Why Fiscal Sustainability Is An Unsustainable — Brian Romanchuk

One frequently encounters variations of the phrase "unsustainable debt trajectory" (or similar) in statements by mainstream economists. The phrase is popular as it offers what appears to be a sophisticated criticism of some fiscal policy setting that is disapproved of, but without having any content that can be used to prove the speaker wrong. Modern Monetary Theory (MMT) largely rejects that "debt sustainability" has theoretical validity for a floating currency sovereign. I will focus on the analysis of a paper by Scott Fulwiler to justify this stance....

Bond Economics
Why Fiscal Sustainability Is An Unsustainable Concept
Brian Romanchuk

Initial Comments On Fullwiler's Fiscal Sustainability Paper — Brian Romanchuk

Scott Fullwiler's article "The debt ratio and sustainable macroeconomic policy"* offers a very good introduction to Modern Monetary Theory's (MMT) stance on fiscal policy. It covers a lot of ground, making it hard to summarise. This article has some general remarks on why I recommend reading the paper as an introduction to MMT thinking. The key argument is that interest service is what matters for sustainability (and not the debt-to-GDP ratio) -- and that the rate of interest is under the control of governments.

Apparently Stephanie Kelton thinks that this is a good intro to MMT thinking, too. When Larry Summers requested somethings to read to get up to speed on MMT, she recommended Scott's paper.

Bond Economics

Initial Comments On Fullwiler's Fiscal Sustainability Paper

Brian Romanchuk

 

 

 

Randy Wray — STATEMENT: House Budget Committee, “Reexamining the economic costs of debt”, Nov 20, 2019

This blog is based on the testimony I provided to the US House of Representatives. My written statement will be published in the Congressional Record (a version is also at the Levy Economics Institute: http://www.levyinstitute.org/publications/statement-of-senior-scholar-l-randall-wray-to-the-house-budget-committee. The full statement was co-authored with Yeva Nersisyan.I will argue that the Federal Government’s deficit and debt are not so scary as we are led to believe.Neither the deficit nor the debt ratio is on an unsustainable path. In some sense, chronic deficits and a rising debt ratio are normal.They are not due to out of control spending—now or in the future. They serve a useful public purpose. In any case they are largely outside the control of Congress....

New Economic Perspectives
STATEMENT: House Budget Committee, “Reexamining the economic costs of debt”, Nov 20, 2019

L. Randall Wray | Professor of Economics, Bard College

Bill Mitchell — Of course governments will be fiscally stretched if they define large surpluses as the norm

Wednesday and a short blog post. I regularly work for unions as an expert analyst/witness in their struggles to achieve wage justice with employers who are intent on paying as little as possible. Often these are private employers but at the moment I am helping a union with their campaign to win a reasonable wage increase against a state government. The logic deployed by the government in relation to their fiscal affairs and their wage setting behaviour is a classic demonstration of how neoliberalism has distorted any sense of reason and created self-fulfilling problems. So today, I will just introduce this issue – given how fascinating it is....

Bill Mitchell – billy blog
Of course governments will be fiscally stretched if they define large surpluses as the norm
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

John T. Harvey — But Can The Government Afford It?

We’ve been hearing that a lot lately, being asked about things like the proposed US-Mexico border wall, the possibility of universal health care, and even regarding existing programs like Social Security. It’s a relevant question, to be sure, but 99 times out of 100 (or maybe 999 out of 1000), the context in which it is placed is completely wrong.
I say this because the question is almost always asked regarding whether or not we have enough money. If there is one place where the economics discipline has most substantially let down the general public, it’s in explaining how the financial sector works.

Long story short: money is not a scarce resource. Labor is, oil is, clean water is. Money is not.

Money can be and is created with a keystroke, just as easily as I am typing these words. This is true in both the public and private sectors....

Forbes — Pragmatic Economics

But Can The Government Afford It?
John T. Harvey | Professor of Economics, Texas Christian University

Bill Mitchell —Band of Lower bond yields do not save the Japanese Government money

I was going to write about the situation in Timor-Leste after its national elections were held on Saturday. But I will hold that over for another day as I get some more information. So today, I think we can learn a lot from an issue raised in the Bloomberg article (May 14, 2018) – Kuroda’s Stimulus Saves Japan $45 Billion, Easing Debt Pressures – which discusses the QE program in Japan and introduces several of the basic errors that mainstream financial commentators make when discussing these issues. The article traverses all the usual suspects including the misconception that numbers in official accounts are ‘costs’ to government and that smaller numbers in official accounts mean the government can put larger numbers in other accounts than it might have been able to. These articles are as pervasive as they are erroneous. Hopefully, as the precepts of Modern Monetary Theory (MMT) spread and are understood more journalists will endure scrutiny of the rubbish they write and the public commentary and debate will progress towards a more reasonable – realistic – appraisal of what is going on in the world of finance and money. This article is one of the worst I have read this year so far. And there have been some real terrors!

This is about government finance rather than Japan alone.

Bill Mitchell – billy blog
Lower bond yields do not save the Japanese Government money
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Jeff Epstein — The True, Accurate, And Only Answer To “How *Exactly* Will We Pay For Medicare For All?”

So, how exactly do we “pay for” Medicare for All?

The same way that we just “paid for” $700,000,000,000 for a single year of military funding.

The same way that we just “paid for” $1,500,000,000,000 in tax cuts for the wealthy.

The same way that we “paid for” a $1,300,000,000,000 fighter jet in 2016.

The same way that the United States has always “paid for” all of the fantastically-expensive things that benefit the powerful: Immediately and without discussion. Because they want it.…

Quotes Stephanie Kelton, but selects a quote that doesn't give the actual answer — credit bank accounts as the currency issuer.

Without making the distinction between the currency issuer and currency users, the question cannot be answered properly in terms of what occurs operationally.

Fail. Well, OK. It's step forward, albeit a small one. Let's give it a "D" instead of an "F."

Citzens' Media TV

The True, Accurate, And Only Answer To “How *Exactly* Will We Pay For Medicare For All?”

editorial by Jeff Epstein, Editor-in-Chief of Citizens’ Media TV

ht Yves Smith at Naked Captialism

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

Brian Romanchuk — Understanding Fiscal Sustainability Debates

I have encountered a number of discussions of fiscal sustainability over the past weeks. In particular, there have been debates between proponents of Modern Monetary Theory (MMT) and mainstream economists. This article does not attempt to settle the debate (although I am in the MMT camp, and obviously biased), rather frame the discussion. One of the problems with the debate is that the sides tend to talk past each other, as they have a quite different theoretical views, and this article explains why....

Bond Economics
Understanding Fiscal Sustainability Debates
Brian Romanchuk

Bill Mitchell — Fiscal policy is effective, safe to use, and markets know it

The Federal Reserve Bank of Kansas City has just hosted its annual Economic Policy Symposium at Jackson Hole in Wyoming where central banks, treasury officials, financial market types and (mainstream) economists from the academy and business gather to discuss economic policy. As you might expect, the agenda is set by the mainstream view of the world and there is little diversity in the discussion. A Groupthink reinforcing session. One paper that was interesting was from two US Berkeley academics – Fiscal Stimulus and Fiscal Sustainability – which the news reports claimed suggested that governments should be increasing fiscal expansion even though they may be carrying high levels of public debt. The conclusion reached by the paper is correct but the methodology is mainstream and so progressives should not get carried away with the idea that there is signs that some give is emerging, which will lead to more progressive outcomes. A progressive solution will only come when the neo-liberal dominance of my profession is terminated and an entirely new macroeconomics paradigm based on Modern Monetary Theory (MMT) is established. There is still a long way to go though....

This is a must-read for those interested in MMT. Bill also provides links to previous blog posts that are key to understanding the MMT position on fiscal space (policy space) and fiscal sustainability.

The actual constraint is availability of real resources and policy needs to be addressed to effective and efficient use of those limited resources. Financial resources are unlimited for a soveriegn currency so issuer, so policy is never constrained by "affordability."

Policy is too tight if real resources that are available are be idled, which is wasteful and foregoes opportunity. Policy is too loose if effective demand is stimulated in excess of the capacity of the economy to provide goods to meet it, so inflation may result. The goal is run a policy that optimizes use of available resources in the present, while also generating the economic capability to increase real resources for future use.

The purpose of MMT as a "policy science" is showing how this is possible based on the actual operations of a modern monetary production economy. This involves debunking the myths that rest on a failure to correctly understand money monetary operations in the context of the presently existing monetary system, which results in the inability to appreciate the theoretical implications of this for policy.

Bill Mitchell – billy blog
Fiscal policy is effective, safe to use, and markets know it
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Let's Talk About Debt, Baby

Gerard MacDonell wrote "The debt debate is relevant now" a couple of weeks ago. In it, he argues that debt sustainability in the United States is a relevant issue now, not an academic issue a couple of decades out. He realises that economists in the Modern Monetary Theory (MMT) school will disagree, and he explains why he disagrees with the MMT view. I am in the MMT camp, and I suspect that I do not violently disagree with Gerard's view on the current state of the cycle. I would side-step his concerns about "fiscal sustainability," and instead argue a slightly-modified version of his argument: fiscal policy is relevant now (and it always is). However, political economy matters. That is, I do not think we can discuss fiscal policy in the dry technocratic terms our elites prefer to use; we need to accept that fiscal policy is inherently political. "Debt sustainability" is best labelled "political sustainability of debt." Given the drift in the Debt Ceiling debate, "(political) sustainability" is an issue that may hit in a matter of months....

Bond Economics
Let's Talk About Debt, Baby
Brian Romanchuk

Bill Mitchell — Currency-issuing governments can keystroke their outstanding debt into oblivion

It is always a good sign when some fiscal deficit terrorist or another bleeds in the media that they’re not getting enough attention. Yesterday (October 12, 2016), the Forbes magazine published an Op Ed (although I wouldn’t call the content educational in any way) by a commentator with the Twitter username @bthebudgetguy – The Deficit Was A Big, Big Loser In Sunday Night’s Debate Between Trump And Clinton. It is not the first time the author has entertained this theme. His bleat? That the current political farce that Americans call the Presidential election campaign is ignoring the state of the fiscal balance. Oh my! What a travesty. The two liars, masquerading as Presidential candidates, have the audacity to talk about other irrelevant things and leave the most irrelevant thing I can think of neglected. But what this tells me is that the millions that the likes of the Peter Peterson Foundation and its ilk have spent on trying to scare Americans witless about the fiscal debt and the US public debt situation has been wasted. That is something to celebrate in fact.…

The glaring reality of a currency-issuing government in a Fiat monetary system. The simple fact that the likes of the Peter Peterson Foundation try to obscure in their venal and expensive deficit terrorism – which if you believe @thebudgetguy hasn’t been particularly effective anyway.

Say it again out aloud – “central banks are ultimately owned by governments”.

Say it again out aloud – any public bonds on central bank balance sheets amount to the government owning its own debt. One computer keystroke turns the positive accounting balance for that debt into a zero balance with no consequences of importance whatsoever…

Bill Mitchell – billy blog
Currency-issuing governments can keystroke their outstanding debt into oblivion
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ellis Winningham — “Affordability” for the US Government is Never a Question of “Money”

“Affordability” for national governments like the US, UK, Canada, Japan, Australia is always in terms of real resources (iron ore, agricultural capacity, water supply, labor supply, etc.) and never “money”. If you still do not understand this concept, you will soon. Forty years of neoliberalism and nonsensical mainstream economic policy errantly focused on the finances of these governments, which do not possess hard financial constraints, while ignoring their real productive capacities, leaving vast resources idle. Persistent recessions, high unemployment rates, expanding income inequality, high private debt levels and financial instability have been the end results of these policies and so, political unrest is rising as world populaces are no longer willing to tolerate these deplorable conditions. At the root of the problem is the erroneous belief that these governments can run out of “money”. That incorrect viewpoint causes you to miss the reality: US Dollars are infinite. Real resources are finite.…

Simple argument to pass along your out of paradigm family, friends and acquaintances.

Ellis Winningham — MMT and Modern Macroeconomics

“Affordability” for the US Government is Never a Question of “Money”
Ellis Winningham

George Osborne — Mais Lecture - A New Economic Model

1. Confidence fairy
2. Reinhart & Rogoff
3. Inflation targeting
4. Fiscal sustainability

How did that work for you?

SayIt — Conservative Party Speeches
George Osborne: Mais Lecture - A New Economic Model

Feb. 24, 2010

ht Brad DeLong

Brian Romanchuk — Economic Stability And The Size Of Government

In "Fiscal stimulus does not necessarily mean large government", Bill Mitchell dissected a debate whether "if you support austerity it is because you really just want smaller government and vice versa." Professor Mitchell argues that this is incorrect, although I would note one small qualification - the government cannot be too small for fiscal policy to stabilise the economy....

Bond Economics
Economic Stability And The Size Of Government
Brian Romanchuk

Bill Mitchell — The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency

MMT versus austerians on defining fiscal space.

The IMF define – Fiscal Space – to be the :

… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.

It is always good to work with first principles as they will rarely lead you astray. They cut out all the humbug in the media, the statements by politicians and the ideological ravings of vested interests. 

The above definition is not based on first principles but is an ideological statement. It assumes that the government in question has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed....

On December 20, 2011, the credit rating agency Moody’s released a special report – Fiscal Space. This paper informs Moody’s – fiscal space tracker, which purports to present a “fundamentals-based measure of the risk of sovereign debt default”. 

The analytical framework used by Moody’s comes directly from the 2010 IMF paper. The credit rating agency just mimics the approach outlined in that 2010 Staff Position Note.

Bill contrasts this with MMT analysis of fiscal space in the existing floating rate monetary system in which governments are not obligated to exchange their currencies for anything other than themselves. In a fixed rate convertible system, government is contained by a real good that it must obtain. In a floating rate non-convertible system, this constraint is absent for government that issue their own currencies and do not incur obligations outside it, so their real constraint is availability of resources and their financial constraints are domestic price level and foreign exchange rate.

Policy-wise, understanding fiscal space is perhaps the most important aspect of MMT in that policy hangs on the effective and efficient use of fiscal space for achieving public purpose in accordance with democratic principles and processes. MMT analysis of fiscal space illumines the boundaries of policy space.

Bill Mitchell – billy blog
The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — The Budget Constraint Does Not Mean The Government Will Pay Off Its Debt

Something to chew on.

Professor Brad DeLong made some assertions about Modern Monetary Theory (MMT) in this article about bond bubbles, which drew responses on the Mike Norman Economics web site (here and here). Professor DeLong's points have a lot of embedded assumptions, and I cannot deal with all of them here. But I do discuss one assumption in my upcoming eReport: Understanding Government Finance. This is the idea government 'has to pay back its debt'.

DeLong's thesis is built around theories that 'bond vigilantes' exist and are powerful. This was a dominant theory when he was at the U.S. Treasury in the early 1990s. However, this was exactly the investment thesis that lead to the humbling of the JGB bears in the 'Widowmaker Trade'.

He writes:
'Why? Suppose people start to fear that the government will not raise enough in taxes to pay off its debts. They will then try to dump government liabilities for real goods and services." 

This is a throw-away comment in a blog post, so I do not want to stretch the textual analysis of this too far. I think he is referring to the concept of 'fiscal sustainability', which is standard in mainstream economics. Or he may be referring to some version of the Fiscal Theory of the Price Level. But 'sustainability' has nothing to do with a common sense interpretation of the phrase 'pay of its debts'.

A government 'paying of its debts' seems to imply that the debt-to-GDP ratio will go to zero at some point. In fact, the inter-temporal governmental budget constraint, which defines 'fiscal sustainability' for the mainstream, says almost nothing useful about what will happen to the debt-to-GDP ratio. Why DeLong uses such a misleading phrasing is unknown to me.

The rest of his article revolves around whether a default can be forced by the bond market. The MMT response is no, but it is a fairly complex topic, which I do not think I can cover completely even within my upcoming report.
The rest of this article is an unedited first draft of an excerpt from my upcoming report, which has the working title: Understanding Government Finance. The estimated publication date: Before the Fed hikes rates. I will attempt to reduce the complexity of this text, possibly by moving material to other sections. (Those sections are not yet complete, so I cannot judge where is the best place for material to be relocated.)....

Bond Economics
The Budget Constraint Does Not Mean The Government Will Pay Off Its Debt
Brian Romanchuk

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

Alan Grayson — How to Destroy an Entire Country

...What is the cause, then? The World Health Organization has the answer: austerity. "Austerity" is a bloodless term for gross economic mismanagement, animated by heartlessness. That robotic cut-cut-cut mentality that deprives us of jobs, of public services, of safety, of health, of infrastructure, of help for the needy, and -- ultimately -- of our economic equilibrium and the ability to survive. The mentality that ushers in, and welcomes, a vicious war of all against all. Austerity is destroying an entire country, right before our eyes…..

In America, we have a rich and powerful lobby that has the same prescription for every economic malady: austerity. Cut-cut-cut. Cut Social Security and Medicare. Cut teacher and police and firefighter jobs. Cut health care. Cut pay and cut pensions. It all boils down to that one ugly word: austerity. And austerity always brings disarray, disaster, decay and death.

People often ask me my position on various issues. Well, I'm for certain things, and I'm against others. But on one issue, I'm very consistent. I'm against pain and suffering. Especially avoidable pain and suffering. And therefore, I'm against austerity. It begins with seemingly innocuous budget cuts. It then leads inexorably to the destruction of countless lives.

Why am I telling you about Greece? In 1935, Sinclair Lewis wrote a book called It Can't Happen Here. But it can. And it's up to us to prevent it.

The Huffington Post

How to Destroy an Entire Country
Alan Grayson | U.S. Congressman for Florida's 9th District

Michael Stephens — The 0.2 Percent Solution: Some Advice for Debt Hawks

Pretty clear evidence that the objective of the debt and deficit hawks is not actually either, but rather a push to cut social spending as a matter of ideology. The economics doesn't support it, even the CBO figures.

Multiplier Effect

The 0.2 Percent Solution: Some Advice for Debt Hawks

Michael Stephens