Wednesday, December 9, 2020

James K. Galbraith — How Jason Furman and Lawrence Summers Reinforce a Destructive, Debunked Mainstream Paradigm to Support Deficit Spending

The new paper “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates” by Jason Furman and Lawrence Summers (hereafter, FS) is most sympathetic from a policy angle. The authors drive toward their conclusion that the United States can afford the large-scale emergency programs and federal investments, even if “deficit-financed,” that the country needs, at least in the near term. On this point one cannot complain.

This note will address the underlying economics. They are a mess. To be blunt, the FS paper is built on a pastiche of obfuscations, entirely unnecessary to support the conclusion. Their effect, and one may reasonably surmise their purpose, is to make the argument without appearing to question the longstanding “mainstream” theory of interest rates. That theory, which has been the source of deficit- and debt-hysteria for several centuries, in turn underpins the newly-proposed FS debt-service-to-GDP ratio criterion for fiscal policy. It will be nothing but a source of trouble, unless disposed of....
Naked Capitalism
Jamie Galbraith: How Jason Furman and Lawrence Summers Reinforce a Destructive, Debunked Mainstream Paradigm to Support Deficit Spending
James K. Galbraith | Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin


Matt Franko said...

"Economics fancies itself to be a science and is in denial"

more dialogic figurative language here personification or anthropormorphism... The discipline of Economics isn't "fancies itself!"... try again...

try to describe what is happening in literal language or real terms ... then you might get somewhere...

AXEC / E.K-H said...

From the debt economy to the gift economy: how America is brainwashed to love budget deficits
Comment on James Galbraith on ‘Reconsideration of Fiscal Policy: A Comment’*

COV19 is a godsend for the Oligarchy. The 3-sector macroeconomic Profit Law Q≡(G−T)+(I−S)+Yd implies Public Deficit (G−T) = Private Profit Q. The current acceleration of deficit-spending/money-creation will result in the biggest profit explosion ever.

Government deficit-spending, of course, increases public debt and it roughly holds Financial assets of the Oligarchy ≈ Public debt of WeThePeople. As a result, the inequality of income/wealth increases in the process.#1

While not much can be said against short-term deficit-spending in an emergency situation, some people are concerned about the longer-term effects of a continuously increasing public debt. MMTers, the proponents of deficit-spending/money-creation, claim that there is nothing to worry about and that the debt-hysteria over several centuries was just that: much ado about an economic non-event.

Because MMT is a refuted approach and MMTers are agenda pushers for the Oligarchy their arguments have to be taken as tranquilizers for the general public. The question is still open whether there is an upper limit for the public debt. Economists have come up with the answer that there is nothing to worry about as long as the economy grows faster than the debt which is as trivially true as it is idiotic.

Neither mainstream economics nor MMT has sound scientific foundations. So the macroeconomic analysis of deficits and debt has to be first of all based on correct premises.

As the new analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of marketclearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R, i.e. the market-clearing price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#2

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving is defined as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s profit equals the household sector’s dissaving. Vice versa, the business sector’s loss equals the household sector’s saving. This is the most elementary form of the macroeconomic Profit Law.

With the government included, the Profit Law reads Q≡(G−T)−S+Yd. And under the condition of S=0, Yd=0 one gets Public Deficit = Private Profit. So, the deficit of the public sector reappears one to one as monetary profit of the business sector. If the public sector issues bonds to cover the deficit, the business sector has the exact amount at hand to buy them, no matter how large the public deficit is.

To simplify things, it is assumed that the profit of the business sector is fully distributed to the owners, i.e. the Oligarchy. Distributed profit is not spent but used to buy government bonds. The receivers of distributed profit income Yd and the receivers of wage income Yd make up the household sector.

In the first period, the state sector spends G, and taxes T are zero, so deficit spending equals G and for the profit of the business sector holds Q equals G. This profit is distributed, so Yd equals Q. Total income of the household sector is Yw+Yd and C=Yw and S=Yd.

See part 2

AXEC / E.K-H said...

Part 2

In the next period, public expenditures increase because of the interest on public debt. This amount is taxed from the wage income receivers and paid out to the bondholders, i.e. to the Oligarchy. The disposable income of WeThePeople is reduced Yw−T and that of the Oligarchy is increased Yd+T. The budget deficit remains the same (G+T)−T. The Oligarchy spends T on consumption, so total demand does not change.

In principle, this simplified process of deficit-spending/money-creation can continue period after period. What happens is that public debt increases continuously and with it the interest=tax payments of WeThePeople.

The debt is never reduced, so it has to be rolled over at maturity. To avoid this, the government can issue perpetual bonds. Remains the problem that interest = tax T sooner or later becomes equal to wage income Yw and disposable income of the wage income receivers approaches zero. So, there is an absolute upper limit for the growth of debt. This limit vanishes only if the interest rate on perpetual bonds is zero. However, a debt that is never repaid and yields no interest is not a debt but a gift. For a gift economy, the MMT assertion that the amount of public debt does not matter is trivially true.

As long as the interest rate on perpetual bonds is greater than zero, there is an upper limit for the growth of public debt. This limit may be so far in the future that it is not of practical importance for the present generation but just because it is beyond the time horizon it does not vanish.

As a matter of fact, with growing public debt and a given positive interest rate on perpetual bonds, the disposable income of WeThePeople falls continuously from the present onward and their living standard continuously deteriorates. The never-mentioned negative distributional effects are the ultimate reason why the MMT policy of permanent deficit-spending/money-creation is a political fraud.#3, #4

Egmont Kakarot-Handtke


#1 MMT works just fine

#2 Wikimedia AXEC31

#3 MMT is ALWAYS a bad deal for the 99-percenters

#4 Stephanie Kelton sells children into debt slavery