Tuesday, October 25, 2016

Paul McCulley — The deficit is too small, not too big

Paul McCulley packs a lot of MMT-friendly information in a small space.

The Hill
The deficit is too small, not too big
Paul McCulley, The Hill contributor and senior fellow in Financial Macroeconomics and Adjunct Professor of Law at Cornell Law School


Matt Franko said...

"Who's going to buy them now?!?!"

John said...

Matt, I know you and Mike disagree with the MMT view that the deficit is too small. Is there a way to square your views with the MMT view. Can be integrated in some fashion into a more general framework? Or is it possible that something else is going on -more debt - that is keeping things from collapsing, and that the MMT view will prevail?

I still can't figure out why Bill Gross didn't listen to Paul McCulley. Pimco would have made a staggering amount of money and Gross would still be the bond king, leaving the pretender to the throne Guuuuuuundlaaaaach still muttering about whatever nonsense comes into his head.

Matt Franko said...

John its a statement that reveals a basic lack of understanding its more a political statement ... so I at least cant square things up technically...

If the Peterson people are going all around saying "We have to get the deficit down!" so we want to just get in their face and say the opposite for political reasons I guess I could see that but at some point we have to move on and be more serious technically....

If we think we have to wait for the morons to catch up with us before we can advance our own understanding then we will never advance.... at some point WE have to move forward...

So all of this "money!".. "inflation!"..."deflation!" ... "monetary policy!" and "supply and demand!"... all of these monetarist BS terms have got to go... we need to move on...

NeilW said...

"the MMT view that the deficit is too small."

The MMT view isn't that the deficit is too small. That's just the rejoinder to the 'deficit is too large' crowd.

The actual position is that you look after government purchases for the public good and the deficit will be what it will be. That's what functional finance is all about.

It's all about the flow, not the balance.

Tom Hickey said...

The actual position is that you look after government purchases for the public good and the deficit will be what it will be. That's what functional finance is all about.

It's all about the flow, not the balance.

Right. It's a matter of running a "full employment budget" in the face of demand leakage to saving, which is revealed in the sectoral balances (flows). Government addition of aggregate net financial assets to non-government can balance the sectoral balance equation at at full employment by maintaining effective demand when the domestic private sector desires to save in excess of income and the external sector does not offset it. Since the domestic private sector cannot create net financial assets, net saving must be offset with net borrowing, which is unsustainable without increasing incomes sufficiently to sustain it.

Ideally this is handled by automatic stabilization and a JG as a buffer stock of employed.

As tax revenue decreases win a contraction, transfers increase, and the buffer stock of employed expands as more workers are laid off. The deficit is what it is to stabilize the downturn and offset decrease in effective demand.

John said...

Matt, Neil and Tom, sure, that's all true. When put in that way, who's gonna disagree, but I can't see the reason for the subtle clarifications in a situation that doesn't need one. Although I must say that Matt does in fact leave you believing that the deficit is too big! Dry humour perhaps?

We know that in general running almost any kind of deficit will ALWAYS be considered too big by the economic bigwigs, policy wonks, politicians and private power, but which we know from employment and other considerations is way too small. And a deficit that will result in an economy that works in the general interest will ALWAYS be larger than is considered prudent by assorted power interests, hence the deficit is simply too damn small. Blimey, when was the last time the deficit was too big, in terms of functional finance? What, never? So why complicate matters and get caught up by making it a political rejoinder? Let's just say, as Bill and Randy, say that the deficit is almost always far too small. It's a factual rejoinder!

It'll be what it'll be, and deficits are always after the fact and a result of savings and other leakages. That's all exceptionally useful information and a way of better understanding the real economy, but you see how you're making it a factual rejoinder? Yes, the MMT view is more subtle than simply saying that the deficit is too small, but, really, when wasn't it too small?

If you're saying it's a purely political rejoinder to the "too big" crowd, well, in some sense that's true. And as Neil always nicely points out, there's no such thing as economics, just politics. So from that angle, we can all agree. But simply putting it that way is not that helpful. Everyone is free to explain things how they want to, but I'm not sure it's useful to simply say it's a political rejoinder. So let's say, as Bill and Randy do, with no fuss, the deficit is almost always too small. End of story. Why complicate things with economic subtleties that are very unlikely to present themselves? I always appreciate that about Bill's blogs: he may give you a lot of detail but he nevertheless always leaves you with a powerfully simple factual message, like the deficit is too small.

The analogy I would use, but which you may not like, is one in terms of functional food aid. It's unlikely that a country beset with famine will need to be informed that too much food may have detrimental effects. Similarly, absent inflation which in any case can be managed, a country, like the UK or pretty much any other for that matter, beset with severe unemployment, chronic underemployment, extreme private debt, lack of homes, lack of good public infrastructure and a thousand and one other problems, it is close to impossible that it will face a situation of the deficit being too high.