Tuesday, December 30, 2014

Ezra Klein — This is how the government should budget. But it probably can’t.


Proof positive that Ezra Klein is a moron. Why do people like to him? Oh, they are morons too.
If the government cuts spending on Social Security by $10 billion then it really has saved $10 billion.
VOX
This is how the government should budget. But it probably can’t.
Ezra Klein

58 comments:

Ralph Musgrave said...

Strikes me that Klein makes a thoughtful attempt to answer a difficult question, i.e. should capital spending by government be treated differently to current spending.

An aspect of that question of interest to MMTers stems from Warren Mosler’s claim that govts should incur no debts: i.e. they should issue only zero interest yielding liabilities, namely base money. Milton Friedman argued likewise. But you could argue that govt investments be funded by govt debt on which the minimum “zero risk” rate of interest is paid. That gives people flexibility in how they fund govt investments: i.e. they can pay a big lump sum and get interest, or they can pay extra tax over the years to fund the interest.

As distinct from govt capital investments, I see no excuse for govts incurring debt so as to fund stimulus. I.e. given the need to create fiat and spend it (and/or cut taxes) there is no Earthly point in the state borrowing money when it can print the stuff.

And stimulus ought to be directed towards current not capital projects because capital projects normally can't be turned on or off just like that.

Matt Franko said...

Tom and it is not even correct within the moron paradigm as the example he uses, Social Security, is run as a "Trust Fund" that in their minds is not "the govt's money" but it belongs to the SS "Trust Fund" so-called...

Oh brother...

And here: "Since the point of capital budgeting is to make it easier to spend money on the items defined as capital investments,..."

Whaaaaaaaaatttttt????????

This is severely tortured logic here...

What is he even saying? Now let me get this straight... "the point" of budgeting is to "make it easier to spend" ?????

What is the "hurdle" over which we would like it to be "easier" to get by????? People who think "we're out of money!" ??? Morons are the hurdle?

So now in some sort of tortured logic, what we have to do to "fool the morons" is in a brilliant Machievellian way, just call the planned spending "capital budgeting" and THEN the morons blood pressure drops a few 10s of points and we can "get it by them easier"???

THIS is why we do budgeting????

Its not to publish a financial plan for the non-govt sector to be advised about how much approximately the Fed govt is going to spend on various functional areas over the near term future????

Boy I guess Kelton is going to have a lot to UN-learn if she is going to work at the Senate Budget Committee in DC... and communicate with idiots in the DC press corps....

Oh brother...

Matt Franko said...

Well Ralph I think Tom takes a general exception to Klein here writing within the context as "govt as a firm" and stepping on his own crank with the use of Social Security (our public senior income support program over here which is surely lacking at present) in his example where "If the government cuts spending on Social Security by $10 billion then it really has saved $10 billion." which is like a phrase right out of the deranged lobotomized Peterson organization phrase book that we here are operating against 24/7/365...

Why firms do capital budgeting is because they are profit seeking enterprises that establish internal "hurdle rates" as goals to meet when they are evaluating project proposals..

http://en.wikipedia.org/wiki/Minimum_acceptable_rate_of_return

so if the project is approved, then the managers are evaluated against meeting those original goals of "return on capital" so the accounting is tailored to report out these financial management metrics.... (Capitalism 101...not too complicated...)

So again coming back to reality here where WE know that govt is NOT a firm, and as we are actively seeking to inform others of this reality, its more than disappointing to see a mainstream fairly well known DC left-leaning reporter like Klein here spewing garbage like this...

rsp,

Unknown said...

Ralph-

The mixture of securities to reserves is largely irrelevant as QE demonstrates. What is with people and this obsession with treating one type of Govt liability as "debt" and another type of Govt liabilities as "debt-free".

Both CD's and checking accounts are considered bank "debt" or at least not distinguished as very important in the liability characteristics.

WRT taxes and Govt spending. Why not just make this stuff as simple as possible. There is no need to "pay for this" or "fund that". Decide a general outline of spending decisions:

5% of GDP on infrastructure
10% of GDP on Retirement
5% on education
5% of R & D
10% on health care
etc

and then adjust your simple tax structure accordingly depending on private sector economic conditions.

The amount of taxes that are required to stabilize inflation in Q1 maybe be different than Q4, there is no way to predict this a year in advance. So there's no sense in tying taxes to any particular type of spending because as we know the need for taxes is not at all related to the spending.

Ryan Harris said...

The important distinction between interest and non-interest bearing fiat has traditionally been that interest bearing bonds and savings accounts were non-negotiable. Banks wouldn't allow a customer to write checks from a savings account and a bond couldn't be used to purchase goods at a store.

They could be used as collateral for loans or other securities but not spending.

Wasn't the idea that the government/bank was compensating the owner to NOT spend or to defer spending the fiat so governments and banks could prevent outflows of real money/gold from the bank, central bank or treasury?

So the decision to pay interest when there is no gold standard, should only be made when the government/bank/central wishes to pay people not to spend?

Unknown said...

Ryan-

While this may be true for banks as it helps their reserve management departments with predictability etc, and it may have been important for Govt's in the past wrt gold reserves.

Neither of these attributes applies to sovereign currency operations today. Owning TSY securities is never a hurdle to spending as the TSY securities market is the largest and most liquid market in the world.

And today, the TSY direct site actually allows you to have an account directly at the Fed via the TSY dept with functionality that is almost identical to online banking at Chase. You connect your private checking account to TSY direct and make "purchases" and any time you want to "sell" you get credits to your checking account within 24 hrs. Everything is very straightforward and user friendly from what I've seen. Its really quite an excellent service looking from the outside.

The Just Gatekeeper said...

I can't seem to understand why Ezra and Matt keep insisting on this out of paradigm garbage. I know they have heard of our stuff but just don't seem to get it or care. They just want to be seen as these cute and cuddly wonky liberals who don't rock the boat too much.

Tom Hickey said...

So the decision to pay interest when there is no gold standard, should only be made when the government/bank/central wishes to pay people not to spend?

Saving only works for sterilization to the degree that savings vehicles are illiquid?

Tom Hickey said...

I can't seem to understand why Ezra and Matt keep insisting on this out of paradigm garbage. I know they have heard of our stuff but just don't seem to get it or care. They just want to be seen as these cute and cuddly wonky liberals who don't rock the boat too much.

I guess moronism is fashionable.

Ryan Harris said...
This comment has been removed by the author.
Calgacus said...

Ryan interest bearing bonds and savings accounts were non-negotiable. AFAIK that has not been true about most government bonds. The only major exception I can think of is US War Bonds in WWII - which became a major part of the whole US National Debt (and were later renamed US Savings Bonds). Not negotiable, not collateralizable. But they weren't secret so if a bank knew someone had a $1 million in such bonds, they would be rather more likely to lend to them. Keynes's forced savings plan in the UK in WWII, eventually instituted somewhat, were a similar idea. But though there were markets back then, I think you are right that the usual idea was to buy and hold, be a coupon-clipping rentier, so they may have elicited more savings - which could have been useful in booms. Governments do care about negotiability then because it would feed inflation.

"Paying not to spend" is pretty much the only reason I've ever heard to issue interest bearing bonds (and understood more widely, to issue money at all). Could make sense in a very full employment situation like WWII. Or maybe when one is setting up your nations finances and central bank - as at the institution of the Bank of England. Similarly a bit of interest to attract savings in a poor / weak / small country's currency.

About Auburn's comments - Yes. The brain damage caused by NOT conflating "currency" & "credit" is comparable to, of a piece with that of gold standard/ commodity money thinking. And of course gold has caused much more brain damage than lead. Too bad no alchemist ever made a reverse philosopher's stone.

NeilW said...

"i.e. should capital spending by government be treated differently to current spending."

No.

Next question.

There is no different between current spending and capital spending. All of it results in capital spending at some point, because you need that to produce the stuff the spending is actually causing the creation of.

Just do functional finance. What government chooses to buy and whether that is direct or indirect is never a matter of money. It is a matter of what is required in real terms by the rest of the economy.



NeilW said...

"Saving only works for sterilization to the degree that savings vehicles are illiquid?"

Saving never works for sterilisation, because you still have wealth which is the whole basis for the expectations based wealth effect.

As usual neo-classicals are completely inconsistent even within their own nomenclature.

The only way to sterilise is to reduce people's capacity to do something, which essentially boils down to taxing them or banning the activity.

Money is useful for settlement. If it isn't available then people develop other ways of doing trade - particularly in business where you just run up a credit account.

Dan Kervick said...

I've read this whole thread, and I really have little idea what you guys or saying, or exactly how you would run a government retirement security program if you were put in charge of one.

You are always suggesting that you have some alternative "paradigm" that shows everyone else is an idiot. But I don't really understand what that paradigm is and how it translates into concrete policy proposals and structured programs. It seems to me that it is only half a a paradigm, or a quarter of a paradigm ... or some vague slogans and a murky dream of a paradigm.

Perhaps the reason you are unable to convince all the "morons" out there about how to run a Social Security system is that you really have not thought the question through in any detail whatsoever. Why don't you prepare a concise but comprehensive white paper on how to run the Social Security system on MMT principles. Lay it all out: the demographic projections, the levels and kinds of material retirement support stretched out over different periods of time, the ways in which those kinds of support are provided, the conditions attached (or not attached, to the receipt of different kinds of support, etc.

You wonder why other people can't "get" what you are saying. Perhaps the reason is that there is nothing to get. You have no plan, no program - just some slogans and vague intuitions.

I hope you are not suggesting that the mere fact that the government can manufacture units of its currency at will means that all of the hard questions are automatically answered.

Unknown said...

Dan-

Easy

Universal retirement program. Every American over the age of 64 gets 2X the poverty level monthly income. Done. No trust funds, no accounting gimmicks. If the resulting purchasing power for seniors is so high they start to generate inflation, raise taxes.

Done. Your welcome.

Matt Franko said...

Well Dan how about starting with a quick micro/actuarial analysis of a 65 year old retiree in the US who needs USD balances for:

Fresh Foods,
Clothing,
Personal Transportation,
Housing/Utils
Medical Care/Pharma,
Long Term Care,
Well-being/Leisure,

create a reasonable monthly budget for (at least) these items....

Then raise the current xfers for SS and Medicare to whatever that level works out to... probably will work out to be around $6k per individual retiree...

50M in Medicare (65+) so that will require about $300B per month at this point... 3.6T annual.... so what?... will go up a bit for a while then it will go down in a decade or two...

Get existing ERISA fiduciaries to "buy in" if we must... do NOT raise the current conforming loan limits.. .. prohibit auto lending above $30k per...

There you go done.... fill in some more details if you must.... get Dr. Gruber & Co. to do it maybe...

we can tweak it as we go (which is NOT EVEN what we are doing now btw...)

If you dont think that all of these influential people going all around saying "we're out of money!" is not a big part of the problem these days I'm afraid you are sadly mistaken....

Tom Hickey said...

Dan, without changing anything in place right, all that needs to be added is understanding that the trust fund doesn't "pay for" SS. This was known at the time of the New Deal. See Luther Gulick —Memorandum On Conference With FDR Concerning Social Security Taxation, Summer, 1941.

In many if not most cases, MMT changes nothing but the understanding of what's actually going on operationally instead of what people erroneously imagine is happening. I could add, due to moronism.

Different people might advocate different approaches to various issues under a correct understanding of the operational reality of the current monetary system. So I don't think that there is a particular MMT proposal for SS that MMT proponents would necessarily sign on to as optimal, or anything else that requires political choice other than the MMT JG.

MMT's main message here is that the claim a welfare state is unaffordable is incorrect. It's due either to ignorance or to political lobbying for a market state on ideological grounds (neoliberalism, economic liberalism, market fundamentalism) rather than sound economic reasoning.

Dan Kervick said...

Great guys. Now why don't you write that stuff up as a clear 2-3 page policy note, and send it to Ezra Klein and the other wonks so they have an actual plan to evaluate?

Back of the envelope, I estimate Auburn's proposal is only about $150 billion more than current payouts. But I assume you guys want to can the payroll tax, which brings in about $1.05 trillion right now, so we're talking about a permanent $1.2 increase in the deficit, disregarding further complication related to an aging population and/or changes in the federal poverty rate guideline. Would you suggest any additional revenues, or do you think the economy can handle that kind of leap in net federal liquid asset injections in a non-inflationary way?

I'm glad Stephanie Kelton now works for the actual government, so we can begin to see more carefully developed policy packages from MMTers, and less loosey-goosey philosophical feelies about the monetary system.

Matt Franko said...

Tom these people are just not qualified or competent...

We are currently using an accrual basis accounting methodology for the "spending" amounts at the Federal level that are being used in the discussions, while not even tracking/monitoring the cash basis spending levels ... there is no govt report that I can find at all much less one that is being used monitoring the cash basis...

None of the people there I'm sure can even explain the difference between vanilla cash and accrual for a firm, much less understand the mathematical/logical applicability of either of these two accounting methods to the accounting of federal govt spending in the first place...

Firms typically run both methods for different management/reporting purposes... and they dont freak out about it... its just different illustrations to get different looks... no big deal...

The people there are just not qualified or competent and neither are the people who are reporting on them... I'm sorry... and millions of our fellow citizens are going to remain in big trouble until this changes imo....

Dan Kervick said...

Tom, without hard numbers it's impossible to tell whether people like Klein propose the things they do in the way they do because they really don't "get it", or because they are just packaging the same things MMTers would accept in substance, but in a conceptual framework that people have a chance of understanding and enacting.

The trust fund is just the name of the government account through which Social Security payments and receipts are processed. It also holds bonds issued by other government accounts, which are obviously insignificant from an overall government perspective. It's like a homeowners "Christmas account" - just a way of segregating and earmarking certain cash flows.

Politicians and activists have routinely lied and dissembled about the nature of the trust fund, mainly, I think, because they are worried that if Americans discover we basically have a pay-go retirement system and not a savings plan, political support for it might collapse. Also, the rich regard Social Security as a poor man's retirement fund, and the contract the US government made with the people who own the country and handle their own retirements through their private investment portfolios is that if the middle class schlubs want a government retirement plan, it has to keep its own books and use pay-go flows from the middle class schlubs themselves.

Matt Franko said...

Dan here about Klein:

"He attended the University of California, Santa Cruz but later transferred to the University of California, Los Angeles, from which he graduated in 2005 with a B.A. in political science. "

He dosent have the correct training for this kind of work.... I'm sorry...

Not saying "fire him!"... I'm sure he can report on the political process, etc...and I'm sure very well.... but he does not have the KSAs to be involved in any sort of technocratic discussions about economic policy proposals, etc...

Its like here "how the govt should budget" he writes... THEN what he says is that they should use some sort of made up methodology where it is easier to "get stuff passed" or what ever... there is no technical input here whatsoever... or he has to resort to the "household/firm analogy" as that is all he has to cling to...

You say "write up a short policy paper" for him.... I dont think he is qualified to comment on any such thing... he is not trained in any of this...

The left-media is full of people like this that is why we keep getting nowhere with them... they dont understand what we are saying because they have never been trained in any of this....

We have to create our own media somehow...

rsp,

Unknown said...

dan-

there is no reason at all to think that a permanent increase in the deficit would be problematic if we simply follow Matt's advice and limit leverage. In the aughts before the GFC, the private sector was cranking out an average of $2T worth of debt every year and obviously increasing the broad "money" (more accurate to describe it as financial asset count) each year. If you remove some of that unsustainable debt increase, and replace it with sustainable Govt deficits instead, things would be much better.

Or maybe another way to think about it.

In the golden era of capitalism, productivity and real wages tracked each other very closely and we never had a huge inflation problem. If I could pick only one metric to target, it would be that one. Make sure that real purchasing power keeps up with productivity + imports and let the deficit fall where it may.

Unknown said...

The problem is that the conventional economic thinking targets the wrong metric, namely deficits and debt to GDP and ignores everything else except GDP. They dont really care about unemployment and wages.

but the reason they focus on the debt and deficit is 100% dependent on the Govt budget as a household budget mentality. And if MMT ever accomplishes anything substantial it will be to banish this type of thinking to the waste bin of history just like all the other stupid ideas like segregation, convertible fiat, communism, feudalism, royalty etc.

Unknown said...
This comment has been removed by the author.
Tom Hickey said...

Tom, without hard numbers it's impossible to tell whether people like Klein propose the things they do in the way they do because they really don't "get it", or because they are just packaging the same things MMTers would accept in substance, but in a conceptual framework that people have a chance of understanding and enacting.

Dan, my post was about Klein being out of paradigm on one sentence in his post. I was not commenting on the post itself, only the misleading bit about cutting government spending being "saving."

If one is in paradigm, then one realizes that the US government doesn't "save" when it cuts spending and that it cannot "save" operationally (although even MMT economists do use "borrowing" and "saving" wrt to government fiscal balance wrt to sectoral balances). Some economists realize the operational reality when they use this terminology and others do not. But Ezra's use does fall into this category when taken in context. He clearly seems to be talking about saving in the conventional sense that people understand it, which is not applicable to a currency sovereign.

Furthermore, the reality is that spending and taxes are entirely separate events operationally in functional finance. They can be related if policy makers wish to for political purposes. There is nothing wrong with offsetting highway expenses with a gas tax or levy on trucks for example. The bridge is addressing a negative externality. Same with a pollution tax or sin taxes to discourage these behaviors.

But it is never a question of these taxes paying for anything operationally. The payment is not in kind but in terms of a disincentive to offset negative externality, for instance. Similarly, a payroll tax can be viewed as a sort of social reciprocity — skin in the game — rather than as payment that funds a retirement annuity or medical insurance.

continued

Tom Hickey said...

continuation

The way that functional finance would approach spending and taxation is to spend — "do what it takes" — in order to accomplish desired goals arrived at through political choice most efficiently and effectively without regard to affordability and then to craft a tax schedule that addresses the price level. There is likely to be some "redistribution" at this level, but it's not taking from rich Peter to pay poor Paul, even though it may seems so to Peter, who would naturally conclude that if Paul didn't get that transfer then his own tax bill would drop. But the fact is that capitalism has a distribution problem that government needs to address to maintain the social fabric, on one hand, and to create a prosperous society on the other. The Third World is proof enough of that.

This is a very general approach that needs to reduced to specific proposals and that is what the political process is about. I'd slash military spending not to "save money" but because it is unnecessary for national security and goes way beyond a reasonable need for defense. I would also greatly expand the "welfare state" and do much more "capital spending" on infrastructure, R&D, education and the like that have huge payback both socially and economically, not only because it is the right thing to do in my view but also based on public purpose and good economics, that is, using available resources to optimal advantage. The amount budgeted could therefore be roughly the same as it is now, even though the defense cuts don't "pay for" the expansion in welfare and public goods.

Of course, this is roughly what most liberals and progressives want to do already, but many erroneously think that they need to capture the funds from defense to fund progressive programs, and so they distracted arguing over affordability with the opposition.

I have been recommending John Kenneth Galbraith's The Good Society (1998) as a liberal/progressive starting point for developing a presentation about formulating a comprehensive and integrated liberal/progressive policy for our times. He covers the main issues. What needs to be added is the MMT perspective on monetary economics, as well as a bit of updating to take changes into account. But his work is surprisingly up to date.

NeilW said...

"Why don't you prepare a concise but comprehensive white paper on how to run the Social Security system on MMT principles."

You just pay the living wage to people that others consider 'retired'. If you're over the relevant age and living in the country legally you get the pension.

In other words the 'Job Guarantee' for those people is 'retirement work' - looking after grandkids, etc.

It's the one bit of 'basic income' theory that will hold water because the people that receive it will be seen as worthy due to age.

You want the age down as low as the society finds comfortable.

The production issue is the same production issue as basic income theory and job guarantee theory - of which there is legions of data. Essentially invest in education and lots of robots, and stop relying on nicking skilled staff from other parts of the world.

Systems will quantity expand before they price expand and where they don't you initiate a competition investigation. Point that out before hand to set the relevant expectations.

I'm sorry Dan, but the solution is dead simple and doesn't require a huge white paper. Just pay people and invest in education and open research and development in areas the private sector finds risky and expensive. Ban things that are a non-productive use of man power (i.e. most of the finance sector) to make space where necessary. Stop relying on the 'holy power of taxation' - just ban things that pollute minds in the same way as you ban things that pollute rivers.

The private sector will then leverage that all that reduction in risk to fill in the gaps.

The problem is that the solution is so simple it seems to repel minds. The job of the government sector is to enable and regulate the nuclear power of capitalism.

The numbers are largely irrelevant, because nobody actually knows what the economy can provide since it hasn't been run at full output for so long.

The process of introduction just follows the usual TEFCAS success formula that any working operational control system uses.

Dan Kervick said...

"I'm sorry Dan, but the solution is dead simple and doesn't require a huge white paper."

Not huge, Neil. Just a 2-3 page policy note. If the solution is so simple it should be very easy to spell out the overall plan. It should be a huge political winner with the average Joe, right?

All it has to include:

1. Who gets the money, how much they get, and under what terms and conditions.

2. What existing taxes will be cut and what new taxes (if any) will be added.

3. What monetary policy components are required: Bond sales with permanent near-zero rates? Direct dollar issuance? Something else?

4. How the plan charts out demographically over time, perhaps showing a few best case/worse case scenarios for GDP growth, population growth and age cohort size

5. How and why the plan is compatible with overall price stability.

I think we're talking about three pages. A few tables, a handful of charts, 500-1000 words of text.

Matt thinks Ezra Klein is too stupid to grasp the MMT plan for retirement. Maybe he is. But so far, there is no clear MMT plan - so where is he supposed to look?

Dan Kervick said...

Tom, we've been around this block a hundred times before, so I don't want to beat the path again to far.

But you guys have to get through your heads that when most Washington types say we are "out of money" or that the government has to "save" or take from one program to fund another, they do not literally mean that the government is out of money. They are perfectly well aware of the fact that governments manufacture currency units and can manufacture as many of those units as they want in some fashion or other.

What they mean is that under current conditions, government cannot expand its deficit significantly over the long haul without committing itself to an unacceptably inflationary monetary policy. You can always send old people bigger nominal checks. But that doesn't help much if you erode the purchasing power of their dollars at the same time. And if it erodes the purchasing power of everyone else's dollars - including all those working people who are actually producing the stuff granny and gramps will be consuming - then the program will be an utter political failure.

You guys are always tilting at windmills. Once upon a time, it seemed like MMT had a plan for full employment and price stability. But the price stability component turned out to be an unconvincing mishmash of sloppily worked out ideas. Now whenever the issue comes up, MMTers generally change the subject. There seems to be a kneejerk MMT resistance to putting plans down on paper with even a bare modicum of math and modeling. And then you wonder why the policy wonks don't take you and your "paradigm" seriously.

How much easier it is just to complain about how everyone else in the world is a moron.

Unknown said...

Dan-

"You guys are always tilting at windmills. Once upon a time, it seemed like MMT had a plan for full employment and price stability. But the price stability component turned out to be an unconvincing mishmash of sloppily worked out ideas. Now whenever the issue comes up, MMTers generally change the subject. There seems to be a kneejerk MMT resistance to putting plans down on paper with even a bare modicum of math and modeling. And then you wonder why the policy wonks don't take you and your "paradigm" seriously."

With all due respect. This is simply dishonest intellectual garbage. MMT is the paradigm, and you yourself are in paradigm. Everyone else is out of paradigm. There is only one correct description, this isnt a matter of opinion.

MRW said...

What does TEFCAS mean?

Matt Franko said...

Look,

Go to this video of Mike trying to explain this simple mathematical relationship to former OMB Director Miller from a while back...

FF to the 5:00 mark...

https://www.youtube.com/watch?v=2Ou7WbNiXjA

The guy is claiming that it is "his tax dollars, blah blah...." and Mike is trying to explain to him in VERY simple terms that it logically/mathematically CANNOT be "his tax dollars" as the govt is spending MORE than it takes in...

Mike is in effect saying to put it in terms of FY2014 just ended: "$3T minus $4T is NOT a positive number"

AND THEY DON"T GET IT....

Miller says and I quote "I find this highly confusing and a lot of gobbledegook" unquote...

THEY ARE NOT LYING.....THEY CANT GET IT...

They are suffering under SEVERE COGNITIVE IMPAIRMENT.....

Mike says: "3 minus 4 is negative 1"

they DONT f-ing understand this....

Our Roger here is a f-ing nuero-physiologist, PH f-ing D, listen to his podcast with Mike...

Their brains are completely haywire.... their synapses have become mis-wired...

We are able to witness this MAJOR cognitive impairment with these people.... MAJOR.... they cannot even accomplish simple addition and subtraction within the context of these fiscal topics....

THEY CANT GET IT ...they are F-ed up scrambled egg for brains.... sorry.

NeilW said...

"Not huge, Neil. Just a 2-3 page policy note."

Who's going to read it and why?

Why should it be written in neo-classical style? That's just accepting the framing.

The whole point of functional finance is that *numbers are irrelevant*.

The framing is wrong. The general functional finance principle is how you will administrate the system - concentrating on the real output. The numbers just float to accommodate that real goal.

All of which has been written about dozens of time. Lerner's four items still hold true.

After that pick a retirement age, say 65, and pay people in the country the living wage at retirement.

That's about it.

If anybody argues, then just ask them what else they are proposing to do with these people.

Execute them Logan Run style? Work on what given there aren't enough jobs to go around in the first place?

The job of the retired is to demand goods and services so that people will be employed to provide them - or preferably create the robots that will provide them.

And to look after their grandkids of course.

If you want to go full on then get rid of all the social security investments and put the fund on deposit - like we have in the UK. That has the happy political consequence of reducing the national debt.

Getting people to think in different terms is the first battle. And you do that by studiously avoiding talking about money. Because it is irrelevant to the discussion at hand.

You don't need a 1000 words that nobody is going to read.

Implement functional finance. Repeal and close down anything that gets in the way of that and then just pay people.

NeilW said...

TEFCAS

- Try
- Event
- Feedback
- Check
- Adjust
- Success

It's the way the brain operates, and is the general process by which you run or control anything.

Try to Adjust is iterative. Success is the goal.

Try something and see what it does, change what doesn't work and try again.

Tom Hickey said...

Tom, we've been around this block a hundred times before, so I don't want to beat the path again to far.

But you guys have to get through your heads that when most Washington types say we are "out of money" or that the government has to "save" or take from one program to fund another, they do not literally mean that the government is out of money. They are perfectly well aware of the fact that governments manufacture currency units and can manufacture as many of those units as they want in some fashion or other.

What they mean is that under current conditions, government cannot expand its deficit significantly over the long haul without committing itself to an unacceptably inflationary monetary policy.


No, Dan, that's not what they mean at all. What they mean is that spending has to be paid for in the present by increasing taxes now or cutting other spending, or else by borrowing that has to be paid by taxes in the future, just like firms and households.

It is true that a few are aware of the operational capacity to spend with out funding with taxing or borrowing and are concerned about inflation. But that is not the chief argument.

MMT economists have already answered this concern clearly enough for Brad DeLong to understand it, for example. The inflationists' argument hands on loanable funds and bod vigilantes, which is nonsense operationally when the cb controls the interest rate and can control the yield curve — as QE has shown people like Bill Gross that bet that the bond vigilantes would rule and drive up yields.

Anyway the issue is not the action of the cb but of the fiscal authority in its spending and tax policies. FF explains the principles for controlling both inflation and disinflation and running a full employment economy with the MMT JG soaking up residual UE.

Now Stephanie will be called upon to demonstrate this to Democratic lawmakers and I am reasonably sure that this will involve not only explaining principles but also crafting specific policy in the Senate budget committee, which I assume also communicates with the minority on the budget committee in the House.

Dan Kervick said...

Neil, numbers do matter. People who propose economic legislation have to put various specific numbers down on paper, and then sell them. They have to propose specific spending numbers and schedules; and they have to propose specific tax numbers and rates. Their opponents - who will come from all corners of the city - are going to challenge their numbers, and use math to predict all kinds of bad things will happen in the world if the legislation is passed. The defenders of the legislation will have to use mathematical analysis of their own to show where the opponents go wrong.

That's how the game is played. There is nothing "neo-classical" about this. It applies to any significant piece of economic legislation based on any style of economic thinking whatsoever. To turn ideas into policy in Washington, you need to run a gauntlet of think tanks, advocacy groups and policy shops who are going to churn out fancy analyses to shoot you down. If you don't have the chops to deal with those analysts, they will shred you alive and leave you in pieces. You can't just respond with some vague theoretical fluff about paradigms and whatnot.

And if the legislators in question say, "Well why don't we just try X and then adjust it if it doesn't work," they will be laughed off the floor of Congress. I can guarantee you that is not the approach Bernie Sanders - or any other non-clown candidate - is going to take in developing his policy platform.

As I said, I'm glad Stephanie Kelton is in Washington now, because that will help to inject a little more of the reality principle into MMT discourse, something it sorely needs.

Tom Hickey said...

Neil, numbers do matter. People who propose economic legislation have to put various specific numbers down on paper, and then sell them. They have to propose specific spending numbers and schedules; and they have to propose specific tax numbers and rates. Their opponents - who will come from all corners of the city - are going to challenge their numbers, and use math to predict all kinds of bad things will happen in the world if the legislation is passed. The defenders of the legislation will have to use mathematical analysis of their own to show where the opponents go wrong.

I assume that this is what Bernie Sanders hired Stephanie to do.

Dan Kervick said...

Tom, here's what Ezra Klein said about the platinum coin business in 2013:

Minting the coin would interrupt that process, uniting Republicans -- and many voters and business groups -- against what they would see as an unsettling, illegal and inflationary power grab from the executive. And if you think the press spreads blame too equally over the debt ceiling, wait till you see the coverage if the White House decides to respond by creating a trillion-dollar coin out of nothing. You can explain the basic logic of fiat currency until you're blue in the face, but it's not going to matter. That coin would drive our country's increasingly deranged politics, which are really at the heart of this crisis, to the edge.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/11/a-lot-can-go-wrong-with-a-platinum-coin/

As you can see, if you read this piece and other pieces from around the same time, the analysis is mainly political, with a bit of economics thrown in. He worries a bit that the coin seigniorage would start us down an inflationary road. More importantly, he worries that the road would be perceived as inflationary and markets and confidence would respond badly. He also worries that that the overall politics of the coin would be terrible.

There is nothing at all in those pieces to suggest that Klein does not understand that the government can mint a platinum coin, or issue more dollars in some other form. But as he says, you can "explain fiat money until you are blue in the face", and it doesn't matter.

I think all of you need to develop better skill in reading between the lines and stepping up your game. Stop wasting your time arguing with internet crackpots who write Austrian blogs or swallow gold and silver or whatever.

Ryan Harris said...
This comment has been removed by the author.
Matt Franko said...

"our country's increasingly deranged politics, which are really at the heart of this crisis,"

Dan that is how we should expect someone trained in Poli-Sci would view it..

A lot of us here are not Poli-Sci people...

This looks like a cognitive issue to many of us... not a 'political' issue primarily...

The 'political' disfunction is the result of a more basic problem with cognition... this is the way I look at it... but I have not been trained in Poli-Sci...

iow "politics" cannot be "deranged" as Klein asserts here, PEOPLE can be "deranged" though...

The people in these policy making positions are exhibiting very severe cognitive impairments... they are 'deranged' to use Klein's term here....

so I would agree with Klein that there is 'derangement' afoot, but it is not "politics" its these policy people... these policy people have BIG problems imo...

Ultimately we are going to have to overcome these people and more specifically their cognitive problems...

What you say here I think is true:

""Well why don't we just try X and then adjust it if it doesn't work," they will be laughed off the floor of Congress. I can guarantee you that is not the approach Bernie Sanders - or any other non-clown candidate - is going to take in developing his policy platform."

I think you are correct here.

But I also dont think a 2 or 3 page paper is going to turn all of this around either... this is going to be a long ideological war that is probably just getting started...

rsp,

MRW said...

Dan, Klein "understands" fiat currency in a silo. The way he understands what a gold standard is. As a definition. There is no evidence whatsoever he understands the consequences of a fiat currency in our economy, which of course is the reason for this post.

Tom Hickey said...

"Tax and spend Democrats." Nothing about the price level.

Ezra's post to which yoy refer was on Wonkblog. "Wonk" says it all. It's not something most people pay attention to.

Anyway, this really comes dow the political disagreement over the size of the government and what government should and should not be doing based on different ideological norms.

A basic rationale on the right is that the smaller a government is, the less expensive it is and so taxes can be less than with a bigger government.

A basic rationale on the left is that the size of government is on the issue but the effectiveness of government. What is needed is good government rather than "small" government and people need to be taxed to pay for it.

Both positions hang on the need to tax now or borrow now and tax later to pay for government.

They are both wrong in this regard. But under FF how much government spends may matter about how much tax needs to be levied for inflation control

So even if everyone's understanding is correct operationally, the issue of the size of government will remain as a political issue with economic implications.

Even if government were free of charge in a place that where "money grows on trees," many on the right would oppose government on principle as an ideological matter. They would see a utopia provided by government as a corrupting influence on character and an invitation to laziness and self-indulgence that would lead to moral degradation.

Actually, the size of the government can matter for the level of taxation, just not in the way that most people think now. Say a country runs a huge military and a large welfare state, then taxes might need to be higher than with a minimalist state.

So in the end the real issue boils down to ideology rather than economics. In developed countries the argument is more or less on the range of the size of government being ~10-15% at the right extreme of a minimalist neoliberal market state and 50-60% at the left extreme of full-on social democracy.

The right brings in the tax and spend issue against the left and the left so far has been incapable of fielding the challenge well. MMT to the rescue with the operational understanding. However, even with a correct understanding, the basic philosophical (ideological) issues still remain over the degree of involvement of government in individual and social life.

circuit said...

Tom, Dan:

There's certainly some truth to Dan's point. Economists who do serious policy analysis in Washington are aware of the fiat nature of money. Just as an example, here's Alan Blinder back in 1992: "We never need fear defaulting because we can print as many dollars as we need. It may be wise or foolish to incur more debt. But fear of default is a red herring in the case of the US." These economists share the concern that the current political system, in which Congress is held responsible for fiscal policy, is not amenable to rational fiscal policymaking because you can't count on politicians to do what needs to be done (eg, from a functional finance perspective: raise taxes, cut spending, etc) at the right time it needs to be done.

Thus, I think there is some merit in Dan's recommendation that what is needed is to set out a detailed plan explaining how deficit spending in the short and medium term is consistent with overall long term price stability.

(Dan, on a separate topic, when Blinder says ‘banks should lend out reserves’, he's simply describing the process of increasing lending and deposits until the bank reaches its maximum ratio. It's just the shorthand way of describing the process. It's a commonly used expression within CBs)

MRW said...

@Circuit,

"when Blinder says 'banks should lend out reserves'."

You mean in the sense that Blinder's shorthand is 'banks should lend out to their reserves ratio'?

Unknown said...

Circuit-

There has been zero correlation between govt deficits and inflation in the pure fiat era since 1971. So I dont know where your evidence is that pols cant be trusted not to run up deficits so large that inflation becomes a real problem. If inflation starts to run at 10% with consistent 15% of GDP Govt deficits, if the population complains enough, you can be damn sure, measures will be taken to reduce the inflation level.

This Govt handing out money for votes and thus causing inflation meme is so fallacious, its almost as bad as the Govt as a household budget nonsense.

Your (and not yours alone) logic seems to run like this:

If we are honest about the nature of Govt finances, this will lead to inflation.

There is simply no justification for this view.

circuit said...

MRW: ...maximum loan to deposit ratio that complies with existing regulatory reserve requirements.

Matt Franko said...

circuit,

I'll see your Blinder with a Rogoff and raise you a Reinhart:

"The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.

“The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff."

Read more: http://www.businessinsider.com/imf-paper-reinhart-rogoff-western-debt-defaults-2014-1#ixzz3NVekAy9a

Blinder may have some level of insight into all of this but he is just one person.... and he is not very influential...

Here is Robert Rubin: " I am absolutely convinced that the president was elected with an internalized view that he had to deal with this immense deficit and debt loads that he had inherited."

http://www.pbs.org/wgbh/pages/frontline/shows/clinton/interviews/rubin.html

The guy is the US Treasury Secretary and he is talking about the President of the US.....

so when you say here: "These economists share the concern that the current political system, in which Congress is held responsible for fiscal policy, is not amenable to rational fiscal policymaking because you can't count on politicians to do what needs to be done "

You are correct but they are thinking that the Congress wont do the right thing to avoid bankruptcy or something... NOT that they are going to be spendthrifts and cause "inflation" (whatever that is...) or something...

Right now the concern is "fiscal sustainability"... it is HARDLY a concern that they will cause "inflation".... please... NOBODY is thinking that way....

rsp,

Matt Franko said...

circuit,

Wait till March and they have to raise the "debt ceiling" and watch what goes down...

Here it is:

https://www.govtrack.us/congress/bills/113/s540/text

this has to be modified by mid-March or we start to circle the toilet bowl....

I guaranty you none of the discussions about modifying this legislation will involve "inflation"...

rsp,

circuit said...

Auburn Parks: That's a valid point. I agree entirely that it's been a long time since inflation was caused by too much govt spending. I was just giving an example. The point is just that effective functional finance would most likely be challenging to implement when politicians are at the helm (though it would be different if it were done via automatic fiscal policies). Also, proper functional finance has never really been tried so there's no evidence to suggest that it wouldn't be inflationary either when politicians have jurisdiction over fiscal policy.

circuit said...

Matt: There's a lot of dumb morons out there. I won't disagree with you about that!

Unknown said...

Circuit:

".... there's no evidence to suggest that it wouldn't be inflationary either when politicians have jurisdiction over fiscal policy."

Politicians already have jurisdiction of fiscal policy. I view the question as very simple:

Do we need to lie to the public about the nature of the Govt's budget.....or not.

My position is that we do not have to lie to the public. That even if every single person in the world understood MMT, no harm would come. I see it as practically impossible for demand to keep up with supply, a problem that is only going to get worse as robotization and automation continue to increase the efficiency with which we are able to produce goods and services.

circuit said...

Auburn, I also think we are facing a long-term, secular demand shortage, which will mitigate the inflationary pressures. But unless you can convince politicians otherwise, they are going to keep thinking and pumping out policies that reflect their beliefs that 1970s-style inflation is just around the corner.

circuit said...

Auburn:

".... there's no evidence to suggest that it wouldn't be inflationary either when politicians have jurisdiction over fiscal policy."

I meant "it" here to mean effective functional finance (FF). I know fiscal policy is already under the purview of Congress. Just saying there is no evidence that politicians would be good at FF.

Unknown said...

Circuit-

"..... But unless you can convince politicians otherwise, they are going to keep thinking and pumping out policies that reflect their beliefs that 1970s-style inflation is just around the corner."

And thats what the whole MMT project is about, convincing pols and voters otherwise.

"I meant "it" here to mean effective functional finance (FF). I know fiscal policy is already under the purview of Congress. Just saying there is no evidence that politicians would be good at FF."

right, that makes sense. However, there is no evidence that politicians would not be good at FF either since they dont understand Govt finance.

Actually, it could be argued that the only time the pols actually did execute FF was during WWII, and they did that remarkably well. Just because the FF understanding was directed at winning a global war doesnt mean they didnt do a great job.

I think that one has to go in my corner :)

Tom Hickey said...

The fundamental distrust of "politicians" to manage fiscal affairs responsibly without supervening rules like "pay as you go" and oversight by grownups at the central bank is an indictment of representative democracy. And the advertised reason that we don't have popular participatory democracy is that the rabble would raid the treasury and vote themselves all sorts of goodies that would bankrupt the nation.

These are just rationales for other form of oligarchy, aristocracy — the substitution of the haute bourgeoisie-ownership class of capitalism for the hereditary aristocracy of feudalism.

Austrian and neoclassical economics are just rationales for economic liberalism-neoliberalism that leads inexorably to plutonomy unless actual democratic government supervenes to adjust distribution based on rents and rent-seeking.

If we have to justify out position in terms of their framework, we will never succeed. Whoever frames the debate wins the debate. We need to change the framing by exposing moronism for what it is.

This is not primarily about economics and monetary operations; it's about politics and power.

We need to be clear that those on the other side will all means possible including dirty tricks and even force if push comes to shove to preserve their power, privilege and the booty they have looted.

Tom Hickey said...

circuit: I also think we are facing a long-term, secular demand shortage, which will mitigate the inflationary pressures. But unless you can convince politicians otherwise, they are going to keep thinking and pumping out policies that reflect their beliefs that 1970s-style inflation is just around the corner.

Agreed. There are a number of economists and finance people already saying this. The only solution is a "Keynesian" one, and by that I obviously mean a genuine Keynesian one rather than bastard Keynesianism.

This is going to require a new paradigm that goes beyond the Post Keynesian one, which is still addressing 20th century issues.

We need a global economics for the 21st century that addresses the emerging challenges that humanity has not had to address previously in the same way. However, humans have had to address similar emerging challenges and we are still here.

Now we need to be thinking out of the box, and this is going to require a new approach to economics — both new methodology and the development of a new paradigm for addressing social, political and economic issues globally in the post-modern, post industrial, digital age. In other words, we need a new Keynes for these times.

However, this time it is likely to be a global collaborative effort that the work of a single individual. Moreover, it cannot be a Western-centric solution and be global in the sense of comprehensive, integrated and inclusive. In addition, it has to take into account the emergence of new global culture as the underlying and overarching context.

While it's necessary to stand on the shoulders of giants, it is also necessary to be looking at the horizon.

Tom Hickey said...

Actually, it could be argued that the only time the pols actually did execute FF was during WWII, and they did that remarkably well. Just because the FF understanding was directed at winning a global war doesnt mean they didnt do a great job.

Exactly. When the chips were down in the Great Depression, the politicians the people choose and the economic advisers they listened to came through. If it can be done in the worst of time, why not all the time?

circuit said...

Good stuff Tom.

Some say that the Kennedy tax cuts of 1962 (business) and 1964 (personal income) were examples of successful functional finance. The problem occurred when it was time to raise taxes. This eventually happened, but many economists regard the 1968 tax increase as having been enacted too late. This event had lasting effect on economists' and commentators' beliefs that functional finance could work.

I tend to agree that more direct, participatory democracy could make functional finance more effective