inflation

The Job Guarantee and the MMT Core: Part Six, Carney on Stagnation

Joseph M. Firestone — Wed, 11 Jan 2012 00:22:48 -0500

Parts One, Two, Three, Four, and Five.

In the first five parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche and Peter Cooper in conjunction with a post by John Carney, which kicked off an explosion of blogosphere posts and commentaries on the JG. In Part Three I began an analysis of John Carney's views by taking exception to his claims that the JG would be inflationary, a bureaucratic nightmare, and would cause economic stagnations. In Part Four, I critiqued his views on the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also his claims on the JG and stagnation. In Part Five, I focused on his discussions of the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also stagnation.

In this post, I continue analyzing John's further take on the JG in in his 'The Trouble with a Job Guarantee. His arguments in this post cover incentives to work that might be impacted by a JG program, and the notion that we know that prosperity with unemployment is possible. My interleaved replies from an MMT perspective to his arguments are provided in this and an upcoming post, as well as in Parts Four and Five of this series. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

The JG is a Guarantee of a Job Offer, Not a Job

”It would be possible, of course, to diminish or eradicate the inflationary effect by tightening other government expenditures, raising taxes, or making sure the Jobs Guarantee wages were so low that the increased demand generated would be minimal.

The MMTers argue that the Job Guarantee positions will be so low-paying that workers will not be incentivized to stay in them. But I’m not sure this is correct. Do we really understand how workers will react to a job they cannot lose? Will there be some people who prefer to work just enough to get by, showing up at the Job Guarantee office every now and then, working for a few weeks, then going back to their personal hobbies?”

Comment: People will be able to lose their JG job. MMT proposals guarantee an offer to work. They don't guarantee that someone will be able to continue to work if their work isn't satisfactory.

There may be some people who will want to work just enough to get by. So what? Why is this a problem, if people can get by this way. They'll be doing valuable work, while they're doing JG work from time to time. If they don't want to graduate to private sector work, and periodically join and drop out of the JG, instead, then why should that bother us, as long as they're getting paid for the work they do?

”Yes. There will be. And some of these people will be very intelligent, even diligent people. I know people like this in New York City, who go through long periods of voluntary unemployment during which they paint, act, and write. They are enabled in this lifestyle by unemployment insurance and rent-control. Some of these people used to be computer engineers but found that they preferred more leisure and the income from unemployment insurance to less leisure and income from a private sector jobs.

It’s a wonderful life, really. But if it were too popular it would obviously be economically stagnating. I can see the possibility of The Job Guarantee inviting this type of economic stagnation at a whole new level. Work a week per month, earn enough to pay your for your rent-controlled apartment, then spend the next three weeks painting.

Work every other day. Work half days. Whatever. There's always a job waiting for you the next day. Get sick? Go down to the Job Guarantee office, take a job, then use the health insurance to pay for the medicine you need.

We do not know that this is what would happen. But that’s part of the point. Nothing on this scale has ever been tried before. It is bound to produce unexpected and unintended outcomes. Pretending as if we know the economic and social consequences of this kind of revolution in the way Americans work is a dangerous conceit.”

Comment: Oh, those evil New York wastrels, and bohemians! How can the hard working folks out in Iowa possibly agree to support them with guaranteed occasional work, even if they have that same guarantee themselves, even if it provides them with the full-time continuing work they prefer, and even if they're not (remember, John, this is MMT) actually funding them from anyone's tax money?

And, what, exactly, is wrong with the value produced from painting, acting, and writing? Of course, not everything produced from these activities adds value. But the same is true of many private sector activities. Does John really think that economists are more valuable to society than artists, actors, and writers, for example?

And why isn't it the case that many people will use the JG as a means of leveraging getting new businesses started? Why assume that this sort of pattern will be economically stagnating? Maybe it will be the opposite. Maybe it will free up creativity? Why is a certain amount of freedom from other people's judgments about what activities are valuable to undertake “stagnating?” Again, John is showing an ideological bias here, and it is a conservative bias toward reinforcing authority and against increasing personal freedom.

Prosperity with An Unemployed Buffer Stock?

”As Cullen Roche at Pragmatic Capitalism points out, we know that we can have prosperity with unemployment. We don’t know we can have it without unemployment because we’ve never tried it and our economic models will always fall short. The maps aren’t the territory.”

Well, the question here is: prosperity for whom? Maybe there's prosperity for Cullen, and for John, but there's no prosperity for the people in the unemployed buffer stock, their families, or their children. There's also no prosperity for working people whose wages are either kept low or further depressed by the rising buffer stock of the unemployed. That's why the median wage in the US has increased very little in the US since the 1970s and that's also why inequality has grown so greatly. If we want to stop trends like this and create a more equal society, more consistent with robust political democracy, then we have to stop depressing wages by fighting inflation with large unemployed buffer stocks.

Also, what is the standard used to say that the unemployed buffer stock “works”? It certainly hasn't worked for working Americans if we compare their state with citizens of other nations. With each passing year we see that cross-national indicators of economic well-being show that US citizens are falling farther and farther behind the citizens of other modern nations. There is no getting around it: something's rotten in the United States, but not in Demark. The US isn't working as it should as an economy producing the kinds of opportunities people value; including the opportunity to start new businesses, to attend college, to receive health care when you need it, or even to have an economic safety net when disaster strikes. And one of the reasons is that we don't (John Carney and Cullen Roche, not withstanding) have widely shared prosperity due to our insistence on having an unemployed buffer stock.

”You’ll notice that in my story of my arty NYC friends above I pointed out that unemployment interacts with rent control in ways that many people have never considered. The Job Guarantee will not come into an economy unencumbered by regulation. It will become part of an extremely complex web of regulations enacted during the last hundred and fifty years. It is impossible for anyone to know how the Job Guarantee will interact with the rest of the regulatory state.”

This is a very common conservative complaint about any attempt to change the way things are done. Yes, we live in a complex adaptive system, and our participation in it is reflexive to boot. Life is about unanticipated consequences and “black swans.” It is impossible to know exactly what will happen if we make major changes to our economic system. But the only way to find out is to make the changes we think will improve things, to evaluate them, and then change things again if what we've done doesn't work. John's attitude toward the JG is the traditional conservative 'can't do” attitude. The attitude that says the sky will fall if you change anything substantially. But, I think that the present system is ruining a lot of lives. We need to change it, and keep changing it, until we get it right -- until those lives are no longer being ruined.

Conclusion: Fallacies of Composition

What we're seeing in the objections to the JG offered by Cullen Roche and John Carney are micro-economic and even anecdotal arguments arguments being used against the JG proposal by people who don't want to risk certain possible, but not likely effects of the program. What's possible can be recognized by thinking through scenarios like those which end in inflation, excessive bureaucracy, skills mismatch, and stagnation. All these things are possible consequences of the JG impact on some individuals.

Implementing a JG may well cause one-time price adjustments in the economy. We will probably be able to point to examples where its introduction causes certain prices to go up. But, because of the impact of other MMT stimulus programs and the aggregate demand introduced by the JG itself, the private sector will move strongly toward providing full employment (though at higher wage levels) within 6 months. So, the JG population will be declining, and along with it Government deficit spending and any inflationary impact it could have. From the micro point of view, it may be reasonable to project that the JG will cause inflation, but from the macro point of view it makes no sense at all if we look at things over time and in terms of the likely interactions between the Government and the private sector.

When we think about the JG, further, and also think about our personal experiences with Government programs, a plausible reaction is: “Oh no, not another Government bureaucracy.” However, if the JG program primarily relies on State and local authorities and non-profits to hire JG people, while the Government restricts itself to funding, then it may not add very much to bureaucracies that already exist. So, if we look at it in the context of other existing bureaucracies, the micro objection that this is going to take another big bureaucracy pales before the reality that the work on the ground can be overseen by bureaucracies and organizations that are already there.

The skills mismatch complaint, next, looks plausible, when we reflect that most of us may have had the experience of seeing an advertisement for a desirable job and then lamenting that we are lacking a few qualifications to take advantage of the opportunity. But that's not looking at things from a macro point of view. Which industries really have skills/job qualifications mismatches that would require more than a short time of company paid for, or JG supported training or both to resolve? What percent of the unemployed pool is affected by that? What percent won't be hired because they want good wages and benefits, and people who need people with their qualifications cost much less in other nations? Without good data on the frequency of the mismatch “problem”, how can we know whether it will impact the JG or not? It may be a possibility; but that doesn't make it likely.

Finally, we all know about “welfare queens.” Reagan's never existed. He just told a story, and people believed it because they could imagine that it might have happened, and because they wanted to believe the worst about people on welfare.

John Carney's story about his “arty friends” in New York, may be true, and maybe he knows them. But the fact, that the JG may produce JG Queens or Kings only becomes a problem, if the people involved are a statistically large proportion of the program, and also if they're people who aren't producing value in their JG and broader social roles.

Anecdotes about individuals John knows, don't show that this possible phenomenon would be an actual problem if the JG program were implemented. They only show, instead, his own judgmental Calvinism, which looked at from a macro societal point of view may be a bigger and much more serious problem than any possible JG Queens or Kings could ever be.

The Job Guarantee and the MMT Core: Part Five, More on Carney and Mismatch

Joseph M. Firestone — Tue, 10 Jan 2012 01:01:35 -0500

Parts One, Two, Three, and Four

In the first four parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche and Peter Cooper in conjunction with a post by John Carney, which kicked off an explosion of blogosphere posts and commentaries on the JG. In Part Three I began an analysis of John Carney's views by taking exception to his claims that the JG would be inflationary, a bureaucratic nightmare, and would cause economic stagnations. In Part Four, I critiqued his views on the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also his claims on the JG and stagnation.

In this post, I continue analyzing John's further take on the JG in in his 'The Trouble with a Job Guarantee. His reasoning in this post, focuses on the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also amplifies his claims on the JG and stagnation. My interleaved replies from an MMT perspective to his assertions and arguments are provided in this and an upcoming post, as well as in Part Four. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

Does the JG Really Solve the Mismatch Problem?

”The Job Guarantee gets around one of these problems: it guarantees that anyone who comes to the government employment office ready, willing, and able to work will be able to get work for pay and benefits. The problem of mismatch is seemingly solved since the government will just supply the demand for something the unemployed can do. Direct hiring works better, in this sense, than trying to jigger the knobs of monetary policy.

But is the problem of mismatch really solved? I do not think it is.

The jobs created under the Job Guarantee are specifically not supposed to compete with the private sector, which means that they supply goods and services for which there is not a market demand. The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives."

Comment: This statement really reflects John Carney's bias towards private sector employment, and is simply ridiculous and outrageous on its face! We all know that Government work produces valuable goods and/or services that improve our lot in life, everyday. We also know that a lot of Government work is valueless or produces negative real value. But we can equally well say the same things about private sector work. Much of it has zero or negative real value from the viewpoint of those of us who aren't getting paid for doing it, and I won't trouble to even provide the very obvious examples of this. There's also much private sector work that adds real value to our lives and is well worth doing.

My point is that whether JG work produces real value has nothing to do with markets or whether businesses in markets believe they can make a profit from certain kinds of activity. But it has everything to do with whether Americans are likely to and, in the event, will value the goods and services produced by JG work. Whether the output of the JG program is “productive” will be judged by the people that will or will not benefit from it, and not by the private sector market that it will not be competing with.

"Now some people will say that this is fetishizing the market. Aren’t there things that improve our lives other than what the market will pay for? I don’t want to argue that there are not. I do not think, for instance, that these days we could pay for the Sistine Chapel but our lives are greatly improved by its existence. The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground."

Comment: I'm sorry, but the quote just before the disclaimer does “fetishize the market.” It clearly does make the a priori assumption that what the market values is much more valuable than what the political system or society or people value. And this is a generalization that John Carney cannot establish with any scientific tests or data. It is an ideological view coming out of Austrian economics and Randian ideology. It is not an assertion that should be taken at face value.

Actually, also, contrary to John's view, there is plenty of reason to think that people laboring in JG positions will add value to the economy. We know that many non-profits add value to American life. We know that New Deal project outcomes added lasting value to American life and continue to do so. We also know that many government activities add value today. But, most importantly, we have plenty of reason to believe that the people who run the JG program will be able to design it so that JG workers will be very likely to produce value. We have the years of research on the JG by MMT researchers to show that many good ideas already exist for JG projects that have value. All we have to do to assure ourselves that this is true is to read that literature.

I know that John says that he has read the MMT JG literature and that he hasn't any reason to believe that value will be produced, so he wants to be cautious before implementing the JG. But I've read that literature too, and I totally disagree with John and think his view is colored by the bias I called attention to above. He is predisposed to think that the JG cannot add value, so therefore, no examples of projects that might produce value will persuade him.

I can't say for sure whether this view of mine about John is right. To see whether it is, readers of this post should read the MMT literature themselves and decide. Don't take my word for it, and don't take John's. Decide for yourselves! I'm confident that you will decide that John's claim that “The problem is that there is no reason at all to think that people laboring in Job Guarantee positions will supply meaningful improvements rather than holes in the ground,” is just false.

"The Job Guarantee folks seem to think that there are plenty of meaningful jobs that aren’t getting done but that could be done by the unemployed. I don’t think this is correct. In fact, I cannot really think of many at all. Sometimes things like caring for the elderly or constructing bridges and roads are nominated as candidates. But these are not jobs that can be done just by anyone. They require a certain sort of person with a certain set of skills. Most jobs do."

Comment: This is the same claim as the one made above. Read the literature! Decide for yourself! It's easy to think of productive work for people to do. I'll bet you can do it for yourself. Here's one, start a JG project to provide the SEC with 50,000 new investigators to ferret out the control fraud in the private sector that led to the crash of 2008. That one will certainly add value to American life; specifically a value it is lacking now – namely the value of justice and fairness under the law. Of course, the 50,000 new investigators will need some training; but I suspect Bill Black could design a brief educational program teaching the basics of investigation that wouldn't require more than two weeks of intensive training to complete.

The Distribution of Labor and the JG

"So the Job Guarantee actually falls prey to that old problem of the distribution of labor. Unless the skills, talents and dispositions of the unemployed miraculously match the jobs the government would like done, it doesn’t actually work much better than the “full employment” monetary policy.

This creates the inflation problem I wrote about when I first addressed the Job Guarantee. The MMTers claim that their approach isn’t inflationary. In fact, they like to call it “Full Employment and Price Stability.”

But if they are creating jobs that put more money into people’s hands without creating more supply of that which is actually demanded, then prices are likely to increase. Businesses may be able soak up some of the extra-demand by increasing their output—but this has limits, especially if there is a labor-demand mismatch. The productivity of existing workers can only be increased so far."

Comment: This just re-hashes John's old assertions. Everyone agrees that Government can't deficit spend an unlimited amount without causing demand-pull inflation. MMT doesn't disagree with this. No one's proposing deficit spending beyond productive capacity using the JG or anything else. JG spending is designed to shrink as the private sector responds with more supply to the Government providing funding for real work that will add value to American life.

The reason why it will is that in responding to increased demand the private sector will rehire people from the JG and it will shrink. As I've argued above, the so-called labor/demand mismatch is really a claim that the increased demand can't be met by an increased supply response. But there is absolutely no evidence or reason to believe that we can't "supply" in response to the increased demand coming from the JG. If John thinks there is, then I think the burden is on him to provide some calculations based on empirical data. I challenge him, or anyone else, to do that.

"Because the workers without skills demanded by the private sector have jobs and earn income, their incentive to retrain and relocate is diminished—which means that the labor mismatch persists and businesses may not be able to increase output to match rising demand."

Comment: This one is really strange. If businesses aren't able to meet the demand that existed before the crash of 2008, then it will be because they don't hire back the workers they laid off. If State Governments can't meet the demand for the services they provided before the crash, it will, again, be because they are refusing to meet that demand by hiring their employees back. It won't be because of any skill mismatch. There's little empirical evidence that this will be a serious problem, if the demand is there.

Also, if some people remain on the JG because they can't get better-paying private sector jobs due to a skills mismatch, and if they know that those jobs are going begging, then they will take advantage of JG-related opportunities for retraining, because the incentive for them to do so in the form of higher pay and better benefits will be there if the market is working, and will pay a higher price for labor as demand increases. And if the market doesn't work, then the JG safety net is all the more necessary to give those the market can't provide for, work that will produce real value.

The Job Guarantee and the MMT Core: Part Four, John Carney on the Mismatch

Joseph M. Firestone — Mon, 09 Jan 2012 22:43:16 -0500

Parts One, Two, and Three.

In the first three parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche and Peter Cooper in conjunction with a post by John Carney, which kicked off an explosion of blogosphere posts and commentaries on the JG. In Part Three I began an analysis of John Carney's views by taking exception to his claims that the JG would be inflationary, a bureaucratic nightmare, and would cause economic stagnations

In this post, I'll begin analyzing John's further take on the JG in a second post of his. His reasoning in this post, focuses on the problem of a mismatch between demand and the skills needed to fulfill it, the possible inflationary impact of this mismatch, and also amplifies his claims on the JG and stagnation. My interleaved replies from an MMT perspective to his assertions and arguments are provided in this and upcoming posts. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

The Mismatch Problem

In commenting on the Government's efforts to fight unemployment since “The Great Depression” John Carney writes about the Government's efforts to achieve full employment through monetary policy. He starts his narrative with:

”. . . there was little reason to think that the additional demand created would be for the skills and services the unemployed possessed. If the cause of unemployment was not just a lack of demand but a lack of demand for what the unemployed could do, job growth would not result. What would happen instead was that there would be more money chasing the goods and services actually in demand. This created the potential for high unemployment and high inflation.

Comment: I don't think it's true to say that the US Government was trying to achieve full employment using monetary policy during the post-war 1945-1970 period. Instead, fiscal policy and monetary policy advocates contended with one another about whether monetary policy could possibly produce full employment. During the Kennedy/Johnson Administrations fiscal policy certainly held the upper hand, and even during the 1970s Nixon famously asserted that “we are all Keynesians now,” conceding that fiscal policy was the key to full employment.

During the 1970s, however, neoliberalism began to gain traction, as did Milton Friedman's monetarism. By the time of the Carter Administration, and in the face of cost-push inflation introduced by the Oil Cartel, monetary policy to reduce inflation was the order of the day, and the Government backed off using Keynesian fiscal policy to create full employment.

The closest thing we've had to aggressive Keynesian fiscal policy since that time was the present Administration's attempt to use deficit spending to recover from the crash of 2008. But most Keynesian and MMT- inspired stimulus advocates believed in early 2009 that a stimulus bill twice the size of the ARRA act, with far less emphasis on tax cuts, and far more emphasis on public sector spending was necessary to enable recovery. Experience since 2009 has refuted the view that the $800 billion ARRA fiscal initiative was large enough to enable full employment, or anything near it. The view among many macro-economists now is that the Administration, probably due to its unwillingness to be aggressive with the Democratic Senate, and partly due to its admitted underestimation of the severity of the balance sheet recession, injected far too little aggregate demand and/or direct job creation into the economy.

Experience has also once again refuted the view that monetary policy can bring about full employment, or that aggressive monetary policy, designed to do that, would cause inflation or hyperinflation, since it is hard to imagine a more aggressive monetary policy than that practiced by the Fed since the crash, and we see that its policies have produced neither full employment nor any serious across-the-board inflation. This is consistent with MMT predictions, which viewed monetary policy as primarily impacting portfolio composition in the private sector, without however, adding any Net Financial Assets (NFA) to it. The Fed's expansion of the money supply, has added to reserves, but its hasn't added to the NFA stock and therefore to aggregate demand (AD).

In other words, MMT predicted that Fed policy would neither contribute to increased employment nor contribute to significant inflation, since trading bank reserves for assets of equal value held by the private sector increases the money supply in a very narrow sense, but doesn't increase AD in the private sector because it doesn't add to NFA. The question raised by this is whether Carney's view, quoted above, is even relevant to our present situation, since the real issue wasn't a mismatch between demand created by monetary policy and the skill composition of the labor force; but whether any significant demand at all was created by the Fed's monetary policy.

Mismatch and Hayek's Theory

John Carney goes on with his “mismatch” theory, quoting Hayek, he says:

"In other words, the core problem of most unemployment is a distribution problem. The distribution of labor did not match the distribution of demand. Increasing aggregate demand would not necessarily decrease unemployment. What is typically required to actually decrease unemployment is relocation and retraining of workers, something which many of the temporary measures intended to ameliorate the effects of unemployment actually interfere with.”

Comment: This is an assertion of theory, and one that is rather indirect in its construction of the problem. The creation of demand from a Job Guarantee program funded through deficit spending comes from paying JG workers, i.e. providing them with NFA in the form of high-velocity money, they did not have have prior to their participation in the JG program. At that point, those workers/consumers are the source of demand for further products/services in the private sector, not the Government directly.

These are likely to be products and services the JG workers could afford to buy before the crash resulted in their unemployment. So, if the capacity to supply those goods and services existed before the JG went into effect, there is no reason to believe that the same capacity would not be used to fulfill the new demand created by the JG provided that one is started before the recession causing unemployment has atrophied previously existing productive capacity. If the capacity is lacking because the recession caused lay-offs, then the workers necessary to satisfy the new demand can be re-hired as needed, as long as the private sector businesses are willing to exceed the JG floor on salaries and benefits.

The assertion that re-training and re-location are needed to lower unemployment assumes that some proportion of the people who want full-time private sector jobs can't get them because their skills don't fit businesses close to where the unemployed live, whose products and services would be demanded in the context of an operating JG program. This is probably true to some extent at a micro-level, but from a macro point of view, the actual size of that segment of the potential JG pool is what's important and that's an empirical question. John Carney doesn't even address that question. So, he doesn't even tell us what the size of his “problem” is.

And he also doesn't make explicit that he clearly has in mind local private sector for-profit businesses, that he thinks will not be able to employ that part of the JG pool whose skills don't fit the new demand these businesses will want to satisfy. Finally, he tacitly assumes, in the quoted passage, that Government-funded employment in the JG program isn't “actual employment”, when clearly the purpose of the JG is to create a buffer stock of fully employed people.

Next, there certainly will be some people whose skills don't fit the current labor market among those who want full-time employment, and there will be a consequent need to train these people. But, JG programs can make provision for re-training, and even for re-location within the US, if that's really what's needed. Many jobs these days, can be performed at a distance over the Internet. This will become increasingly the case over time, so that the relocation issue will become less and less important as the years go by as an important factor in employment decisions.

Hayek's argument about mismatch of demand and skills is now more than 60 years old, and re-location is far less important as a factor in structural unemployment than it once was. If it were still true to any significant degree, American businesses wouldn't be able to outsource consulting, marketing, advertising, software, accounting, and other private sector work to India and China, so clearly local businesses that can use these skills can certainly “outsource” them to other local areas within the United States, if that's what they want to do.

In fact, if John Carney is so keen about this problem of the JG program perhaps a partial solution is to pass laws requiring that businesses selling and operating in the US not to outsource services like the above to companies whose employees are resident in other nations. Some might think that such a proposal accompanying the JG is out of the MMT paradigm, since it's the MMT position that trade deficits add to the real wealth of nations, sovereign in their own fiat currencies. But if there's really a serious contention that the JG program might be less effective because of such a skills mismatch, then it seems to me that in a conflict between increased profits for US companies coming from that kind of outsourcing, which mostly serve to increase inequality in the United States, democracy in this country would be much better served by “outsourcing” to people in other local areas of the US, who are in the JG program, in order to minimize any possible “skills/demand mismatch” that may decrease the effectiveness of the JG, rather than by “outsourcing” to people of other nations.

The Job Guarantee and the MMT Core: Part Three, A Reply to John Carney

Joseph M. Firestone — Fri, 06 Jan 2012 18:52:50 -0500

Parts One and Two

In the first two parts of this series, I analyzed views on the Job Guarantee (JG) idea offered by Cullen Roche and Peter Cooper in conjunction with a post by John Carney which kicked off an explosion of blogosphere posts and commentaries on the JG. In this post, I'll analyze John's take on the JG. He says:

“There are at least three reasons the Jobs Guarantee cannot work.” it's: “. . . massively inflationary”; “. . . . a bureaucratic nightmare; and “. . . economically stagnating.”

His reasoning, and my interleaved replies from an MMT perspective are below. All my replies assume that the JG would not be “paid for,” but would occur through deficit spending.

Would the JG Be Massively Inflationary?

”While employing the unemployed may not create upward pressure on wages, it dramatically increases demand. The national income is increased by the amount the government pays those laboring in JG jobs.”

Actually, GDP is increased by even more than that, because there would be a fiscal multiplier attached to the JG wages similar to the multiplier associated with unemployment insurance, probably in the neighborhood of 1.6 – 1.7. In addition, unlike UI, JG jobs would carry benefits, including access to Medicare, so one would have to add Medicare-related payments and their multiplier onto the multiplier associated with UI. The fiscal multiplier attached to the initial introduction of the JG is one of the arguments for it, since it would represent increased private sector activity and expanded private sector hiring.

”That income is entirely from newly created money, so the money supply is expanding.
That additional demand is not matched by additional supply, however.”

I think this part of John's argument is really weak. Since the output gap is now between 25 -30% of what our economy is capable of, we can expect business to respond to the new aggregate demand with increases in supply, not with increased prices. This will depend on what people want to buy, of course. But there's no reason to assume that people living on a JG wage will want to buy goods and services that are scarce. If John thinks they will, then he needs to amplify that part of his theory about the impact of the JG.

"The people working in JG jobs are not producing goods that the market needs. Their work product is largely waste. Which means that demand increases without the supply of desired goods increasing. The result: inflation."

We can look at the people in JG jobs as supplying demand that the market needs. How do we know this is true? Because of the huge output gap between our capacity to supply and what we're selling. The idea that supply will not increase, as demand increases only makes sense when our capacity to supply is exhausted. But, of course, we have that gigantic output gap telling us that supply will increase and that inflation is not something we have to worry about until that gap is closed.

But when it is closed, JG inputs to the economy will be largely gone, because nearly all of the JG workers will have been hired back by the private sector, and the Federal payrolls will be reduced to its normal complement plus a maintenance staff for the JG program to safegaurd its capacity to ramp up once again, when the next private sector downturn hits.

Also, on what basis is John claiming that JG work products and services are largely "waste"? Is health care for the old and infirm waste? Is building solar and wind power capacity waste? Is work in public schools waste? Is mentoring children lacking parents waste? Is child crae assistance waste? Is the outcome of cultural projects waste? Is repair of public facilities, infrastructure and public spaces waste? Is training people in new skills waste? Is working on entrepreneurial projects waste? Whether, JG work products are waste or not, depends on whether JG workers produce valued goods and/or services that improve the quality of life for other Americans. It doesn't depend on whether “the market” needs those goods and services in the sense that it judges that a profit can be made by producing and selling them.

The story of the US economy in recent years is the story of market failures. It is the story of pharmaceutical companies failing to produce drugs that would actually make people healthier. It is the story of financial services companies sitting on cash and speculating in a massive international gambling casino, rather than using money in a way that is productive for the economy. It is the story of energy companies failing to invest the money needed to bring the cost of alternative sources of energy down and leaving us dependent on fossil fuels. It is the story of the failure of insurance companies to provide affordable health insurance, and the failure of private health care providers to contain costs.

In short, the track record of the market as a mechanism for assessing and producing value for society has not been good for the past 40 years. It has not been adaptive for society at large. Greed has been bad for the market, because it has led business people to try to overturn its workings, to manage it, and even to control it in certain industries. The truth about the market is that works efficiently when it is free, but no business endeavor that is already established wants it to remain free.

In its own area of endeavor a business wants to manipulate the market, to control it, and to create a managed market. Businesses are not for free markets. They are against Government regulations. They are for their own domination of their own market sectors, without Government regulations impeding that domination.

In the past 40 years big business has been very successful at regulating wages in the labor market in a way that benefits them. So, the truth is that the market has largely been a mechanism for seeing to it that the financial benefits of productivity gains largely go to a very small percentage of Americans and an emerging global elite. It hasn't been a mechanism that has increased the real wealth of most Americans by very much over that period.

Will the JG Be A Bureaucratic Nightmare?

John arrives at this conclusion by pointing out that there are 13.5 million people unemployed in the US today, and that an effort to employ all of them would make the JG huge, and implies that the Government couldn't employ all those people without a huge bureaucracy. He claims that:

The JG is a creature of happier times and smaller economies. Bill Mitchell explains that he thought up the idea while he was a student at the University of Melbourne. The total employed population of Australia is only about 11.5 million. Australia currently has an unemployment rate of around 5.3 percent, which translates into 635,800 jobless people. In other words, a jobs guarantee in Australia might be workable. But it doesn't scale to fit the United States.

OK, first John isn't estimating the scale of the problem in a reliable way. It's off the top of his head based on U3 unemployment numbers. To do a better projection you have to recognize, first, that, since dis-employment is at about 28 million, about 25 million full-time jobs are needed to get the unemployment rate down to 2%, which is the MMT full employment goal. In other words, there's an unemployment problem much bigger than 13.5 million to handle. On the other hand, not all of this is necessarily a problem for the JG to handle.

MMT proposals for the JG usually occur in the context of $700 Billion worth of additional deficit spending in full payroll tax cuts for employees and employers, and State Revenue Sharing of $1,000 per person, with a fiscal multiplier of perhaps 1.3 that would kick in before the JG funds really started to flow. It's likely that this deficit spending would cut back the full time unemployed to about 6.5 million, but still leave an additional 8 million part-time employees looking for full-time jobs.

Then, as the JG jobs kicked in after 3 months of ramp-up time at a multiplier of 1.6 – 1.7, private sector hiring would start to accelerate. I think this would make the initial size of the JG problem more like 5 million rather than 13 million. But, please note, I'm not presenting this estimate as anything more than a guess.

Obviously we need some good modeling on this to estimate the dynamics over time and the interactions between different components of the MMT program in ramping up demand and the private sector response. What is clear is that John Carney's estimate of the necessary size of the JG program isn't thought through and is perhaps double or triple its likely actual peak size.

Also, as the JG demand began to hit, it's likely that we'd get a private sector response to it in the form of increased supply and hiring of full time workers within six months. We might very well have a JG program down to less than 500,000 employees within 9 months of the date the JG begins hiring.

In short, I see the JG as a permanent program with a temporary peak size of about 5 million, very quickly falling to 500,000 and eventually to less than a 100,000. If the Federal Government enlists the help of non-profits, State and local Governments to staff it up to the necessary short-term peak, and then relies on individual JG workers and the private sector to staff it down by hiring willing workers away, I don't see the creation of a large permanent Federal bureaucracy coming out of this. John's notion of a bureaucratic nightmare is way overblown, and we certainly can't accept the mere assertion that this would be the result as plausible.

Will the JG Lead to Economic Stagnation?

John also says:

Unemployment encourages those who went into trades that turn out to lack adequate demand to give up those trades and seek another. This is economically productive because it brings stagnate resources—people who can do things no one will pay for—out of stagnation.

The Jobs Guarantee would eliminate this process. The government would buy the labor of people who hold skills not demanded by the market, preventing those people from seeking out new skills. Stagnant human capital would just continue to stagnate.

This argument would be a much stronger one if we weren't in the midst of a balance sheet recession. In this downturn, people may be unemployed because their companies had sales problems due to decreased demand. Their skills may be very much needed by the market as the balance sheet recession eases and then ends. Also, in this particular recession, those in the building industry have experienced a crash. There's no reason to believe that when housing recovers and building starts again that their skills will not be needed. The same, of course, applies to the auto industry and related businesses in its supply chain.

The question of which jobs, and in what quantity, would be coming back in the wake of an MMT anti-recession job creation program is unanswered. But there's no reason to believe that a disproportionate number of people who lost their jobs have obsolete skills and would be unemployable as the recession ends. We need some numbers to see to what extent this is a JG problem. Insofar as it's not a problem, it would simply give the otherwise unemployed a wider range of skills to draw on.

But suppose that 1-2 million people now dis-employed were unemployable in the market when the economy recovered, then who ever said that the JG program would not contain training programs for helping people to acquire new skills. MMT writers have been very clear that the JG would contain such a component. If it's managed well in collaboration with business sectors that need those skills, then those people who lost their jobs due to skill obsolescence would be able to join the private sector again.

Let's Go beyond Talking Points

To the MMT claim that a JG can bring and maintain full employment, John Carney replies: it's: “. . . massively inflationary”; “. . . . a bureaucratic nightmare; and “. . . economically stagnating.” I hope I've shown here that all three risks are overblown, and aren't yet really beyond the stage of talking points. Fundamentally, John's objections seem to follow a script from Austrian economics, echoing Schumpeter and Hayek, while claiming favorability to MMT. Of course, pointing this out doesn't speak to the validity of his points, but it does suggest that he hasn't yet really internalized the full MMT perspective.

He offers these as three risks of the JG program, but in arguing for them he provides no thinking acknowledging that we're in a balance sheet recession where many people are unemployed because demand has collapsed, rather than due to skill obsolescence. He also assumes a likely size for the JG program without considering or thinking through its MMT context. For him, it's just: since we have 13.5 million U3 unemployed, the JG program will employ them all, conveniently forgetting the other elements in the MMT anti-recession program, and the dynamics of its two other legs, which would reduce the need for JG employment and the size of the program.

Finally, his failing to recognize that we're in a balance sheet recession and have a huge output gap indicates that in claiming that there will be “massive inflation” as a result of the deficit spending on the JG, he hasn't thought through the really basic insight that there won't be demand-pull inflation until we've reached full employment and that by that time JG spending will be greatly reduced and won't be a factor in causing any such inflation.

John Carney has written a new post, in addition to the one I've critiqued here. In my next post in this series, I'll critique that one, as well.

End the Austerity War Against the People: Mint the Platinum Coin!

Joseph M. Firestone — Fri, 05 Aug 2011 01:36:20 -0400

How can the President win a victory for the people in the coming hostage-taking over the budget? Here's a scenario!

1. Mint a platinum coin with face value big enough to cover pay-off of the national debt, and the gap between tax revenues and Government spending for many years to come. For example, $60 Trillion in face value would generate enough electronic credits in the Treasury General Account (TGA) at the Fed to last for about 20 years or through 2030. Result: $60 Trillion in the TGA, none of it spent, so no possibility of inflation.

2. Immediately pay off the $6.2 trillion owed by the Federal Government to the Federal Reserve Bank, the various Government Agency Trust funds, among them Social Security and debts to other Government Agencies. Result: Reduction of the national debt from $14.3 Trillion to $8.1 Trillion, all of it owed to the non-Government sector. None of the $60T spent in such a way that the money goes into circulation; so no possible inflation.

3. Pay off the non-Government sector debt, as it comes due using Proof Platinum Coin Seigniorage (PPCS) revenue when necessary. Result: Since the estimated cost is about $300 Billion paid off per month; we can expect another $1 Trillion to be paid off by the end of the year leaving a national debt of about $7.1 Trillion, with a bit less than $53 Trillion still left in the TGA. The $1 Trillion in debt "swapped" for non-governments sector cash reserves is very unlikely to cause inflation, since the debt instruments are probably more inflationary.

4. Use PPCS to pay for any 2011 spending not covered by taxes between now and the end of the year, estimated at about $600 Billion. Result: $52 Trillion left in the TGA. And since the 2011 deficit spending hasn't created full employment, no inflation will result from this action either.

5. Go into the negotiations on the budget with a position, saying

“there will be no spending cuts in this budget at all. In fact, I want a) a full payroll tax cut for employers and employees until full employment is reached; b) immediate lifting of the limit on number of weeks someone can get unemployment insurance; c) restoring food stamp program spending to its state before the recent cut; d) immediate revenue sharing for the States in the amount of $1,000 per person to enable State Governments to retain public service jobs; e) A Federal Job Guarantee program with a base wage of $8.00 per hour cost-of-living adjusted from the lowest cost of living SMSA in the nation upward, with full fringe benefits, and including Medicare enrollment for FJG workers; and f) an increase in SS payments by 50% effective immediately. Now, what is it you gentlemen want?”

Result: They will say that's ridiculous, and threaten to shut down the Government. The President can reply by pointing out that he has solved the austerity/solvency/debt/deficit problem, and there's no need to cut spending.

6. Make a major address to the American people telling them the situation and the history of Republican efforts to tank the economy, informing them of your proposal to head off the likely double-dip recession, end unemployment, and strengthen Social Security, point out that the Treasury General Account has $54 Trillion left in it, and that the national debt is being repaid at a rate of $200 - $300 Billion per month, will be 50% repaid by the end of 2011, and will be almost entirely repaid by 2014. So, there is no deficit, debt, or deficit reduction problem. There is plenty of money in the Federal till to do all the things you've proposed and provide jobs for all, and create plenty of sales to get business roaring.

Tell them the Republicans are standing in the way of jobs for everybody, and that they need to get on the phone to their representatives and demand that they make a deal with all the President's proposals in it. Result: Congressmen and Senators will get all kinds of mail, phone calls and other communications supporting the proposals and telling them to end the sufferings of the American people, or else. That will be even more likely to happen if the economy is continuing to get worse. However, the Republicans will probably still reject the President's proposals, call them profligate spending, and the tea party Reps. will probably threaten to shut the Government down, if their demands are not met.

7. The President can then call for a meeting with the leaders of both Houses to get the demands of the Republicans on the table, and see whether there can be a settlement. The Republicans will propose all kinds of harmful cuts in spending, no tax increases and will demand passage of the Bush Tax cuts on a permanent basis. Emboldened by the presence of $54 Trillion in the bank, the Democratic Leaders will demand passage of all of the President's proposals; but they will probably no longer demand expiration of the Bush Tax cuts, because they will probably recognize that there is no longer any visible money problem.

The President can end the meeting by saying that the Republican position on cutting spending is untenable because he has proven that the US has no revenue problem, and that there is no reason for austerity. At the same time, he can suggest to the Democrats, if they called for letting the Bush tax cuts expire, that there is no economic justification for doing that, and that the only justification is one of fostering greater economic equality; an important issue, but perhaps not one that ought to block a deal with a Republican House on the budget. Then he can ask the leaders to get back to their caucuses and propose a compromise that is likely to pass both Houses.

Result: The President will have leverage to propose a compromise to the country. The Democratic leaders will have no problem getting the full support of their caucuses for the deal. The Republican leaders will have problems with their tea party people; but they can point out that the proposed compromise doesn't violate Grover Norquist's pledge, and also that it will be very hard to oppose a compromise that will definitely produce full employment for everyone who wants to work, and that carries with it no visible debt problem.

8. The President should, at that point, immediately outline a compromise proposal to the nation including all of his demands, and also one Republican demand, namely a continuation of the Bush tax cuts. He can emphasize that he has ended the deficit/debt problem with its need for austerity for good. He must again ask the country to tell their Senators and Representatives to support him in his new compromise which gives the Republicans what they've wanted badly, and also gives to the people the programs that will finally create the good jobs needed to end unemployment.

He can also ask them to fulfill his special request, which is to tell their Representatives and Senators that if they vote against his compromise, the voter will vote against them if they are primaried in 2012, and will even vote against them if the other major party runs an acceptable candidate who supports the President's jobs proposals.

Result: the flood of messages coming into the Capitol will cause the Republicans to “cave” to the compromise proposed by the President. And the President will finally have stood up to the hostage-takers and arrived at a good deal for the people of the United States.

I can't conclude this scenario without noting, that the successful outcome of the coming budget hostage-taking will not be possible without changing the background of any negotiation that will accompany it. Specifically, to be successful, and resist the hostage-takers, the President must change the situation to remove the most obvious justifications for cutting spending.

The function of minting the high face value platinum coin, filling the Federal purse using PPCS, and beginning to pay off the national debt quickly, is to demonstrate dramatically that there is no US solvency problem, or any debt and/or deficit reduction problem.

Issuing the coin and getting the Fed to issue $60 T in credits to Treasury, will demonstrate exactly that, and blow any justification for austerity and spending cuts out of the water. The Republicans won't be able to spin that; and without a plausible claim that austerity is necessary, the drive to force austerity on America will evaporate. Within a few weeks we will have a new political discourse.

The main problem I see with this scenario is getting the President to use PPCS to shake up the austerian system, destroy its forward momentum, and bring forth a new progressive era. He has the power to do it; but he is so tied into his Hooverian austerity-mongering, that I don't think he will use PPCS even though it could well mean the difference between victory or defeat in 2012 for him. He'd rather cling to his neoliberal world view than to learn and to change the terms of the debate and the political paradigm that he is so comfortable with.

That's why I propose that we press for his resignation now! Before he comes up with any more horrible deals with the Republicans and the tea party. Face It! This man can no longer be our leader. His pragmatism is not the pragmatism of FDR and the great Democrats of the past. It is a corrupt short-run pragmatism. He does not deserve our support or our loyalty! What he needs to do is to heed Oliver Cromwell's old admonition to the long parliament:

“You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”

In other words, ask him to resign, immediately!

(Cross-posted from Correntewire.

Proof Platinum Coin Seigniorage: A Political Game Changer for Progressives!

Joseph M. Firestone — Wed, 03 Aug 2011 08:35:04 -0400

Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President's options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won't be discussed again, until the next time there's a “debt ceiling crisis.” In highlighting, in previous posts, the President's option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:

-- 1) pay back the national debt entirely,

-- 2) spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and

-- 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.

The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.

Using PPCS to Pay Back the National Debt

Minting proof platinum coins with arbitrarily high face values, depositing them at the Fed, receiving electronic credits equal to the face value of the coins from the Fed, and then having the Treasury sweep the profits into the Treasury General Account (TGA) can fill the Treasury's purse to an arbitrary level selected by the President. The profits can then be used to redeem debt held by the Fed, debt held by the Trust funds (including Social Security) and Government agencies, and debt held by the non-Government Sector, including domestic investors and foreign Governments and investors.

The importance of using PPCS to pay back the debt isn't economic. Modern Monetary Theory (MMT) tells us that Governments like the US with free floating, non-convertible fiat currencies, and no external debt, cannot be forced into insolvency by economic conditions or factors. So, the government spending capacity of those nations isn't affected at all by the size of the national debt, or the debt-to-GDP ratio. Nor does the level of the deficit reduce spending capability; even though if it is too great, inflation may be the result. However, nations and governments are not purely economic and financial systems. They are also political systems. So, the issue of paying off the national debt has to be viewed from a political point of view, whether paying it off is necessary economically or not.

From a political point of view, deficits, the national debt, and very high debt-to-GDP ratios are a serious political and messaging problem for those who want to spend more than the Government can collect in tax revenues. People simply don't understand the fiat currency system, and they view the Government as they would their own household. They know that their debt is bad for them, and they also think that public debt is very bad for their country and must eventually be paid back through taxes.

We could try to educate people in the MMT point of view that Government “debt is not debt,” and could also eventually get them to accept that Government debt in the aggregate can be continuously rolled over and never paid off, and that its absolute level and even the debt-to-GDP ratio are of no consequence. But success in this kind of educational project would not come for years and years. It's a slow process, and we need to free up Government fiscal policy to handle our various problems by spending more than it taxes in the short run; not the long run.

So, how can we get people to support us in doing that? I think we need to remove the worries people have about public debts and deficits by removing them from the fiscal picture of the Government, i.e. by paying the debt off and by never running any technical deficits where Government spending exceeds Government revenue.

Until PPCS was legislated in 1996, the Executive didn't have the ability to do that without gathering enough revenue from taxation to generate sufficiently high surpluses for as long as it took to pay back the national debt. And that course was unacceptable, because paying back all the debt subject to the limit using surpluses would have been equivalent to draining the economy of all liquidity and destroying all economic activity.

Now, however, the PPCS capability allows the US Government to fill the Federal purse with financial assets sufficient to re-pay the national debt without removing and destroying existing private savings. PPCS could be used to pay back debt held by the Fed and debt held by the trust funds and other Federal Agencies, a total of $6.2 Trillion, almost overnight. The remaining national debt of $8.1 Trillion, would be repaid as it matured, along with interest due on the securities. Since most of the outstanding debt will mature within 3 years, in that period of time the US would be nearly debt-free, and its debt-to-GDP ratio would be among the lowest in the world.

It's important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch, alone. President Obama could see to it that the process is begun and that the repayment of the first $6.2 Trillion was completed this very week. By election time next year, close to $9 Trillion in debt would have been paid off, and the US debt-to-GDP ratio would be less than 40%. Mr. Obama could claim to be the President who placed the nation on the road to debt freedom, all without causing additional pain or the economy to deteriorate further. Here are some of the political implications of using PPCS this way, and minting a platinum coin with a large enough face value (say $30 to $60 Trillion) to pay off the national debt and do other things as well.

-- Lots of political slogans supporting doing nothing about our problems, due to “financial constraints” instantly are swept away. Imagine, if you can, American politics without having to argue about, or cope with, slogans or sound bites like these.

-- “The Government is running out of money.” (Not with a $60 T coin in the bank.)

-- “The Government can only raise money to spend by taxing and borrowing” (Not with PPCS)

-- “We can't keep adding debt to our national credit card.” (We won't be using any of the money on the credit card.)

-- “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)

-- “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won't be borrowing anymore.)

-- “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations." (Again, the Government won't be borrowing anymore, so who cares if they no longer want to buy our debt)

-- "Our grandchildren must have the burden of repaying our national debt." (There won't be any debt or any burden.)

-- “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)

-- “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.” (But it is sustainable. If we use PPCS, then we can have gaps between taxes and spending every year.)

-- “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PPCS, because we won't be running out of money!)

-- “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PPCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)

-- “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)

-- “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can't say that if most of the debt is about to be paid off.)

-- “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PPCS can confront it responsibly, but the bipartisan horror just enacted can't.)

-- “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let's stop borrowing and use PPCS.)

-- “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three - Medicare, Medicaid and Social Security - Social Security is the most solvable. . . . “ (The budget can be be as big as we need it to be with PPCS.)

-- “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)

-- “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What's the problem? We can't run out of money with PPCS!)

-- “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can't create unlimited funds through PPCS; but the Federal Government can.)

-- “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It's always good to cut spending that's not in the public interest. But if spending is having good results, and we're using PPCS, then there's no reason to cut it, whether taxes cover the spending or not.)

-- “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PPCS, we can easily strengthen SS by extending benefits, and we don't need to do it through a bipartisan Rube Goldberg contraption.

-- “The United States is in danger of becoming the next Greece or Ireland.” (Even without PPCS it can't become Greece or Ireland, only the next Japan. But with PPCS it can become the United States again.)

-- “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PPCS, the debt-to-GDP ratio will be stabilized and reduced, but no "surplus," in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)

With the debt paid off, sound bites like the above won't be around anymore. When progressives bring up Medicare for All, or Federal Job Guarantees, or State revenue sharing to save jobs, a payroll tax holiday, or an infrastructure rehabilitation program, or education programs; or large scale programs to create a new energy foundation for our economy, conservatives will have to debate the merits of the proposals. They won't be able to say that we can't afford it because we're running out of money. When progressives propose funding for food stamps, or extending unemployment to 156 weeks, or even propose that all limits on the number of weeks for collecting unemployment be removed, conservatives won't be able to reply that we have a deficit problem, or that our national debt is too high, or that we have to be concerned about our poor grandchildren. They'd just have to admit that they don't care about the unemployed, and that insofar as they do care, they only care about making more of them so that wages stay low.

-- The neoliberal economic paradigm of response to policy proposals is constraining our politics in a very tight strait jacket, choking the life out of progressive initiatives. The first response to all proposals for change is to ask whether a proposal is fiscally responsible, where fiscal responsibility means, government spending that, whatever else it does, leads to a declining debt-to-GDP ratio over time. If CBO projections show that a program will increase deficits and add to the debt-to-GDP ratio, they are opposed, and, most often, rejected on grounds of “fiscal unsustainability.”

PPCS can change all that. It can change the paradigm governing political games in Washington. The deficit hawk ideas of fiscal sustainability and fiscal responsibility will no longer be relevant, once $60 Trillion in electronic credits are in the Treasury General Account (TGA). Then the important questions will be whether the proposed programs are likely to achieve public purposes or not, and whether if they are, our representatives will appropriate for "deficit" spending, if necessary, the already existing financial resources. A political game organized around messaging about the public purpose, is much preferable to one focused on whether we can meet a set of long-range targets in some deficit reduction austerity plan that, over time will destroy the real wealth, capabilities, and employability of most Americans.

-- If PPCS is used, messaging around the public purpose can't be opposed by austerity; but, instead, it will be opposed by claims and fears that PPCS will result in inflation. The argument of PPCS vs. inflation, however, is a much easier argument for progressives to win than the current argument of austerity vs. need. The reason is that in dealing with this last argument, progressives have granted and continue to grant the idea that deficit reduction is necessary for fiscal responsibility in the long run. This is a myth. But it is powerful. On the other hand, if PPCS gets rid of the need for austerity we can then consider whether PPCS will be inflationary.

Scott Fullwiler has recently done a comprehensive analysis of inflation possibilities with PPCS. It turns out that it is very unlikely to cause inflation because there appears to be no transmission mechanisms from the mere presence of PPCS profits in the TGA to inflationary outcomes. As always, Congressional appropriations followed by spending can produce inflation, if that spending exhausts the productive capacity of the economy. But that kind of inflation would result whether or not PPCS is used as the basis for spending.

Using PPCS to Spend More than the United States Collects in Taxes

Having revenue generated by PPCS, and using it to pay off debt, doesn't guarantee that Congress will want to appropriate spending in excess of tax revenues, and have PPCS revenue close the tax/spend gap. Congress may want a budget in which spending doesn't exceed tax revenues anyway, even with $60 Trillion sitting in the TGA. Or if it wants to appropriate spending in excess of tax revenues, it may still insist that the uncovered spending be preceded by selling new debt instruments in dollar-for-dollar correspondence to the new debt.

Or, perhaps the President may wish to close the tax/spend gap by issuing debt, rather than using PPCS revenue, because he wants to continue subsidizing investors in the bond markets. Projections based on CBO's say that over the next 15 years interest costs on the national debt would approach $12 Trillion. Paying off the national debt will eventually reduce these interest payments to zero. Investors in the bond markets will be angry at this development, so the Treasury continuing to issue debt, to be paid off on an annual basis, to provide them at least a fraction of the projected income (about 10%) expected under the old debt-based regime, is a possible outcome of the political conflict that is likely to occur when the Government tries to use PPCS to pay off the national debt.

This would result in continuing the existence of the national debt, though not in growing it, since the $14.3 Trillion we have now would be paid off, and any new debt incurred could be paid off quickly using PPCS, especially if Treasury issues only securities with terms of a year or less. If this were done, a decision to keep issuing debt, and using PPCS only to pay it off wouldn't materially effect the political background of budget debates. There would still be very low debt levels, with the debt being paid off every year and very low debt-to-GDP ratios. So, the very damaging austerity rhetoric and proposals we see today would still disappear and would no longer paralyze progressive politics.

Using PPCS to replace borrowing as the Basis for Creating the Credits Needed to Spend Congressional Appropriations

What if the President decided to use PPCS to create that TGA balance of $60 Trillion, and and also decided to replace all debt issuance as the basis for spending Congressional appropriations, and relied instead on taxes and PPCS revenue, alone? Then, there would be no more Federal debt, and there would be no further interest subsidies to the bond markets and foreign nations for placing their USD reserves in what is essentially a risk-free interest-bearing savings account at the Fed. The Government would “save” nearly $12 Trillion in projected interest costs over the next 15 years.

Considering that PPCS profits are considered “revenue” and not “debt,” the Federal budget would always be in balance, and so, the Government would never technically have a “deficit,” defined as the gap between spending and revenues. The gap between tax revenues and spending would continue to exist, however, and that gap is very important, because when Government spending exceeds tax revenue, the gap adds to non-government (including private) sector net financial assets, dollar for dollar. On the other hand, when tax revenues exceed spending, the gap subtracts from non-Government net financial assets. Of course, in the case of such a “surplus,” no PPCS credits would be subtracted from the TGA.

Possible Political Implications This Fall

I said earlier that having that $60 Trillion in the TGA, would change the background of political discourse and the paradigm governing political debate. With PPCS it could focus on public purpose and its relationship to policy proposals, rather than on issues of austerity and whether or not a particular proposal was “fiscally responsible” or “fiscally sustainable.” This change in focus will make a great difference in American politics, because it will expose the real motives of politicians very quickly, since they won't be able to hide behind the austerity slogans and rationalizations.

It's very important to see that this change in background and the terms of discourse doesn't have to wait for any new election results. If President Obama were to implement PPCS in the right way, this week, the transformation of discourse could start immediately. The $60 Trillion in the TGA account would sit there, a huge elephant in a small room. An overnight payment of debt immediately reducing the Fed and Intragovernmental debt to zero, and paying off $6.2 Trillion of the debt counted against the limit, would hit Washington like the proverbial ton of bricks, making it clear that the extension of the debt limit just passed was meaningless compared to the impact of PPCS. Progressives in Congress could immediately apply pressure to void the recent agreement on hurtful spending cuts this year. How could the leadership in Congress oppose voiding it? By saying that the agreement is more important than the fact, evidenced by the $60 Trillion in the TGA, that there was never a need for any spending cuts at all?

Good luck with that! A refusal to restore the cuts would make the people doing the refusing a laughing stock! Even if they got away with that first step, what would happen when Thanksgiving rolls around and the “super Congress” is deciding on further cuts and then presents these for an up or down vote. Will a majority in either House vote for cuts on the grounds that deficit reduction demands it, with $52 - $54 Trillion still sitting in the bank and Trillions in debt scheduled to be repaid over the next year? How would they spin that? How would they paper it over?

How will they act if and when progressives move to restore food stamp cuts and extensions of unemployment insurance, and State Revenue sharing, and payroll tax holidays? How will they act when the public realizes there's a huge amount of money in the TGA and no reason for Congress to go around cutting programs that benefit them? And when hundreds of thousands of outraged citizens, perhaps even millions, demonstrate across the country against the austerity kabuki and the tea party that was about to condemn working America to a decade of stagnation and suffering, when there was absolutely no reason for it; what will Congress do then?

I gotta say, I think they'd cave. The change in the material background resulting from the PPCS $60Trillion application would be a very powerful catalyst, powerful enough to overcome habitual patterns of thought, and delivering a shock to the neoliberal system that would free up progressivism to be militant and moral again.

(Cross-posted from Correntewire.

Coin Seigniorage and Inflation

Joseph M. Firestone — Tue, 02 Aug 2011 00:12:23 -0400

This post by Scott Fullwiler is the definitive post on how proof platinum coin seigniorage (PPCS) relates to inflation.

Brinksmanship On the Debt Ceiling

Joseph M. Firestone — Wed, 11 May 2011 21:14:11 -0400

As the United States Government approaches “running of money” to pay its bills, news articles and pronouncements by politicians about the debt ceiling dispute focus on several things. First, they talk about the dire consequences of defaulting on our obligations. Second, they talk about the need for spending cuts that will put us on a long-term path to balancing the budget, getting a Government surplus, and improving the debt-to-GDP ratio. Third, they talk about the debt ceiling preventing the Government from issuing further debt instruments to “fund” paying for its obligations. Fourth, they talk about the Republicans holding the economy hostage to force the Democrats into accepting spending cuts in very popular domestic programs, while excluding the possibility of closing the deficit by raising taxes on the wealthy and corporations. Fifth, they talk about the brinksmanship and game-playing by both major parties, and the expectation that the debt ceiling will be raised in the end because failing to raise it will subject Wall Street and the banks to very real consequences. And sixth, they talk about the many little ad hoc things Timothy Geithner can do to put off the date when the Government “runs out of money” (now projected as August 2nd).

Geithner's expedients for putting off the day of reckoning include: draining a special $200 Billion cash management account held at the Federal reserve; borrowing money from a pension fund for Federal workers; postponing scheduled auctions selling Federal debt instruments; raising revenue by selling Federal property; raising revenue by selling the almost $600 Billion in gold held by the Federal Government, any other tricks he can think of to squeeze a few more pennies of revenue out for the Treasury General Account (TGA) at the Fed.

Amidst all this talk and writing, there's a notable absence of talk about two things that can easily be done to remove the need to raise the debt ceiling: one by Congress and one by the Obama Administration. Let's talk about Congress first.

What Congress can do to end the debt ceiling crisis, other than raising the debt ceiling, is to allow the Executive to deficit spend Congressional appropriations without issuing any additional debt. Congress can do this at any time, and the Treasury will never have to issue debt instruments again in order to deficit spend.

I know, I know, some of you reading this will think, “Is he crazy? If Congress does that there'll be runaway inflation.” Of course, I think this is just a false theory, not a fact. There won't be any more inflation resulting from deficit spending without issuing debt than there will be from deficit spending with dollar-for-dollar debt issuance as currently mandated, because deficit spending without debt, produces no more net financial assets for the private sector than deficit spending accomapnied by new debt.

But my point here is not to argue the inflation/hyperinflation issue. It is to simply point out that this way out of the debt ceiling isn't being discussed by any politicians or MSM writers or broadcasters. Their field of vision is restricted to the brinksmanship over the debt ceiling, and they're not debating the pros and cons of what Congress can do to both keep the debt ceiling where it is, while at the same time it allows the Executive to deficit spend that part of its Congressional appropriation that exceeds its revenue. Everyone seems to love the brinksmanship, and the drama, and the risk, and won't even take the trouble to compare the consequences of repealing the requirement to issue debt prior to deficit spending, with the consequences of default, increases in the debt, or cutting of popular programs.

So, why won't the MSM explain that the very existence of the national debt is most directly caused by Congress's own appropriations, coupled with their mandate that debt must be issued when the Government deficit spends? Why won't they write about the alternative of Congress just repealing that mandate and point out that it may be a way out of the brinksmanship, while, of course, being “objective” and pointing out the downside of Congress doing that, compared to the downside of Congress raising the debt limit, or raising taxes, or cutting popular programs in order to seek smaller deficits and even budget surpluses?

In general, why is it that the MSM, in case after case, filters out some solutions to problems and arrives at a small number of alternatives that from a broader perspective seem inadequate to solve the problems they're directed at. Take the stimulus program. There were many ways to pursue it. Why did the MSM focus in on President Obama's “trickle down” program and negotiations surrounding it, without ever writing about more direct stimulus measures like State revenue sharing, payroll tax holidays for employers and employees, and direct Federal job creation in the context of a Federal Job Guarantee Program?

In the area of credit card reform, why did the MSM say hardly a word about limiting Federal Card Interest rates to roughly 5 points over the credit card companies' cost of borrowing? Why didn't they say anything about the importance of immediate implementation of the reform, so the companies would not be able to raise rates and impose new fees before reforms went into effect? In the area of health care reform, why did they stop talking about Medicare for All so early in the reform process, when surveys showed that a majority of people wanted just that? More recently, in the face of many polls that show that a majority of people are against deep cuts in entitlements, or specific discretionary spending programs like Head Start, or in social safety net programs, while they also favor much heavier taxation of people with higher incomes and corporations, why isn't the MSM running stories about how much revenue would be forthcoming from these sources, if only the politicians would stop taking fair share taxation off the table?

The MSM is failing the American people. It's interpreting its job as being one of tracking the thinking of elites on policy issues and as only discussing the ins and outs of alternatives the politicians view as “serious.” MSM reporters claim that this is objective reporting because alternatives “taken off the table” are not news. But this kind of thinking means that the politicians and their paymasters determine what is news and what is not, rather than the problems we all face and alternative solutions that might best solve those problems. So, the MSM is not doing its duty in “telling the people” what's really going on.

And when it comes to the debt ceiling, it won't tell the people that the very existence of the debt isn't caused by deficit spending alone, but by deficit spending coupled with Congressional rules forcing the Government to issue debt when it deficit spends. The continuing very existence of the national debt is Congress's fault, since with no more debt issuance, the national debt would be largely extinguished within 5 years, and mostly extinguished within 10. Why don't we hear about that in The Washington Post amidst all the writing we've seen warning America about the unsustainable deficits and debt-to-GDP ratio?

Getting to what the Executive branch can do to end the debt ceiling crisis, here too, we have politicians and the MSM unable, or unwilling, to talk or write about anything the Treasury can do about the debt ceiling that goes beyond temporary expedients. The MSM is willing to talk about all kinds of Rube Goldberg schemes that Geithner might use to put off the day of reckoning implied by the debt ceiling, but they won't report on, discuss, and evaluate, the one thing that Treasury already has authority from Congress to do, that would render the debt ceiling irrelevant, and enable Treasury to deficit spend all of the appropriations that Congress has already approved for this fiscal year.

That one thing is to use coin seigniorage to generate revenue without either increased taxation or increasing debt by borrowing. In fact, coin seigniorage, can be used to extinguish the national debt, without either reclaiming currency from the private sector by taxing, or, technically, even running a Federal deficit (provided “deficit” is defined as spending – Federal revenue raised from all sources, including, but not limited to, tax revenues.) Here's how a coin seigniorage initiative by the Executive might work to end the brinksmanship on the debt ceiling, and any risk of Government default proceeding from it. The President would:

-- Direct the mint to create a jumbo platinum coin with face value $500 Billion.

-- Direct the mint to deposit the coin in its account at the New York Federal Reserve.

-- Direct the Treasury to “sweep” the mint's account to collect profits from coinage (this would result in marking up Treasury's General Account at the New York Fed by $500 Billion).

-- Inform Congress and the public that the previous actions were taken to head off any possibility of default or Government shutdown due to the House's possible refusal to raise the debt limit in the course of implementing its strategy of extracting severe budget cuts from the Administration. The President should also mention that increasing the size of Treasury's account balance at the Federal Reserve will not be inflationary because Government spending will remain exactly the same as it would have been if the coin had not been minted.

-- Wait for reactions to this move. The ensuing uproar from many quarters including the business community, many economists, and the Federal Reserve, will focus on fears of inflation, and it's likely that top economists, and some Federal Reserve officials such as Ben Bernanke will claim that spending without issuing debt to absorb the new money placed into the private economy is inflationary, because the quantity of money in the economy will increase. It's likely that this view will create quite a stir in the media, and even that the value of the dollar will go down in international markets briefly, because the expectations of people will be affected by this argument, and a limited period of “self-fulfilling prophecy” will occur.

-- Respond to this reaction by pointing out that it was forced on the Administration, which could not stand idly by while the full faith and credit of the United States was threatened by irresponsible Congressional partisans whose purpose was to take the economy hostage to force an agreement on spending cuts that are against the wishes of a substantial majority of the American people, as indicated by every public opinion poll appearing in recent weeks. The President should also point out, that even though he doesn't believe that the minting of jumbo coins to pay for spending is inflationary, for reasons he previously stated, he is willing to work with Congresspeople who think there's a possibility of inflation enduring beyond the initial psychological reaction to minting jumbo coins, and then he can suggest two proposals that Congress may want to consider to remove the need for the Executive Branch to issue jumbo coins to meet debt ceiling crises.

1) Congress could eliminate the debt ceiling so that the US has no more crises of this sort again. Congress can still cut/control spending through the appropriations process, even in the absence of a debt ceiling, and this is the appropriate way for Congress to do it so that individual Congresspeople must go on record for any cuts in Federal programs they want to make.

2) Congress could eliminate the requirement that Federal deficit spending must be matched by issuance of new debt dollar-for-dollar. The President could emphasize here that if this was done, not only would there be no more debt ceiling crises, but the Federal Government could pay off most of the national debt, except for very long-term instruments, within ten years, because the only thing that is maintaining that debt is Congress's requirement that new debt be issued in response to deficit spending.

He can also point out here that he doesn't think that the rollover of Federal Government debt is any problem for the long run because of the way the US's fiat currency system works. But for those who do think it is either a short or long-term problem, this option will eliminate any possible generational debt problem because it will eliminate the national debt which we will not then have to hand on to our grandchildren. He can then add that he knows that many will react to this proposal by saying that it will be inflationary to try to eliminate the national debt this way. But he thinks that since the amount of Government spending won't change if we implement this proposal; and the amount of Net Financial Assets Government is injecting into the economy also won't change, he doesn't think so. But if it should turn out that inflation results from this effort to pay off the national debt; then the Treasury will simply begin to issue debt again, and also adopt other measures to control inflation.

-- The President, after making these proposals, should add that the $500 Billion in revenue from coin seigniorage will probably take the Government through August or September without its having to issue new debt, and that if Congress can't come to agreement on what to do about the debt ceiling before then, he will issue a new jumbo coin, this time one having $1.5 Trillion in face value, and that he will use the new coin for program spending and also to pay off $1 Trillion of the national debt. He can also say that he hopes he doesn't have to do that, but like institutions in the private sector, the Government can't operate well in an atmosphere of psychological uncertainty. Government workers have to know that their work and family lives will not be placed under stress by partisan conflict in Washington. In addition, private sector businesses and workers are greatly impacted by any freeze in Government spending caused by attempts at hostage-taking by Congress.

I think that Mr. Obama is a winner in the scenario I've outlined. He will be much more popular than he is now by virtue of rendering the debt ceiling threat impotent, and because he will be perceived as acting strongly and cleverly to get around the Republican House to avoid a shut-down of the Government and the possibility of default. He will even be perceived as more “adult” than the other participants in the “debt ceiling crisis” because he will be implementing a technical solution to the problem that prevents the “hostage-taking” temper-tantrum foot-stamping element in the Congress from inflicting real damage on the American people.

The Republicans will come back for another bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using coin seigniorage he can take the deficit and debt issues completely off the table, and that Congress can't simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

This lesson won't be as clear in the case of the $500 Billion coin, even though some of that money will be used to pay off debt. But, once people see that the national debt doesn't need to rise if seigniorage is used; it will be easy to explain that if it is used more, the national debt can actually be paid down or paid off. Of course, if the President ends up having to use the $1.5 Trillion coin, then there will be a very graphic demonstration that having a national debt is a matter of a policy choice which Congress is now making, not a matter of necessity.

After that, objections to Government spending based on the idea that it will increase the deficit and the debt will be “off the table.” And then we can move on to handle the many real problems of the American people without worrying about the purely political and psychological, but non-financial and no-economic, problems of the debt, and the deficit.

In considering either the Congressional or Executive options for defusing the debt ceiling issue, our politicians and the MSM writers who track our political games ought to keep in mind and in their many broadcasts and writings on this subject the juxtaposition of two aspects of US law, and thanks to beowulf for pointing out the juxtaposition. First, there is Sect. 4 of the 14th Amendment. It reads in part:

”. . . .the validity of the public debt of the United States, authorized by law... shall not be questioned”

I think that office holders and others who through their brinksmanship create conditions that may cause the US to default certainly are questioning the validity of that debt.

And second, there is this Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

Members of Congress and the Executive Branch have all taken oaths to uphold and defend the Constitution and Laws of the United States, so they are all obligated to end the debt ceiling crisis and the brinksmanship surrounding it. Congress should end the crisis now by ending debt issuance and the welfare stream it provides to the rich and foreign nations.

And, if Congress fails to do so, the President should quickly implement coin seigniorage to end the debt ceiling crisis, and also make it clear that there will be no more opportunities for hostage-taking and blackmail arising from other debt ceiling crises in the future. If members of Congress want to cut Federal programs, they would no longer be able to hide behind the deficit or debt ceiling excuses while doing it. Instead, they'll have to stand up like honest men and women and say that they're against unemployment insurance, or Medicare, or Jobs programs, or Social Security and admit that while they'll support subsidies and tax cuts for big business, and debt issuance welfare for the rich and foreign nations all day long, they're just against assistance programs for the poor and middle class because working people, unlike their privileged friends and campaign, must stand on their own two feet, subject to the vagaries of their manipulated markets, or the moral character of the nation will be a thing of the past.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Worrying About Demand-Pull Inflation Is A Distraction

Joseph M. Firestone — Fri, 08 Apr 2011 14:49:11 -0400

One commenter at FireDogLake says:

”. . . we should be exceptionally careful not to jeopardize the hard-fought for benefits (like S.S.) by risking devaluation of the dollar. That would be truly tragic.”

and another at New Economic Perspectives says about Modern Monetary Theory (MMT) and inflation:

”Help me understand more about MMT. I understand in principle that the US government can spend without borrowing and that spending on the social safety nets that we would try to improve rather than tear down is a political choice. But MMTers continually say that money is not limited with no caveats. Occasionally one will admit that too much spending may lead to inflation through devaluation. That implies a near-term limit that is very often not acknowledged.”

MMT doesn't ignore demand-pull inflation. But a lot of blogging about it now would be purely academic since we're so far from the full production/full employment conditions under which it would occur. Here, here, here, here, and here, are five links to posts by MMT supporters which themselves provide links to other posts. They show unequivocally that MMT is concerned about inflation of all types, and has taken considerable time and trouble to understand it and specify the conditions under which the different types of inflation, including demand-pull inflation would occur.

There hasn’t been serious demand-pull inflation in this country since WWII. In Carter’s time, drastic increases in oil prices, not Government deficit spending, drove up prices. That instance of cost-push inflation would have been resolved with a one time price and wage adjustment. However Paul Volcker, the new head of the Federal Reserve, decided to try to use monetary policy to control inflation and began to raise interest rates. This silly move actually “fed” inflation and prevented it from petering out. There were multiple rounds of drastic interest rate rises. Businesses fought the increase in their interest costs by raising prices. Finally, rates went up to too high a level for businesses to compensate by raising prices. The result was a recession that partly accounts for Carter’s defeat and a bad few years for Reagan, until Volcker decided he had wrung inflation out of the economy and lowered rates. By this time there was a lot of pent-up demand, so the economy boomed when he did that, just in time for Reagan’s “morning in America” and his big victory in 1984.

Through all this, Social Security cost-of-living increases kept pace with rising prices, since its adjustment formula is based on wage levels. There’s no reason to think that cost of living raises in SS won’t be able to keep pace with any new demand-pull inflation, which, there is no risk of until we reach full use of our production capacity and full employment.

Again, concern about demand-pull inflation at this point is a distraction. That’s not our problem. All the concern about it is a waste of ink or at least bits.

Cost-push inflation is a different issue. We’re getting some of this with oil and related products now. However, that kind of inflation, is unrelated to whether we have Government spend while issuing new debt, or use coin seigniorage, or pay down our existing national debt, both without issuing new debt. There is neither good theory nor any empirical evidence that Government deficit spending using any of these three measures causes inflation in a nation sovereign in its own non-convertible currency, using a floating exchange rate, having no external debt in anything but its own sovereign currency, and experiencing slack aggregate demand of some 30%.

So, my advice is, stop looking under the bed for the bogeyman, and start fighting the moral monsters we must face now, a depressed economy, a depressed labor market, a democracy on the edge of a kleptocracy, populated by politicians who claim they will fix our economy and create jobs by transferring wealth from the have-nots to the already wealthy, and the prospect of ruined futures for both poor and middle class Americans, both young and old. It is a herculean task to solve these problems, we have no time or resources to look under the bed for bogeymen that are not there.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

The Simplest and Best Way Out

Joseph M. Firestone — Thu, 24 Feb 2011 17:32:05 -0500

Well, the proverbial s__t is now hitting the fan in our State Governments, and we're looking at struggles in State after State between newly elected Republican Governors scapegoating civil servants, while they insist that taxes can't be raised on the wealthy and large corporations during a recession. Put briefly, the moves to austerity and the resulting conflicts in Wisconsin and other States are partly Democrats' fault, because they failed to pass a State revenue sharing bill to close the gap in State budgets, so that no cuts in services, employee benefits, or jobs would be necessary. A revenue sharing bill of $300 Billion passed in 2009 would have done the trick, and could have been passed as part of the stimulus package.

Why didn't they do it? Well, the gutless wonders in the 21st century Democratic Party wouldn't go after the filibuster when it would have made a difference in January of 2009, and that left them negotiating with a few “moderate Republicans” and blue dog Democrats who ended up controlling the final form of the very inadequate stimulus bill. There's no turning the clock back, of course. But the Democrats should still propose revenue sharing, make a big fuss about it, and talk about how the Rs were perfectly willing to bail out the big banks, AIG, and even foreign banks, but are not now unwilling to bail out their own American States, and would rather attack public employee unions and their collective bargaining rights rather than doing anything constructive about jobs. The Ds should also point out that all the Rs have done since winning the House is to kill jobs, and that their refusal to pass revenue sharing is just another instance of job-killing.

Of course, someone will read this proposal and say that the Federal Government can't afford even a bigger deficit than it has now so that it's not a serious proposal. To them I say that I prefer to deal in reality and not act as if I believe the fantasies of people who think the Government is like a household. I know that people believe that the Federal Government can't afford it. But that belief is based on various fairy tales and myths I've exposed before like:

-- The Government is running out of money

-- The Government can only raise money by taxing or borrowing

-- We can't keep adding debt to the national credit card

-- We need to cut Federal Government spending and make do with no more money

-- If the Government borrows more money, the bond markets will raise our interest rates

-- If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity

-- Our grandchildren must have the heavy burden of repaying our national debt

-- There is a deficit/debt reduction problem for the Federal Government that is not self-imposed

-- The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too

-- The only way to tackle our deficit is to cut excessive spending wherever we find it

-- We should also find a bipartisan solution to strengthen Social Security for future generations

-- We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.

-- The next generation will inherit a stagnant economy and a diminished country

-- The United States is in danger of becoming the next Greece or Ireland

-- Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus

-- Federal Government austerity will create jobs

Everyone of these myths/fairy tales is used to support the idea that the Federal Government can't afford to do the things it ought to do to end the economic suffering in America, and, in particular, that we can't afford to save State employee jobs and benefits by providing revenue sharing grants of $1,000 per person to every State to close their budgetary gaps. Every one one of them is untrue. Belief in any of them is stopping us from helping the 99ers, from educating our kids, from re-building our infrastructure, from healing our sick, from re-inventing our economy, from developing our alternative energy sources, from creating real wealth for our children and grandchildren, from extending Social Security benefits, and from stopping these completely unnecessary attacks on unions and collective bargaining.

What we badly need is a mental housecleaning in our economic thinking. We need to sweep away the false ideas of neo-liberalism and its practice of “Aztec Economics,” because our experience (most recently, Ireland, Greece, Spain, the Baltic nations, the UK, and even ourselves, since we held back on stimulus and health care reform out of austerity concerns) tells us that they are serving us very badly and causing suffering all over the world. It's time to try the ideas of Modern Monetary Theory instead, and see if they will work better. They tell us, in part, that Federal Government spending isn't in itself a “cost,” since our constitutional authority to spend is unlimited and we can now do so electronically. So, when considering such spending we must never look at its nominal financial cost; but only at its likely real impact. Does it increase value? For whom? What are its real costs in terms of resource consumption and negative outcomes? Does it bring full employment? Does it solve national problems? Is it likely to cause inflation? Does it create a better life for most people?

These are the kinds of questions we should be asking. Asking and answering them correctly and making fiscal decisions based on the answers is fiscal responsibility. Fiscal irresponsibility is watching the impact of spending on deficits, surpluses, debt-to-GDP ratios and other numbers of this type.

The current Administration is fiscally irresponsible, not fiscally responsible. The President's Fiscal Commission exhibited the height of fiscal irresponsibility. And the current Congress, in jumping on the bandwagon of Aztec Economics and austerity, will give us even more fiscal irresponsibility, while congratulating themselves about taking the tough decisions that fiscal responsibility calls for. What more is there to say? We live in Orwell's world. We must find a way out!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).