OMG! Brad DeLong does full-on MMT. We are hitting the turning point.
Grasping Reality with Both Hands
Delong (And Krugman) Smackdown Watch: Bill Black, Stephanie Kelton, And Randy Wray Are Justifiably Irate Modern Monetary Theory How Do Deficits Matter?: Monday Hoisted From Comments Weblogging
J. Bradford DeLong | Professor of Economics, University of California at Berkeley
(h/t Clonal Antibody via email)
20 comments:
Richard Murphy in the UK last week, now Delong... is the left finally getting its act together through MMT support? I think a certain political action group is having some effect as well, Truth out, prog press etc.
Soon you guys will get invited to the orthodox economics conferences instead of the heterodox ones. hmm
I'm unclear what he means by
The deficit and debt can present no nominal financial risk. But it is wrong in that the government can find itself unable to keep whatever commitments it has made on what the real return on government debt--both interest-paying and non-interest paying--will be. The inability to keep such commitments is also a kind of "financial risk", and deficit and debt accumulation can create it.
Don't know what he means there.
The Federal Reserve's Dual Mandate — FRB of Chicago
Noting specific about "real return." What "commitments" is he talking about?
The Fed can set the real interest rate by adjusting the target rate to the short term real rate it chooses plus the current inflation rate. But in actuality, the Fed sets the FFR wrt to "expectations."
And the Fed can adjust the yield curve as it wishes also, if it chooses.
@Tom Hickey,
Yeah, the comment about commitments confused me as well. I assume he means ensuring that buyers of bonds can accumulate financial wealth via interest, otherwise they might not buy them?
money,
I think what he is saying is that if the deficit doesnt end up LARGE enough that can create REAL problems too, which can also be quantified as "financial problems"...
He goes on to cite Jefferson's screw up prior to W1812...
ie Jefferson decreased defense spending and hence REAL readiness (which resulted in a SMALL deficit, which should have been a tip-off) and then the British Navy were able to trash DC, which created a "financial problem", etc...
So what he may be saying is that we have to let the deficit go where it may and instead focus on our govt commitments in REAL terms, so that govt doesnt end up derelict of duty and we end up with REAL problems that can also be quantified in FINANCIAL terms also...
Let's remember the deficit is "EX POST", it results AFTER govt spending in the first place... ie "Govt spends first and then collects the taxes..." (no other way it can mathematically happen)
Looks like DeLong is trying to make this point (to me)...
rsp,
He's saying that if the deficit is too big it can create inflation, and as a result the real value of dollar-denominated government payment obligations can fall below the nominal value. Thus, while the government can always keep its financial promises in nominal terms, it is conceivable that it will be unable to keep its financial promises in real terms.
Of course, it is unclear what "real obligations" the government has. The usual picture, I would have thought, is that the government sells Treasuries at various nominal rates of interest, and it is up to the buyer to price in the inflation risk, and decide whether to buy or not.
However, one of the Fed's mandates is price stability, and so I suppose we can say that there is an overall government commitment(political branches + Fed) to prevent inflation from eating asset values.
Something tells me DeLong's "financial risk" critique is a crock of shit and Warren will have zero trouble dispatching it.
The way I read it, DeLong is arguing, "But, but, inflation!"
Of course, it is unclear what "real obligations" the government has.
It has the real value of its nominal obligations.
In your other comment, you suggest that the government does not need to honour these obligations, which is true; though equally, the government, being the government, can unilaterally declare them null and void if it so chooses. Maybe it should! It would certainly show those pesky savers who's boss. ("God bless our good and gracious King / Whose promise none relies on."--Rochester)
It has the real value of its nominal obligations.
vimothy, how has the government come by those obligations? The government does sell inflation-protected securities. But most of the securities it sells are quite explicitly not in that category and so are not inflation protected. So it's hard to make the case that there is any implicit commitment to a real return. The commitment is to a certain number of dollars.
I'm not saying that the government doesn't have a very legitimate and important interest in the public purpose of preserving price stability, but that interest is not part of the formal obligation represented by (most of) its securities.
DeLong might be thinking about the obligations the government has under its social insurance programs?30
Dan, I agree with your assessment. The government is not obliged to meet its obligations in real terms (for the most part). In fact, in an important sense it's not obliged to do anything, ever--including meeting its obligations in nominal terms. But it doesn't follow that it /ought/ to do these things, just because it can.
vimothy I agree that there are things that the government is permitted to do but that it ought not to do. I don't know if that is all DeLong is talking about.
For some years now, people have been earning a negative real return on government debt. But I don't think that there is any sense here in which the government has either defaulted or failed to meet its obligations, even implicit ones. The people who bought that debt knew what the interest rates were, and they knew that the inflation rate, while as low as one could reasonably expect, was higher that the interest rates. They apparently made a judgment that buying securities with a small nominal yield was better than holding dollars with zero nominal yield.
"The government is not obliged to meet its obligations in real terms"
hang on, if you borrow money from someone you're not promising to pay them back with money which will have exactly the same value, you're promising to pay them back a certain *amount* of money.
"in an important sense it's not obliged to do anything"
That might be true if we lived in a lawless and absolute dictatorship.
"it doesn't follow that it /ought/ to do these things, just because it can."
it sounds like you're equating inflation or depreciation with tyranny. Which doesn't make much sense.
It looks like Delong thinks government debt 'amortizes' which doesnt look to be correct ...
In any case it looks like he has made it past "We're out of money!"... which is at least some progess...
Rsp
it is conceivable that it will be unable to keep its financial promises in real terms.
The govt doesn't make any commitment in real terms. That is what risk is about.
In addition, the cb can always set the short term rate wrt to inflation rate to get the real rate, if it chooses to do so. And it can also influence the yield curve.
I wonder if Brad has read Scott's "Interest Rates and Financial Sustainability" and Warren's "The Natural Rate of Interest Is Zero."
He seems to be implying that the govt is that the mercy of the market. More bond vigilantes?
Brad's got another more recent post on MMT:
http://delong.typepad.com/sdj/2013/03/is-there-still-a-demand-for-even-more-modern-monetary-theory-weblogging.html
y,
From BDL there: "As I have said, repeatedly, austerity now and for the several years is surely counterproductive. But it is not the case that austerity is always and everywhere unneeded..."
Another strawman...
Unless he is asserting a minimal JG/BIG is "splurging" and the old "unemployment is good for us" meme....
BDL doesn't understand either MMT or Godley monetary economics enough to know that the size of the deficit is proportional to changes in non-govt saving desire. that this is determined endogenously, and that variable tax rates and automatic stabilizers create buffers that expand and contract with changing conditions, just like the buffer stock of employed in providing transitional labor. It's doesn't seem that BDL has read anything of this, let alone Scott's "Interest Rates and Fiscal Sustainability." BDL should also read Scott Fullwiler: Paul Krugman—The Conscience of a Neo-Liberal?
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