George Selgin — The Nice Limits of Modern Monetary Theory

Is it plausible that programs costing 34 percent of current US GDP can be financed without running up against those pesky real resource constraints, or by exceeding it only by a tolerable margin? I very much doubt it, which is another way of saying that I doubt that GND can be paid for only by diverting substantial amounts of presently-employed real resources from their current uses.

Now we are getting down the nitty gritty — the real resources constraint. I have emphasized previusly that this is an engineering issue relating to material systems, not an economic or financial problem. It is similar to mobilizing a country for war. Deployment of the real resources of the nation is the only priority and all else is organized around that, as during WWII.

Economists and financial people know absolutely nothing about this and should just STFU about it, other that to say the there are no funding constraints to resources allocation to a nation's priorities if the nation is sovereign in its currency. The financial constraints are inflation risk and exchange rate risk, the various nations involved in WWII dealt with this separately from prosecuting the war effort using all available means.

Nor is there any question during peacetime about funding the military budget and related budgets, such as nuclear energy and intelligence.

George Selgin observes, correctly, that a nation may have to rethink and reorganized its allocation of real resources in light of the priorities it sets. No nation had political difficulty doing this during WWII, even though it involved price controls and rationing to discipline the "free" market.

President Eisenhower explained this trenchantly to the country in his Cross of Iron speech:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. . . . This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Government policy is responsible first for security, second for order, and only third for prosperity. Nations need the appropriate levels of security for the challenges they face, domestically and externally. Nations need to maintain good order internally. And finally, governments must also adopt policy that provides for the general welfare. This involves effective and efficient use of a nations real resources. This what applied macroeconomics is about in the larger context.

So the point that George Selgin makes is correct, but not exactly the way he seems to think. This is the conversation we need to be having now. Meanwhile the US government is preparing for more wars of choice.

What is needed now is political choice about the nation's priorities, which determines how to allocate available real resources. Then the appropriate material systems people need to develop models for using available real resources to accomplish objective effectively and efficiently. Thirdly, economists and finance people need to develop funding models that address financial risk, in particular inflation.

The political aspect of this arises from opportunity cost and tradeoffs that affect individuals' and groups' interests. The alternative is letting the "free market" decide, letting the chips fall were they may, which means accepting the result of possible military defeat for lack of preparedness, social dysfunction resulting from maldistribution, and political unrest arising from dissatisfaction that threaten security and order.

Alt-M
The Nice Limits of Modern Monetary Theory

George Selgin