Sunday, September 20, 2020

The Fiscal Folk Theorem — Brian Romanchuk

In between editing my MMT primer, I read a burst of articles (20+) discussing government debt management in the current situation from non-MMT sources (have to see what the other side thinks). Mainly market commentary, but also op-eds from ivy league professors or other highly credentialed people, think tanks, maybe a rating agency, etc. -- but no journal articles (if one is sensitive to that sort of thing). As one would expect, the articles covered a wide range of political views and economic theory affiliations. What I realised (after the fact) was that the operational content of every single one of those articles collapsed to what I call the Fiscal Folk Theorem. It might surprise people to read this, but the folk theorem is correct. The issue is that the predictive content of the theorem is limited, and if mis-applied, it leads to The Widowmaker Fallacy.
Bond Economics
The Fiscal Folk Theorem
Brian Romanchuk


Andrew Anderson said...

here are three legs to the argument.

1. Government debt is a really big number.

2. If we multiply that number by an arbitrary real positive number (i.e., assumed average interest rate), we get a really big number.

3. If the number in Step (2) is too big, some unspecified bad thing happens to the economy.

Possible choices for bad things in step 3 include debt default, hyperinflation, government bond yields increasing, inflation going up by some amount, or even the Wall Street Journal disrespecting your currency.
Brian Romanchuck

You neglect the most fundamental problem: Positive interest/yields on the inherently risk-free debt of a monetary sovereign constitutes welfare proportional to account balance, not according to need.

Ralph Musgrave said...

Brian might next consider the not widely publicised “Kenneth Rogoff Appeal to Emotion Theorem” (KRAET).

KRAET consists of using emotive language instead of plain English so as to bolster your arguments. It works with about 95% of the human race, and 98% of professional economists, who are even more gullible than non-economists. E.g. Rogoff says “debt overhang” instead of “debt”. That implies we are all under some sort of overhanging cliff which is about to fall on our heads.

He also uses the phrase “financial repression” to describe the process of reducing an excessive debt. The implication is that some sort of REAL COST to the population is involved in reducing the debt (e.g. increased tax). In fact the objective of any such increased tax is simply to cut demand to a level where there is no excess inflation: there is no actual cut in household disposable income, despite the fact that increased taxes normally do reduce disposable income.