The Monetarist fantasy is over — Robert Skidelsky

Quite a good piece that pushes the MMT view without naming it.

Progressive Economy Forum
The Monetarist fantasy is over
Robert Skidelsky | Crossbench peer and Emeritus Professor of Political Economy at Warwick University

Brian Romanchuk — MMT And Automatic Stabilizers

The recent internet debates about Modern Monetary Theory (MMT) have been interesting, but the various critics of MMT have largely missed the elephant in the room: automatic fiscal stabilisers. In my view (which may not reflect the official "MMT Party Line"), one of the keys strengths of MMT is that it is largely built around the importance of automatic stabilisers, and institutional details. The conventional view is to acknowledge the existence of automatic stabilisers, but otherwise pretend that they have no effect on the economy….

Bond Economics
MMT And Automatic Stabilizers
Brian Romanchuk

Michael Stephens — “Stimulus” Isn’t the Best Reason to Support (or Oppose) Infrastructure Spending

Pavlina Tcherneva on Bloomberg with Joe Weisenthal.

Multiplier Effect
“Stimulus” Isn’t the Best Reason to Support (or Oppose) Infrastructure Spending

Michael Stephens

Bill Mitchell on good and bad deficits in Eurozone battle lines being drawn again with Germany on the other side

Bill Mitchell on good and bad deficits. You might want to Evernote this.

Regular readers will know I don’t automatically use the term deterioration to describe an increasing fiscal deficit. I differentiate between good and bad. 

The national government has a choice – maintain full employment by ensuring there is no overall spending gap which means that the necessary deficit is defined by this political goal. It will be whatever is required to ensure there is enough spending in the economy to generate sufficient jobs to satisfy the preferences of the workers for work. 

However, it is also possible that the political goals may be to maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible. 

But the second option would introduce fiscal drag (deflationary forces) into the economy which will ultimately cause firms to reduce production and income and drive the budget outcome towards increasing deficits. 

Ultimately, the spending gap is closed by the automatic stabilisers because falling national income ensures that the leakages (saving, taxation and imports) equal the injections (investment, government spending and exports) so that the sectoral balances hold (being accounting constructs). 

But at that point, the economy will support lower employment levels and rising unemployment. The budget will also be in deficit – but in this situation, the deficits will be what I call “bad” deficits. Deficits driven by a declining economy and rising unemployment. 

So fiscal sustainability requires that the government fills the spending gap with ‘good’ deficits at levels of economic activity consistent with full employment. 

Fiscal sustainability cannot be defined independently of full employment. Once the link between full employment and the conduct of fiscal policy is abandoned, we are effectively admitting that we do not want government to take responsibility of full employment (and the equity advantages that accompany that end). 

You might like this blog from the past – A voice from the past – budget deficits are neither good nor bad. 

In that context, the deficits in France and Italy are at present ‘bad’ because they are being sustained by the deliberately created recessed states and entrenched mass unemployment.

Bill Mitchell – billy blog
Eurozone battle lines being drawn again with Germany on the other side
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Jon Krajack — Guest Post: Obama a big spender? No way.

Obama, Big Government Spender??

According to the Heritage Foundation (a conservative think-tank), here is inflation-adjusted total U.S. government spending since 1993 in Billions of $$$ (with + or – from the previous year, and a * when government spending decreased from the previous year):

1992: $2,079

CLINTON
1993: $2,123 (+44 billion)
1994: $2,156 (+33 billion)
1995: $2,189 (+33 billion)
1996: $2,211 (+22 billion)
1997: $2,228 (+17 billion)
1998: $2,270 (+42 billion)
1999: $2,308 (+38 billion)
2000: $2,379 (+71 billion)

BUSH
2001: $2,420 (+41 billion)
2002: $2,570 (+150 billion)
2003: $2,705 (+135 billion)
2004: $2,801 (+96 billion)
2005: $2,924 (+123 billion)
2006: $3,038 (+114 billion)
2007: $3,032 (-6 billion)*
2008: $3,239 (+207 billion)

OBAMA
2009: $3,772 (+533 billion)
2010: $3,670 (-102 billion)*
2011: $3,746 (+76 billion)
2012: $3,611 (-135 billion)*
2013: $3,455 (-156 billion)*

Federal Spending by the Numbers, 2013: Government Spending Trends in Graphics, Tables, and Key Points Romina Boccia, Alison Acosta Fraser and Emily Goff

Ok. Let’s take note of some interesting things here:

Obama HAS NOT been a massive government spender. Of course his first year in office there was a huge spike in government spending because the economy was tanking… shedding hundreds of thousands of jobs per month. Both Bush and Obama enacted fiscal stimulus, which is part of the reason why the two biggest year to year jumps were 2007-2008 and 2008-2009.

What’s interesting though is that besides 2009, government spending has been decreasing more than it’s been increasing under Obama.

What about these $1 trillion+ budget deficits?  How could they be so large while government spending has not been increasing?

The budget deficit is a record of government spending relative to tax revenue. When the economy plummeted in 2008-2009, huge numbers of people were laid off work. When this happens, i.e. when less people are earning paychecks, tax revenue to the U.S. Government decreases. Make sense? But also, newly unemployed people apply for unemployment compensation and welfare and Medicaid etc., i.e. they need financial assistance. Make sense? The combination of these two things ~ less tax revenue + increased government spending on social safety nets ~ THAT is why the budget deficits are so high under Obama. This would have occurred no matter who became president because the social safety nets are “automatic stabilizers”…. They kick-in automatically when people lose their jobs. They STABILIZE the economic downturn. That’s what they are supposed to do (as well as not let people starve, etc.).

How can we get Obama to become that big government spender he's accused of being?

Jon Krajack

Osborne's folly — get rid of automatic stabilizers to control deficits

It’s impossible to arrive at the right treatment if your diagnosis is itself pathologically crazy. Starting in a few years’ time, [George Osborne] wants to get rid of AME [floating section of budget], or rather to create a new management framework that permits of setting a cash limit on it, and Ed Conway, as a good Very Serious Person and News International employee*, has already started with the talking points – note the title of his blog post. “Uncontrolled spending” anyone?

A Fistful Of Euros
The End of the Automatic Stabilisers
Alex Harrowell

(h/t Kevin Fathi via email)

Harrowell correctly calls this "pathologically crazy."

Bill Mitchell — Exploring pro-cyclical budget positions

Sometimes one agrees with a conclusion but realises the logic that was used to derive the conclusion was false. Which means that the person will get things wrong when applying the logic to other situations. This is almost always the case when we encounter the reasoning offered by so-called deficit doves. These are economists who do not out-rightly reject the use of deficits but typically below them to be cyclical phenomenon only and should thus be offset at other points in the economic cycle by surpluses – the so-called balanced budget over the cycle rule. While many progressives think that is a sensible strategy – the reality is that it is an unsustainable fiscal rule to try to follow. The same economists talk about the dangers of pro-cyclical fiscal positions but fail to appreciate that such positions are desirable in certain cases and there is a fundamental asymmetry that applies to evaluation the desirability of a “cyclical” position. Fiscal austerity (pursuing surpluses when the economy is contracting) is never appropriate whereas expanding the deficit when the economy is growing might be. It all depends. This blog aims to clear up some of these misconceptions.


One such article (August 7, 2012) was written by Harvard economist – Jeffrey Frankel – The Procyclicalists: Fiscal austerity vs. stimulus.

This article demonstrates some of the classic mistakes that economists make when considering the relationship between the government and the non-government sector.....

Bill Mitchell — billy blog
Exploring pro-cyclical budget positions
Bill Mitchell

Izabella Kaminska — Automating Fiscal Policy

The simple MMT approach.

People also have to understand that taxes are just another sterilisation mechanism. They are particularly important when government has to take over from the private sector to stimulate demand. Higher or lower taxes are needed to keep the correct amount of money circulating through the system.

Toward a Leisure Society
Automating Fiscal Policy
Izabella Kaminska