H/T to the Motor City's own "Detroit Dan" for the link to a write-up by Michael Hudson over at Naked Capitalism.
Hudson takes exception to some parts of Paul Krugman's recent advocacy, but in the process states:
So I am afraid that his book might as well have been subtitled “How the Economy can Borrow its Way Out of Debt.” That is what budget deficits do: they add to the debt overhead.
This blind spot with regard to debt derails Mr. Krugman’s trade theory as well. If Greece leaves the Eurozone and devalues its currency (the drachma), for example, debts denominated in euros or other hard currency will rise proportionally. So Greece cannot leave without repudiating its debts in today’s litigious global economy. Yet Mr. Krugman believes in the old neoclassical nonsense that all that is needed is “devaluation” to lower the cost of domestic labor. Costs can “be brought in line by adjusting exchange rates.” the problem is simply exchange rates. That will reduce labor’s cost and other domestic costs to the point where governments can export enough not only to cover their imports, but to pay their foreign-currency debts (which will soar in depreciated local-currency terms). If this were the case, Germany could have paid its reparations debt by depreciating the mark in 1921. But it did – a billion-fold, and even this did not suffice to pay. Neoclassical trade theorists just don’t get this. [Ed: Is he reading Ramanan's posts?]
How will the government running a larger deficit cope with today’s dimension of the debt problem...
The only variables he admits are structure-free: The federal government can spend more, and interest rates can be lowered (especially on mortgages) so that the higher debt overhead can be afforded more easily. No need to write it down. That extreme a structural solution lies outside the scope of his neoclassical economics.
The problem interfering with the circular flow between producers and consumers (“Say’s Law”) is not “saving” as such. It is debt payment. And without writing down debts, the U.S. economy will shrink just as will those of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.
Just when it looked like we had him in the "MMT Corral" after the Remini Conference in February, it looks like Hudson has jumped the fence...
28 comments:
"And without writing down debts, the U.S. economy will shrink just as will those of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity."
Sounds like straight up Minsky. It's Steve Keen's view, too.
Nominal debt remains a drag, unless it is written down or inflated away. The push for austerity is to prevent government from inflating debt away, and the opposition to reform is to prevent cram downs. And debts that cannot be repaid won't. But this is also made more difficult by the revision of the bankruptcy laws. The bankstas have been way ahead of the curve on this, and Hudson and Keen are right to point it out.
I don't think he has, he just isn't clear. It is true that under current fiscal operations, government bonds are issues when the deficit rises, leading to additional interest income for bondholders. In other words, the biophysical costs of budget deficits is higher then it otherwise would be. he could be clearer, but he hasn't jumped away from chartalism. he's been talking about chartalism since the 1970's
"Financial repression" is our friend.
Net interest cost should always be approx 0.
It took me a while to figure out that he was talking about private debt. I liked this paragraph.
"Blindness to the debt issue results in especial nonsense when applied to analysis of why the U.S. economy has lost its export competitiveness. How on earth can American industry be expected to compete when employees must pay about 40 percent of their wages on debt-leveraged housing, about 10 percent more on student loans, credit cards and other bank debt, 15 percent on FICA, and about 10 to 15 percent more in income and sales taxes? Between 75 and 80 percent of the wage payment is absorbed by the Finance, Insurance and Real Estate (FIRE) sector even before employees can start buying goods and services! No wonder the economy is shrinking, sales are falling off, and new investment and hiring have followed suit."
He does focus primarily on the issue of private debt. But there is no getting around the fact that he thinks public sector debt "adds to the debt overhang."
Let's remember that although Keen and MMT see eye to eye on a whole host of important things, Keen has never identified himself with MMT. Krugman fostered the confusion that Keen was an MMTer, but that's just wrong. Keen has criticized neo-chartalism in some of his lectures on monetary theory and macroeconomics.
I think one way to view MMT is that it defends a fusion position between those versions of post-Keynesian thought, on the one hand, that see money and credit as purely endogenous phenomena with the state playing no essential role outside the regulatory role, and competing schools of thought, on the other hand, that view money as exogenously introduced into the economy by the state, which controls its supply in the economy.
MMT goes to neither extreme. MMT adopts the post-Keynesian "loans create deposits" approach of seeing commercial banks as the main drivers of money creation, with the government playing only an accommodative role, and not driving and determining the creation of money through the exogenous injection of reserves, and in line with some money multiplier model.
But MMT recognizes the reality of the hierarchical structure of liabilities in the system that actually exists, and models the contemporary state-run, central bank-based payments system, and the need for that accommodative role without which necessary reserves cannot grow and the payments system would break down.
And since governments like the US government can produce, at no cost or added burden to itself, the final means for the discharge of all debts and obligations in our society, then the government has available to itself a means for discharging its debt obligations that is simply unavailable to other borrowers, and renders talk of government "debt overhang" out of place.
Dan, I think that Michael Hudson's point about government debt is the degree to which it is accumulated not due to advancing public purpose but from crony capitalism, in which gains are capitalized and losses socialized and public wealth transferred to private hands through access and privilege, if not outright corruption. "Military Keynesianism," making space for rent-seeking, and extending moral hazard by bailing out TBTF's is what he is talking about.
Hudson clarifies himself in the comments section. It may be my narcissistic interpretation, but I think Hudson adds an important element to the MMT discussion. In one sense, the need for increasing public debt is a direct result of the distortions caused by the rise in private debt. Merely increasing public debt may not be an efficient way of stimulating the economy. Though increased spending and reduction in taxes can lead to growth, distribution of growth cannot be ignored.
Hudson's focus on the tax code reflects the MMT understanding of taxes as a check on aggregate demand and inflation. His debt overhang thesis explains a lot of the problems with the current economic structure. "Public purposes" such as education, housing, and retirement savings ideally should be satisfied by public spending rather than private debt accumulation. In the long run, tax reform leads to more sustainable growth than increased spending.
He's off the mark here too:
"“Your money or your life” is what banks mean when they say, in effect, “Take out a mortgage or go without a home,” or “Take out a student loan or go without an education and try to get a job at McDonald’s.”
"Banks" arent doing the student loan thing anymore (too risky for the little capital they have left), the Federal government is.
Higher education is now a tax. You sign yourself up for university, the Federal Government advances balances to your school of choice on your behalf, you attend and perform in the classroom, then upon graduation you OWE THE FEDERAL GOVT BACK the balances (PLUS INTEREST which is scheduled to go usurious btw) that they gave to the school on your behalf, and you have no job.
All you have just done is foregone earned income and signed yourself up to pay 10's of thousands of additional taxes that you would not owe if you never went to college.
This is a very serious emerging fiscal policy matter that you cannot see if you are locked into some sort of neo-Trotskyite paradigm.
"All you have just done is foregone earned income and signed yourself up to pay 10's of thousands of additional taxes that you would not owe if you never went to college.
This is a very serious emerging fiscal policy matter that you cannot see if you are locked into some sort of neo-Trotskyite paradigm."
Now do that for mortgages. How big a tax cut would that pay for? :o)
Hudson in the comments section:
"As always, I agree with Yves’ comments on my article. I focused on what Mr. Krugman wrote last Friday and in recent weeks, because I think he left out what Steve Keen calls the elephant in the living room: debt.
Of course public and private sector debt are different. But the focus of Mr. Krugman’s article was on public debt, so I followed it.
Regarding “debt-free money,” the term is misleading to an accountant. It is the essence of book-keeping (especially double-entry book-keeping) that every entry on the asset side has a corresponding entry on the liabilities side (with net worth on the liabilities side being the balancing item). So technically, the greenbacks in your pocket ARE debt — only they are debt that nobody really expects to be repaid.
I’ve explained all this elsewhere, and didn’t want to be repetitive for this focused topical essay.
I’m expanding the article using Mitch Green’s (NEP’s UMKC editor) suggested editing on the UMKC Economics Blog to take account of the above comments."
Public "debt" is only an advantage if it advances the economy of everybody anyway. as far as I see, most of the public debt increases (net savings for the private sector) end up in the pockets of a minority of the population, so what's the point on giving them more free-risk money (in form of treasury bills).
That when it does not end directly in the hand of foreigners.
"So technically, the greenbacks in your pocket ARE debt — only they are debt that nobody really expects to be repaid."
Technically, yes, they are classified as liabilities of the US government, and might therefore be conceived as a kind of debt. But not only does no one expect the debt to be repaid, there is really nothing that is further owed to the holder of the dollar beyond that piece of currency itself.
Beo,
That is also starting to happen.
Only FHA loans are being done today (Freddie and Fannie 79.9% owned by the Fed govt).
Associate of mine just reviewed plans for a residential home (say 2500 square feet). Permits/Inspections/Fees totaled $62,000 that's $25/sq ft JUST FOR THE LOCAL GOVT....
So if you can get a house done for say $100/sq ft then 25% of it is effectively A TAX as that is rolled into the loan which the Federal Govt holds.... so what you are doing is taking out a loan from the Federal Govt to pay local taxes and legal fees. Which you owe BACK to the Federal Govt SO THAT PART IS A TAX.
Probably 25% of all new housing costs today are in effect Federal Taxes.
The Federal govt is emergently getting into the business of "lending" to the non-govt sector to facilitate balance transfers going to provision state and local govt entities involved in education and housing ....this is a tax.
The problem is that if government loans the $ for housing and education, the private debt is still there, just owed to government. Students and homeowners still have the monthly nut to meet regardless.
There is another problem with this arrangements. Banks loaned in spite of how high the prices got, so they would increase their vig. If govt does the same, nothing changes materially, and eventually the banks will get those loans back through privatization.
Government should not be loaning money for ed, but providing ed. Loaning makes no sense when it can be funded. If not then govt has to cap increases, but direct funding is preferable.
"That is also starting to happen.
Only FHA loans are being done today (Freddie and Fannie 79.9% owned by the Fed govt)."
Uncle Sam insures against losses, banks keep the profits.
The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying.
http://en.wikipedia.org/wiki/Federal_Housing_Administration
"The problem is that if government loans the $ for housing and education, the private debt is still there, just owed to government. Students and homeowners still have the monthly nut to meet regardless."
Exactly! Its a reserve drain, taxes can be that much lower.
"Exactly! Its a reserve drain, taxes can be that much lower."
Yes I see that, but these F-ing morons are RAISING taxes in these regards!
This is why it pains me to see someone like Hudson here rage against "the banks" when yes, they are cowards and many are scoundrels, but our govt fiscal policy maker-morons are much more dangerous imo...
Resp,
Mike Hudson has a updated version up at New Economic Perspectives - Paul Krugman’s Economic Blinders
In particular, he says (and this is relevant to the comments above
Quote:
The problem with Mr. Krugman’s analysis is that bank debt creation plays no analytic role in Mr. Krugman’s proposals to rescue the economy. It is as if the economy operates without wealth or debt, simply on the basis of spending power flowing into the economy from the government, and being spent on consumer goods, investment goods and taxes – not on debt service, pension fund set-asides or asset price inflation. If the government will spend enough – run up a large enough deficit to pump money into the spending stream, Keynesian-style – the economy can revive by enough to “earn its way out of debt.” The assumption is that the government will revive the economy on a broad enough scale to enable the individuals who owe the mortgages, student loans and other debts – and presumably even the states and localities that have fallen behind in their pension plan funding – to “catch up.”
Without recognizing the role of debt and taking into account the magnitude of negative equity and earnings shortfalls, one cannot see that what is preventing American industry from exporting more is the heavy debt overhead that diverts income to pay Finance, Insurance and Real Estate (FIRE) expenditures.
In a nutshell, the overall lack of understanding of math systems is epidemic.
This may be somewhat off-topic but is an illustration of why we can't enact smart policy while relying on "experts":
http://www.asymptosis.com/the-top-two-criteria-for-expert-judgment-curiosity-and-curiosity.html
Just on Steve Keen for a moment, from his blog, also saw it mentioned on Rodger Mitchells
Steve Keen
May 13, 2012 at 10:36 pm | #
RJ, MMT contains a logical error when applied to a mixed fiat-credit money economy. It is therefore not an explanation of the actual workings of the system we work in. I have been holding off on making this statement until I had completed the paper, but I get tired of you forever stating as fact something that I know contains an error–not a fatal one, but one that reduces the effectiveness of its remedies
Reading his blog from time to time seems whoever RJ does wind him up a bit but Any bets on what it is? Im going for the "monopoly" thing.
If this were the case, Germany could have paid its reparations debt by depreciating the mark in 1921. But it did – a billion-fold, and even this did not suffice to pay. Neoclassical trade theorists just don’t get this.
Because they were working on a freaking timetable dictated to them by the victorious powers and had to acquire gold on the FX markets, or just print new marks for payment. This caused quite a bit more devaluation and, you know, hyperinflation than would a somewhat weaker mark leading to an influx of foreign capital.
When you say "Jumps the MMT Frence" you do you mean into MMT's finely manicured backyard? Some of the post doesn't sound very MMTish to my admittedly dilettante's knowledge.
Dubs,
I meant he has in effect "jumped out of the corral".
I detected a difference in his writing post Remini what I interpreted as more in consonance with MMT.
But this post deviates a bit from that direction...
Andy: "MMT contains a logical error when applied to a mixed fiat-credit money economy".... I have a feeling that wont be the last we hear of that! ;)
Resp,
@ Matt
yeh lol, actually I really like Keen and what he does, whatever it is should be taken seriously though, my bet still stands though and the clue is in the use of the word "mixed" methinks
Andy,
many of the Libertarian side of things seem not to like that "monopoly" part of MMT... you're foresight is probably correct!
Resp,
Wow -- Ask and you shall receive! I just mention here something that I'm interested in, and along comes a post (complete with hat tip!) with expert commentary. Thanks...
Word up from a fellow (metro, I assume) Detroiter.
Interesting how you all 'like' these 'celebrities' when you all are a lot better at all this than they are!
Also, remember there is 'no such thing ' as ' competitiveness' with floating fx. Just with fixed fx. Think real terms of trade.
And also think 'distribution of real consumption' re debt discussions.
Best! Warren
Hudson's analysis is completely consistent with MMT. He has not jumped the fence, only extended it.
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