that more deficit spending in the present employment crisis will not lead to forced, as opposed to political default, he still believes in a “middle ground” position about the advisability of extensive deficit spending and the MMT claim that deficit spending cannot force us into eventual insolvency, saying:
However, unlike, apparently, the MMT academy, I am not so sanguine about what the future holds in that department, and think that discretion is the better part of valor here, such that we should not be living, as a nation, as though money really does grow on trees, and will do so indefinitely.
In a later comment and in reply to my pointing out that the claim that insolvency caused by economic rather than political factors isn't possible for Governments sovereign in their own currencies, according to the MMT paradigm, powwow stated a number of considerations which I'll reply to here n dialog form
Working off admittedly-limited research, and focusing in particular on this ‘painless or necessary deficits’ question (while recognizing that the operational facts are that all the government does to “create money” these days is to push a button on a computer keyboard), here’s a tentative impression I’m receiving about the MMT federal money debate:
I perceive some MMT proponents to be trying to reframe an extraordinary period in American history – a time of historically-high government deficits and debt, but historically-low interest rates for government borrowing – as the “new normal,” in a way that’s beginning to remind me of the sense I had during the peak of the housing boom. I didn’t know the major contributing factors that created the housing boom (the Wall Street pressure for ever more loans to repackage and ‘collateralize’, etc.), but I was positive that the situation was simply not sustainable. Meanwhile, a cottage industry of players was describing what has turned out to be an abnormal, short-lived period of great excess as the “new normal” for the American housing market and economy.
I agree with you about the housing boom, I, too, had the feeling that it was unsustainable. However, the reason why I thought that was because the boom was based on a private debt bubble, and those building debt had only a limited capacity to continue or spiral it upward. Sooner or later, their credit worthiness would be questioned by lenders, and when that happened the whole house of cards would collapse.
However, the deficits MMT is talking about are accompanied by public debt instruments and the Government issuing them has an unlimited capacity to create/spend the money it needs to meet whatever debt obligations it has. So, however, large the public debt gets, the capacity of the Government to issue more debt is unimpaired, unless political factors intervene. When viewing private debt vs. public debt, it's important to recognize that these are very different, as argued here, here, here, and here.
Also, it needs to be emphasized that running deficits isn't the same thing as issuing debt. Congress, again, now requires that Government first issue debt when it wants to deficit spend. But Congress can change that rule at any time, so that deficit spending could continue, but now without debt. In addition, The Executive Branch now has the capability to issue jumbo platinum coins of arbitrary face value. If it chose to issue such coins and deposit them at the Fed, the profits from coin seigniorage could close the gap between tax revenues and government spending, technically erasing all future deficits, while allowing the Government to completely pay down the national debt over time. If this method were used, net financial assets would still be added to the non-Government economy when the Government spends, because, unlike taxation, coin seigniorage produces revenue and erases deficits without destroying cash reserves.
The housing boom was proven to be primarily a confidence game, with little real justification for its years of existence (which, upon collapse, generated a lot of pain for those at the bottom, but little for those at the top who drove it, and finally ended it). Can’t the same be true of the present ‘seemingly-painless-government-debt’ era of the wider American economy? As with the housing boom, there are heavily-invested players with enormous incentives to keep the game going, who are working overtime to prevent a change in the status quo.
I'm not entirely sure what's meant here, but I think that Government deficit spending won't generate demand bubbles and eventual collapses as long the Government doesn't deficit spend beyond the productive capacity of the economy to absorb the aggregate demand deficit spending has created. So, I think this is the demand-pull inflation issue. MMT opposes deficit spending beyond full employment, and proposes that excessive aggregate demand be contained through taxation.
But just as suddenly transformative and unpredicted as the Lehman bankruptcy was for the Wall Street home mortgage game, probably few can know or predict with precision what factor might suddenly change present circumstances enough to make us wish we’d stopped unnecessary deficit spending by our government long before now.
I already wish we hadn't done much of our deficit spending because of bad effects of the spending itself. For example, I'm against corporate welfare programs and spending on the wars in Afghanistan and Iraq. But, I think you're suggesting that there is something about Government deficit spending itself that has bad effects, apart from the content of this spending, and that under certain unknown and relatively unpredictable circumstances these “Black Swan” bad effects can become highly visible and dominant.
I won't say that there's nothing to the idea of falling victim to a Black Swan, but surely to refuse to take action by spending what we need to to solve our major national problems for fear of encountering a “Black Swan” that might collapse our system, isn't a good enough reason to accept the status quo on our myriad problems, on grounds that we'll spend so much that we'll expose ourselves to those novel conditions we can't even imagine.
Don't get me wrong, I'm all for being careful and watchful for any emerging “Black Swan,” and by “looking for trouble” constantly with any MMT-inspired policies. But I'm not for inaction while: our labor force degrades from unemployment, our educational system continues to deteriorate, our health insurance system causes close to 60,000 unnecessary fatalities per year, our infrastructure continues to decay, our safety net is continuously weakened, and other very serious problems go untreated.
In the end, even if ‘money growing on trees’ were to become the accepted definition of the spending power of the federal government, I’d probably be in the camp of those insisting that we need more than the free will of our representatives, plus endless “free” money at their disposal (or at the Federal Reserve), to keep our federal government in check, even if the bills Congress ran up, or the spending they ordered, was done with money manufactured out of thin air, that never needed to be accounted for in any way.
I don't like the “money grows on trees” metaphor here as well as I like Warren Mosler's “scorekeeper” analogy. Like the scorekeeper, the Government never can run out of points to give to the players in the economic game, unless, of course, Congress constrains the scorekeeper.
As it is with the scorekeeper, the Federal Government neither has nor doesn't have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government's case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it's done electronically; and that also holds true when it destroys dollars.
So, finally, I agree with you that we need more than “free money” and Congressional free will to “keep the Government in check.” But I also think that this is beside the point of whether the MMT paradigm is correct in its analysis of fiscal sustainability and fiscal responsibility. Keeping the Government in check is a matter of getting greater accountability from our representative system of Government, whatever economic ideas we are subscribing to. Right now that system isn't working well to represent working and middle class people, and I think we need to develop new institutions that will help us to keep the old ones in check. But that doesn't mean that we should acknowledge artificial bounds on Government spending when people are suffering, economic lives are being destroyed, and sick people are dying and dying quickly for want of health insurance. If this Hooverian austerity period goes on much longer, we are looking at wasting the lives of a generation of young Americans, at unknown cost to the viability of our democracy. We need that wasting to stop. We need to use the full power of Government spending to create sustainable economic growth.
Middle grounds often sound like a good idea theoretically. But in reality they can be incredibly costly because the cautious,compromising approach they require often means accepting the very outcomes one is trying to avoid. So, for example, we see those who fear Social Security insolvency and a severe cutback in benefits in 2037 advocating cuts to Social Security that will bring the reality of reduced benefits right now. Similarly this Administration's cautious, moderate, middle ground, “bipartisan” approach to economic stimulus, along with its willingness to accommodate Republican and Blue Dog stimulus measures and its insistence that the Recovery Act be kept under $900 Billion in deficit spending over two years, pretty much guaranteed the inadequacy of the Recovery Act as a means of ending the job crisis. The middle ground position failed to solve the jobs problem, and along with other foolish “middle ground” measures has left us on the brink of a double-dip recession now.
We've seen an even more foolish “middle ground” approach, in the health care reform area. The bill that emerged certainly was “middle ground” all the way. No deficit spending. No public option. Medicare savings from waste. Mandates following RomneyCare in Massachusetts. Plenty of Republican giveaways to the private insurance companies included in Amendments. Complete avoidance of the idea of Medicare for All.
The result is a big failure, which thus far had failed to stem the tide of fatalities, foreclosures, and bankruptcies due to health costs and lack of insurance, and which is vulnerable to complete repeal before it even becomes operative. In this Administration, the cost of middle ground approaches to problems has been horrific. I'm afraid the term “middle ground” has a negative connotation for me. It doesn't mean reasonable. It doesn't mean useful. It doesn't mean solutions. It means incoherent. It means failure to accomplish what could have been accomplished because people assumed that doing something, anything, is better than waiting until one can do something that might actually solve a problem. “The perfect is the enemy of the good.” Well, the bad, the incoherent, and the unworkable is the enemy of the good too. So, let's have no more of that!
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