Bill Mitchell — The distinguished economists just embarrass themselves

People are allowed to change their opinions or assessments in the light of new evidence. Diametric changes of position are fine and one should not be pilloried for making such a shift in outlook. Quite the contrary. But when the passage of time reveals that a person just recites the same litany despite being continually at odds with the evidence, then that person’s view should be disregarded, notwithstanding the old saying that a defunct clock is correct twice in each 24 hours. The US Congressional Budget Office (CBO) released its latest – The Budget and Economic Outlook: 2018 to 2028 (April 9, 2018) – and various commentators and media outlets have gone into conniptions over it. The economists that have responded – and they come with affiliations from both sides of US politics (although it is hard to differentiate separate ‘sides’ in the US anymore such is the demise of the Democrat Party) – have significantly embarrassed themselves. Their hysteria is not matched with the facts and they have been guilty of invoking these hysterical responses year-in, year-out for many years. A crack in a record, goes click, click, click, click and repeats ad infinitum. Sort of like the nonsensical arguments about US fiscal deficits that have appeared in the US press this last week.

When this happens, it looks to me like staying on ideological message rather than genuine inquiry and analysis.

Bill Mitchell – billy blog
The distinguished economists just embarrass themselves
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Chris Dillow — The persistence of fiscal stupidity

Chris Dillow mentions MMT.

Stumbling and Mumbling
The persistence of fiscal stupidity
Chris Dillow | Investors Chronicle

J. D. Alt — A Comfortable Betrayal

It would be a shocking scandal if it came to light that the professions of medical science had, for decades, known about an easy to treat, underlying cause of cancer—but conspired to obfuscate and suppress the information to protect their participation in a medical industry raking in hundreds of billions a year to treat the disease. Professional standings, tenures, licenses would be in tatters. Lawsuits would abound. Outrage would march on every city hospital and medical college in the nation—would it not?

Such a betrayal is not humanly possible, right? Yet is it not the case that the professions of economics, journalism and politics are guilty of something very like this kind of betrayal?…

I would make the lede a story of betrayal by companies that knew that smoking caused cancer and denied and concealed it.

Isn't the noble lie of "experts about money creation a similar betrayal of public trust? Even Alan Greenspan admitted in congressional testimony that government is not limited in the amount of currency it can issue.

Ordinarily, this is suppressed however. Bernard Lietaer revealed it as a taboo.

Real Progressives
A Comfortable Betrayal

J. D. Alt

Crossposted at New Economic Perspectives

Robert Skidelsky — Topsy Turvy Economics

Governments, too, must live within their means. So say all of us. But the less a country is producing, the smaller the government's means. So common sense suggests that governments that want to cut their deficits should do all they can to increase their country’s means, which will also increase their own means. The simplest way to do this is to provide people with work. 

But common sense and economics have never had a very close connection. Economists have conned us into believing that all the means available are already being used. If unemployment is a lot higher than it was a few years back, this isn't because people can't find jobs: it is because they prefer leisure to work, and so are not part of the 'means'. So we - governments and all of us - must 'cut our cloth' to suit our reduced means, because the previous means have mysteriously disappeared.

Robert Skidelsky's Website

Topsy Turvy Economics

Robert Skidelsky

Bill Mitchell — The Balanced Budget silly season is upon us again

"Again" in the post title  refers to the US in 1936 when FDR was persuaded by Treasury Secretary Henry Morgentau to adopt a policy of fiscal conservatism after years of fiscal liberalism on the advice of Fed chair Marriner Eccles. While the policy recommended by Eccles had been working, its reversal was soon followed by a reversal in the economy, too, in the recession of 1937. Bill catches us up on the history to show why the supposed medicine of fiscal discipline is actually poison for the economy.

Bill Mitchell – billy blog
The Balanced Budget silly season is upon us again
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Austral

Warren Mosler — Comments on the Current U.S. Budget Debate (1996)

The assumptions underlying the current budget debate are erroneous. Historical analogies include “the earth is flat” and “the earth is the center of the solar system.” Chicken Little has returned, and the consequences are counter agenda for all parties.

The noble attempt by Congress to balance the budget will result in a weaker economy with a true depression a possibility. Every time there is a drop in the budget deficit, as a percent of GDP, the GDP growth rate drops a few quarters later. It is only after the deficit begins to expand again that the economy recovers. The historical correlation is 100%. Lowering interest rates, in an attempt to boost the economy, is seldom effective. Since the government is a net payer of interest, lower rates reduce spending, thereby increasing fiscal drag.

Governments are monopoly issuers of fiat currency. The incorrect , but prevalent, understanding is that issuers of fiat currency must tax, borrow, or otherwise raise revenue so they can spend it. Taxing and borrowing are considered “funding” operations. Consequently, the discussions revolve around how governments can raise “needed revenue” to fund spending. Revenue shortfalls are of great concern; witness the latest government shutdown.

Contrary to general perception, fiat money is driven by the fact that taxpayers need the government’s money to pay their taxes. By levying a tax, the government creates a need for its fiat currency. It creates this need, presumably, so it can obtain the real goods and services it desires via the spending of its currency.

From inception, the only source of money needed to pay taxes is the issuing government. The government cannot actually collect the tax it has levied, nor borrow any of its fiat currency, until it first spends, or otherwise provides, the funds.

A balanced budget, from inception, is therefore the theoretical minimum that a government can spend. The previous statement represents an accounting identity. If individuals and businesses desire to hold actual cash, that money must be “left over” after taxes are paid. All cash held by the public must be money provided by the government in excess of the need to pay taxes (deficit spending). This is also true for all dollars held by foreign central banks at the Fed. For these, and other structural reasons, the possibility of a balanced budget does not exist, and the current attempt to balance the budget will likely result in severe deflation. When the government does not spend enough to cover the total need for dollars created by taxes, the usual result is a recession and a concurrent shortfall in revenues. A deficit remains. Accounting identities have a way of being satisfied, one way or another.

Likewise, the government can borrow its currency only after it has provided it to the private sector. Government borrowing, therefore, functions to support interest rates, not as a funding operation. Nominal savings is not diminished, nor displaced - it is given a place to earn interest. If the government were to spend more than it subsequently collected in taxes, and did not offer securities for sale, the fed fund rate would immediately fall to 0% bid. Treasury spending is a reserve add. Selling securities, by the Fed or Treasury, is simply a reserve drain, a monetary operation. This underlies the empirical evidence that nations can run any debt ratios they want, in their own fiat currencies, and still “fund the debt.”

For all practical purposes, there is no such thing as a balanced budget. Singapore, for example, shows a budget surplus, but that does not include all government spending in excess of collected taxes. The central bank spends Singapore dollars to buy foreign currencies. This “off balance sheet” spending brings the consolidated spending to about 2% higher than collected taxes. The same happens in Czechoslovakia - fiscal policy is tight enough that the only way to get enough local currency to pay taxes is selling foreign currencies to the central bank. When the central bank makes the taxpayers “beg”, as evidenced by currency appreciation, the economy gets softer (Japan is another good example).

Consider inflation. Because the taxpayers need the government’s money, the government is able to define its currency by what it pays for goods and services. By changing what it pays, the government redefines its currency. Currently, the government fights inflation by maintaining an economy weak enough for the private sector to be under pressure to sell goods and services. This selling pressure keeps prices from rising.

How large a deficit is prudent? Let the market decide! This option has not even been considered. For example, the government could offer a job to anyone who wanted one, at some minimum rate of pay deemed appropriate, and let the deficit float. This would end unemployment and unemployment compensation, eliminate the need for minimum wage laws, and promote price stability. Employment (rather than unemployment) would define the currency and become the stabilizer. The price of labor would be stable. Private sector wages would be related to the benchmark of government employment. If the government labor force were larger than needed by the government, taxes could be lowered. This would result in fewer government workers and reduced government spending as the private sector hired these workers.

The Fed sets short term rates. Congress has ultimate control over the Fed. Short term rates go up because the Fed, and ultimately Congress, wants them to - not because of market forces. These rates are not determined by market forces. Treasury securities are not necessary unless the government wishes to support higher long term rates. Short term rates could be maintained simply by paying interest on excess reserves held at the Fed.

The Federal debt is all the money spent but not taxed. It was borrowed after it was spent, so the holders of the money might earn interest. The government pays interest, voluntarily, depending on how much it wants savers to be able to earn. Have you ever heard an owner of government securities say, “I wish the government would stop selling securities so I can get my money back!”?

The current budget debate is based on erroneous assumptions. Washington does not understand fiat money. Until it does, efforts to reduce the deficit will continue, and the economy will continue to underperform.

EPIC | A Coalition of Economic Policy Institutions
Comments on the Current U.S. Budget Debate
Warren B. Mosler
 January 1996
(h/t Charles Hayden of MMT DALLAS DEFICIT OWL COMMITTEE, via Facebook)

Right sixteen years ago, and right now.