Steven Rattner’s opinion piece in the New York Times and [Jason] Furman’s interview on National Public Radio are perfect examples of the ideas that MMT wants to debunk: Deficits are not normal; deficits crowd out private investment; the public debt is a burden on our grandchildren; our ability to respond to societal problems is limited by the fact that the US government does not have enough money to confront them.
Below is an alternative interview to the Furman’s interview that reviews these points. This blog will run like a traditional interview and all the evidence for the points made are in appendices at the end...New Economic Perspectives
What You Need To Know About The $22 Trillion National Debt”: The Alternative Interview
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College
“$22 trillion is the outstanding gross public debt. Until the 1930s, gross public debt fell more often than it rose and only major wars caused rapid increases in the public debt.” ~ Eric Tymoigne
ReplyDeleteThis sentence makes it seem that the US government borrowed money for its world wars. Not true. The US government created massive amounts of money out of thin air for the war machine. Since consumer goods were rationed for the war effort, excess money created the threat of inflation. The US government needed to put money into the economy to keep everyone working, and needed to get money back out of the economy to prevent inflation. The US government removed money by selling Treasury securities to the general public, while falsely telling the masses that the money they spent to buy securities was needed to “fund the war.”
These securities were called “Liberty Bonds” during WW I, and “War Bonds” during WW II. (The US government also started imposing taxes, while falsely telling that public that tax revenue was needed to “fund the war.”)
Then and now the “national debt” was money that people had deposited into Fed savings accounts via the purchase of Treasury securities. The $22 trillion national debt is money on deposit at the Fed. It is as much as asset as a debt, and it has nothing to do with the US government's ability to keep creating money out of thin air.
And yes, pundits politicians have been whining about the non-existent “national debt crisis” for almost 200 years. Politicians do this to make the public think there is “no money” for social programs. This makes the peasants grovel and beg for every drop of water from a bottomless well.
The US government is not alone in this lie. There are “national debt clocks” on public display in the UK, in Taiwan, and in several other nations -- but none in euro-zone nations, since the bankers don’t want European peasants to start asking questions about the euro.
“Politicians are so focused on the debt number that they lose sight of the issues at hand. For example, the misplaced fear about the upcoming insolvency of the social security system has reduced our leaders’ ability to response to the challenges of an aging society.”
Here we go again with the false notion that politicians mean well, but they “misunderstand.” There is no “misplaced fear” in Washington. Everyone in Washington knows that the US government is built on hoaxes such as the “national debt crisis” hoax, or the hoax that the Venezuela oil grab is about “democracy,” or the hoax that the AIPAC lobby is not a lobby, and so on. All these hoaxes are protected by powerful taboos. Anyone who breaks a taboo, and exposes a hoax, is punished.
“Public and private debts are totally different animals when a monetarily sovereign government is involved.”
That’s only true for nations whose currency is negotiable around the world, like US dollars. Many national governments create their own currency out of thin air, but very few currencies are spendable outside a nation’s borders. If a nation has a trade deficit, and is dependent on imports, then the nation’s government must borrow foreign currencies in order to buy imports. This means the nation’s government must budget its foreign expenses, like an ordinary household.
And then there’s the euro-zone, whose governments cannot create any money out of thin air. Euro-zone governments must budget themselves like an ordinary household.
The worry here is not that the US Treasury is more and more dependent on foreigners to finance its expenses; it is not. Instead, the US Treasury does foreigners a favor by being willing to exchange their non-interest earning dollars into interest-earning dollars. Eric Tymoigne [bold added]
ReplyDeleteHere Eric admits that positive yields on foreign owned US sovereign debt is a favor for foreigners, i.e. US welfare proportional to account balance for foreigners.
The worry is that this change of ownership has reoriented the interest payments on the public debt away from the domestic economy, where it boosts private income, toward the rest of the world. This unfortunate change creates a drag on economic growth and the growth of domestic private wealth (Appendix 4). Eric Tymoigne
But here welfare proportional to account balance is no problem at all if the recipients of the welfare are domestic?
Andrew asks "But here welfare proportional to account balance is no problem at all if the recipients of the welfare are domestic?"
ReplyDeleteAs I think Andrew himself has said on previous occasions, there is indeed a problem there, namely: why is interest being paid to anyone simply to hoard a totally safe asset? There is no good reason to do that.
David Hume pointed out the REAL REASON why politicians like to fund public spending via borrowing rather than via tax three hundred years ago. It's that taxpayer / voters notice tax increases, but they tend not to attribute interest rate increases to excessive borrowing by government.
"David Hume pointed out the REAL REASON why politicians like to fund public spending via borrowing rather than via tax ..."
ReplyDeleteThe US and UK governments do not fund their spending by borrowing from anyone. Instead, the US and UK governments create their spending money out of thin air, simply by crediting bank accounts.
Some nasty MMT surprises behind the time horizon
ReplyDeleteComment on Eric Tymoigne on ‘“What You Need To Know About The $22 Trillion National Debt”: The Alternative Interview’*
To the question, how are you going to pay for it? MMTers have a simple answer: deficit-spending/money creation.
To the question, how are you going to repay the public debt? MMTers have a simple answer: “In terms of tax rates, the public debt will never be repaid. We have not been burdened with higher tax rates to repay the public debt created at the time of our grandparents; our children and grandchildren won’t be burdened by higher tax rates to repay the public debt created today. We may raise tax rates in the future but not with the goal of repaying the public debt. There is no reason to do so, and doing so would be harmful to the finances of households, banks, firms and other for the reasons I just provided. The public debt will keep piling up to accommodate the needs of our growing economy and the US government will keep paying it on time. The US government does not, has never, and ought not to, manage the public debt in the same way you and I manage our private debts.”
MMTers simply shove the answer beyond the time horizon. The public-debt rabbit is put into the cylinder and then is gone out of sight. Everybody is well aware that this is a trick. The question is how does it work?
The process goes schematically as follows:#1, #2
(i) The initial economic configuration is the elementary production-consumption economy. The initial state is characterized by budget-balancing of the household sector C=Yw, i.e. consumption expenditures C are equal to wage income Yw, and zero profit of the business sector Q=C−Yw=0.
(ii) The government deficit spends. Deficit D is defined as public spending G minus taxes T, i.e. D=G−T. T is set to 0. Deficit spending on current production causes a one-off price hike (NO inflation) and the business sector ends up with macroeconomic profit Q=G.
(iii) The business sector fully distributes profit. The distributed profit Yd goes to the Oligarchy and takes initially the form of deposits at the central bank. The CB’s balance sheet shows government overdrafts on the asset side and the Oligarchy’s deposits on the liability side. Both sides are equal to the penny.
(iv) The government normally consolidates overdrafts by selling interest-bearing bonds. The bonds are bought by the Oligarchy and paid for with the deposits. The CB’s balance sheet shrinks again. The Oligarchy’s portfolio consists of bonds and money = deposits at the CB.
(v) Here, we ignore step (iv) and assume that zero-interest deposits/overdrafts are simply accumulated. Suffice it to note that interest on public debt has redistributive effects.
(vi) Steps (i) to (iii) are repeated for an indefinite time. Accordingly, public debt in the form of overdrafts grows. On the other side of the CB’s balance sheet, the Oligarchy’s deposits grow in lockstep.
(vii) As a matter of pure logic, this process can go on to infinity. Thus far, MMTers are right.
See part 2
Part 2
ReplyDelete(viii) The concept of debt, though, logically entails repayment in finite time. So, in some period t the question arises how to reverse the process of debt build-up. Simple answer: the stock of deposits is revalued to zero uno actu with the government’s debt. Subsequently, things go on with a new currency.
(ix) Step (viii) is a bad surprise for the Oligarchy’s grandchildren. The alternative is taxing away the deposits. In this case, there is tax T but no government spending G, i.e. a budget surplus, and both sides of the CB’s balance sheet go to zero.
(x) Step (ix) is also a bad surprise for the Oligarchy’s grandchildren. So, let us tax WeThePeople instead. Accordingly, consumption expenditures are reduced to C=Yw−T. Government spending G is zero, so there is a budget surplus and the government’s overdrafts are reduced. However, the business sector now makes a loss Q=−T and its overdrafts increase by the same amount. On the CB’s balance sheet only the composition of overdrafts on the asset side changes.
(xi) The logical end of (x) is a complete replacement of public debt by business sector’s debt. However, before this happens the economy breaks down because of the continuous losses of the business sector. Step (x) is a bad surprise for ALL grandchildren.
MMTers tell everyone that all is fine for “our” grandchildren because, after all, they owe the public debt to themselves. True, all is fine for someone who falls from a skyscraper until they pass the first floor.
MMTers are fraudsters. They deceive WeThePeople first about the profit-effect of deficit-spending/money-creation#3, then about the redistributive effect of interest on public debt, and finally about the nasty surprises behind the time horizon. The rest of economists either understands nothing or is complicit.#4
Egmont Kakarot-Handtke
* New Economic Perspectives
http://neweconomicperspectives.org/2019/02/what-you-need-to-know-about-the-22-trillion-national-debt-the-alternative-interview.html
#1 The new macroeconomic paradigm
http://axecorg.blogspot.com/2017/09/the-new-macroeconomic-paradigm.html
#2 From MMT misunderstandings to the true Theory of Money
https://axecorg.blogspot.com/2019/02/from-mmt-misunderstandings-to-true.html
#3 Why the MMT benefactors of humanity never talk about profit
https://axecorg.blogspot.com/2018/09/why-mmt-benefactors-of-humanity-never.html
#4 There is NO such thing as “smart, honest, honorable economists”
https://axecorg.blogspot.com/2019/01/there-is-no-such-thing-as-smart-honest.html