Finally revealed: The GOP JOB Strategy

The long-promised GOP jobs strategy turns out to be based on lowering wages to increase jobs. According to "Spend Less, Owe Less, Grow the Economy — Executive Summary" published in the Joint Economic Committee — Republicans:

"Decreasing the number and compensation of government workers. A smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs [overall]."

The idea is clear. Decreasing government employment increases the number of educated and skilled jobseekers, thereby driving down wages for all workers by lower the offer. There being more bidders than jobs, the increased number of bidders competing with each other for limited offers will be inclined to accept a lower offer.

The GOP strategy is being played out in the states, where GOP governors are cutting taxes on business to make their states more attractive to businesses in order to lure businesses to the state. Cutting state government employment and reducing wages and benefits for existing workers lowers wages prevailing in the state, making the state more attractive to businesses. Reducing the power of unions and collective bargaining in their states also reduces the bargaining power of workers there. It is assumed that this will create more jobs in the private sector "by reducing labor cost." One wonders whether they have forgotten that workers are also voters who may not appreciate the lower pay scale and reduced benefits and protections.

The race to the bottom is on.

Where is the demand to come from, you ask? Ricardian equivalence, which Prof. Bill Mitchell dispatches at the link.

Here is what they say: "Keynesians hold that fiscal consolidation programs are contractionary in the short term, because they reduce aggregate demand. However, large government budget deficits create expectations for higher taxes to service government debt and affect the economy in the short term as well as the long term. Consequently, fiscal consolidation programs that reduce government spending decrease short-term uncertainty about taxes and diminish the specter of large tax increases in the future for both households and businesses. These “non-Keynesian” factors can boost GDP growth in the short term as well as the long term because:

• Households’ expectations of higher permanent disposable income create a wealth effect, which stimulates purchases of consumer durables and home buying thus driving up personal consumption expenditures and residential investment in the short term.

• Businesses expecting higher after-tax returns boost their investment in non-residential fixed assets in the short term."

How is the UK doing with that?

(Hat tip to Ezra Klein, Prosperity through lower wages?)

I will be on "Bulls & Bears" on Fox Business today at 4pm EDT

I will be on "Bulls & Bears" on Fox Business today at 4pm EDT. This is the new segment called, "Mike vs Charlie," where I will be debating Fox Business editor, Charlie Gasparino on topics related to economics, the markets and policy. This is going to be a regular Friday segment. Who knows...maybe if it's successful it will be turned into a show so be sure to watch!

Tell the CFTC: Cut gas prices by reining in oil speculators now!

We need your help!!

Please sign this petition telling the CFTC to rein in the speculation that is currently pushing up food and energy prices. Thank you.

-Mike Norman

Mundell-Laffer on the External Sector; c.1975

Tom posted a link to an article he came across from the late Jude Wanniski's Polyconomics which was a review of a paper written by Mundell and Laffer in 1975. I was a subscriber to Wanniski's analysis some years ago until his sudden passing.

It is titled "A New View of the World Economy", and provides what they believed was an operative description of the external sector in 1975. This was just a few years after the US completely abandoned the gold standard so perhaps at that time, people were very eager to come up with some new ideas as to what a new framework for understanding the global economy would be. Here is an interesting excerpt:

Going a step further, Mundell has revived the proposition, and Laffer has documented empirically, that money, like apples and gold, is also subject to these international forces of supply and demand. When, for example, there is an excess demand for money in the United States relative to the rest of the world, we will import money and run a balance of payments surplus -- i.e., more money will be coming into this country than is going out. When there is an excess supply of money in the United States, we will export money and run a balance of payments deficit. This idea also has its roots in earlier centuries, but is still a minority view among economists everywhere. Balance of payments deficits are thought to represent not a market phenomenon but a structural problem -- i.e., "capital flight" or "undercompetitiveness." Laffer has further demonstrated that when a country`s growth rate accelerates relative to the rest of the world its balance of trade worsens; and vice versa. (As a child grows, it consumes more than it produces.) But such a deficit is not cause for alarm. What is then happening is something perfectly natural. As long as its government does not speed up its own money creation, the country will export bonds to pay for its deficit in trade. All that is occurring is that the rest of the world has decided the country in question, with its higher growth rate, is a good place in which to invest. (Just as parents invest in their growing children).

Some observations:

The authors seem to treat all "money" as a singular fungible commodity, seemingly ignoring the fact that there are different currencies in every country; and the relative value of each (as indicated by an exchange rate) can change over time. Ignoring "Hickey's Law" ;) that a currency must stay in it's currency zone.

They state that a country with a higher growth rate will exhibit a balance of trade that "worsens", implying exports: good, imports: bad. This flies in the face of our current global situation where China has had MUCH higher growth than the US while at the same time running an external surplus with the US that is unprecedented in the entire history of human civilization.

Mundell and Laffer posit that a country can EXPORT bonds to "pay for" real imported goods; and that the country taking possession of a foreign country's bonds looks at such a transaction as an "investment".

These are bizarre descriptions of international transactions. This was written in 1975, just a few short years after the US dropped the gold standard in full so perhaps some understanding is in order as the authors may have been "brainstorming" to try to come up with a new framework.

But Wanniski's affirming review of these claims was written in 2005, and I am not led to believe that either Laffer or Mundell have significantly changed their perception of reality. Both Mundell and Laffer are still influential within economic policy circles. These beliefs may still influence policy recommendations they are making to this day.

In Charge and Clueless

Reading Central Banks Worldwide: Past, Present And An Uncertain Future gives the impression that the people in charge of the global financial system are clueless — and more concerned with their credibility than addressing their ignorance. This is doubly important because not only are central bankers in charge of managing a nation's finances, but also they are major players in determining the direction that the world economy takes in a century of increasing globalization.

I had this exchange with Warren Mosler in this thread:

TH: Right now central banking is the greatest threat to liberal democracy and national sovereignty. This is where global integration under a command system is emanating from.



WM: i’d say the largest threat is from the failure to understand monetary operations



TH: Warren, I agree on that economically. However, I am concerned about the political threat that cb independence and interdependence among cb’s constitute. I am sure that these people are well-meaning, and I agree that the direction is toward increasing globalism, but I don’t trust the direction they are taking to get there. If they understood monetary ops, that would be a help. but there is still [Dani] Rodrik’s trilemma to deal with, and I think they know this and have an agenda to force increasing integration at the expense of either national sovereignty or liberal democracy, since the three can’t all exist together. This is clear in the case of the EU/EZ, for example.

Rodrik's trilemma results from what he calls an "impossibility theorem."

DR: I have an "impossibility theorem" for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

What we are witnessing in the EU, through the EZ, is that the ECB is leading Europe toward greater economic integration. It was clear from the outset that this could only be accomplished by greater political integration that involves surrendering at least some national sovereignty. For example, joining the EMU involves surrendering monetary sovereignty by adopting the euro in place of national currency. The plan was to herd Europe toward greater politically integration gradually, by imposing greater economic integration with less national sovereignty and less democratic choice and control.

Initially, the goal of greater political integration was opposed democratically. What is happening in effect is that the leaders are trying to impose economically a political arrangement that failed at the polls and remains unpopular.

This attempt can be seen as a test case for greater integration of the world economy along the same lines. Should we as a nation be trusting our fate to clueless bankers who are also "interested men" in Tom Paine's sense of the phase? If they understood how the monetary system works, we might have a chance. But in is clear that they don't, or are hiding it very effectively for some unknown reason.

We need to be thinking carefully about Rodrik's trilemma and debating choices instead of letting ourselves be herded by small groups of technocrats that are unelected and unaccountable since they are "politically independent." Moreover, some of them are not even citizens of this country. At any rate, virtually none of them really know what they are doing from an MMT perspective of monetary operations. Should the clueless be in charge?

DISCLAIMER: The views put forward here have nothing to do with NWO conspiracy theories such as that being put forward here.

Professor John T. Harvey joins Mikenormaneconomics as a Contributor

In my ongoing effort to make this blog the preeminent MMT and economics blog in the blogosphere I am pleased to annnounce another great coup! John Harvey will be contributing articles on a regular basis. Professor Harvey teaches economics at Texas Christian University with a specialty in post-Keynesian economics. He is also extremely knowledgeablein MMT and recently had an article published in Forbes.com entitled, "The Big Danger in Cutting the Deficit."

I want to personally welcome professor Harvey and I look forward to his contributions as I'm sure you all are as well.

-Mike Norman

$14 trillion in debt? How about $14T in cash in our hands!

We constantly hear about the debt left to our kids from government spending. It's $14 trillion, right? They pound this figure into our heads constantly. You can even go online and look up one of those crazy "debt clock" websites. They'll break it down for you as $45,818 per citizen.

So what is the debt? It's the amount of government securities--Treasuries--outstanding. "It's what WE owe," they say. Well is it what we owe or what the government owes? Let's be clear because it makes a difference. The debt is what the government owes. It owes it to the public, foreigners and to other government agencies.

From an accounting standpoint the debt is a liability of the government. However, to the non-government (that's us) it's not a liability, it's an asset.

Treasuries are nothing more than dollar denominated liabilities that pay interest and have some term or duration, say, 2 years, 5 years, 10 years, etc.

What's is a dollar bill, then?

A dollar bill is pretty much the exact, same, thing with only a couple of small differences. A dollar bill is a dollar denominated liability of the Federal Government, but it differs in that it has no term and pays no interest.

That's it. That's the whole difference between a dollar bill and a Treasury. No big deal.

Actually, you can think of a dollar bill as being like a checking account and you can think of a Treasury as being like a savings account or Certificate of Deposit. (Would you say you're broke if you held $14 trillion in a CDs?)

So by definition, those $14 trillion of Treasuries outstanding represent the same thing as if the government just handed out $14 trillion in cash, with a slight difference in duration and interest. And really, it's only about interest because you can roll over a Treasury as many times as you want making duration a moot point.

Ask yourself or your colleagues at work...if the government had sent out an enormous mountain of cash do you think people would be going around saying that it's some kind of great, big, liability that's going to be passed down to their kids and grand kids?

Hardly.

On the contrary, they'd be jumping for joy saying they've just inherited a windfall...a windfall that will eventually be handed over to future generations. They'd stop calling it a burden and instead, they'd be calling it a blessing.

Believe me, this is no lottery dream. It's exactly what's been going on. That $14 trillion "debt" is actually the exact same thing as $14 trillion of cash that has been literally handed out.

The crazy part is, in order for the government to "pay its debt" it would have to take back those trillions $$. And that's precisely what we are asking it to do. That's how we think we're going to "save" future generations. How dumb is that?

Revolt!!! Portugal gov't on the verge of collapse as lawmakers resist calls for more austerity

Portuguese lawmakers are voting against the planned imposition of new austerity measures. This is nothing short of a revolution as it will likely lead to the collapse of the existing government. The revolt against the highly destructive neoliberal economic agenda is spreading. Ireland will likely resist new austerity measures. We must bring this revolution right here to the U.S.A!

Glenn Beck Contemplates Starting Own Channel

New York Times reports here.

Beck has been mis-reporting the U.S. fiscal realities for some time, and is the 'poster child' for the misinformed, 'U.S. Treasury as a Household' analogy. This analogy is simply incorrect, and as Beck continues to propogate this analogy, he is actually doing more damage to the U.S. economy as the public is increasingly led to believe that our country has less fiscal options.

Here is a video from the impostor Beck (he is masquerading as an informed economist) where he is lamenting how "our banker" China can "take our assets".

He actually sounds deranged in this short segment. He sounds like he is starting to lose it by the end of the clip. (It's kind of funny!)

Glenn, please read here how China is not "our banker", and they have already been paid for their imports (in US dollars) and are simply placing their surplus US dollar denominated balances in ultra-safe US Treasury securities for the time being.

Mike, if he is trying to hold up Fox for more money, I suggest you tell Roger Ailes to just let him off the hook!

Branko Milanovic on Inequality and the Global Crisis

In Inequality and the Global Crisis, Branko Milanovic makes a case that the global financial crisis arose out of the hoard of savings at the top resulting from fiscal policy that reduced taxes at the top, rather than from the Ponzi finance now recognized as the proximate cause.

Milanovic observes:

The current financial crisis is generally blamed on feckless bankers, financial deregulation, crony capitalism and the like. While all of these elements may be true, this purely financial explanation of the crisis overlooks its fundamental reasons. They lie in the real sector, and more exactly in the distribution of income across individuals and social classes. Deregulation, by helping irresponsible behavior, just exacerbated the crisis; it did not create it.

To go to the origins of the crisis, one needs to go to rising income inequality within practically all countries in the world, and the United States in particular, over the last thirty years. In the United States, the top 1 percent of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s. That eerily replicated the situation that existed just prior to the crash of 1929, when the top 1 percent share reached its previous high watermark American income inequality over the last hundred years thus basically charted a gigantic U, going down from its 1929 peak all the way to the late 1970s, and then rising again for thirty years.

While the wealthy account for about 40% of consumption, there is a limit to how much the wealthy can consume. The rest is saved. Those who are sophisticated about money know that they cannot compound their savings through their own efforts as well as they can by hiring others to do for them. This generated a demand for above average returns from a bevy of financial professionals. Soon the better opportunities were identified and bid up, leaving a still large pot looking for spaces to occupy. The obvious solution for financial professionals was to "innovate" and create opportunities that did not yet exist.

One avenue would be to invest the funds in new ventures, but that is risky and good primary investments are limited. Clients were looking for regular performance that could be measured period over period. This meant generating credit instruments, such as securitization and other derivatives. This push to innovate in the financial sector lead to financialization.

Financialization exhausted normal channels, so financiers looked for new ways to expand credit. This led to extending credit to poorer and poorer risks as firms reached down into the pool of prospective borrowers. Competition resulted in a race to the bottom. As result credit quantity increased substantially, while credit quality decreased markedly.

Another problem was that real wages were not keeping up with productivity gains. The top was getting richer while the middle was stagnating and the bottom was losing ground, as welfare was cut. In MMT terms, demand leakage was not being offset by sufficiently large deficits, so either incomes had to increase or the economy had to contract, unless net exports increased, or the private sector increased indebtedness. What actually happened was that deficits were too low to offset the increase in net imports, which provided cheaper prices and tamed inflation, along with the increased saving taking place at the top. Worker incomes were held in check by neoliberal policy, e.g., weakening of labor and global labor arbitrage. Lax credit standards and competition for loans led to increasing private debt accumulating at the margin. The result is shown in the rising indebtedness at the middle and bottom that culminated at the cresting of the wave.

So "the first part of the equation" was the gathering of wealth at the top looking for a place to park at an attractive return, and "the second part of the equation" was the predicament of the middle and lower classes, who were not participating proportionately in economic growth. Moreover, they were becoming increasing indebted to maintain their standard of living, or even increasing lifestyle due to easy credit. Eventually, the level of private debt became unsustainable and finally imploded, drying up liquidity and plunging the world into a financial crisis from which it is still trying to recover as the middle class continues to deleverage.

Milanovic concludes:

The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed (and for which economists used to praise them). The real cause of the crisis lies in huge inequalities in income distribution which generated much larger investable funds than could be profitably employed. The political problem of insufficient economic growth of the middle class was then “solved” by opening the floodgates of the cheap credit. And the opening of the credit floodgates, to placate the middle class, was needed because in a democratic system, an excessively unequal model of development cannot coexist with political stability.

Could it have worked out differently? Yes, without thirty years of rising inequality, and with the same overall national income, income of the middle class would have been greater. People with middling incomes have many more priority needs to satisfy before they become preoccupied with the best investment opportunities for their excess money. Thus, the structure of consumption would have been different: probably more money would have been spent on home-cooked meals than on restaurants, on near-home vacations than on exotic destinations, on kids’ clothes than on designer apparel. More equitable development would have removed the need for the politicians to look around in order to find palliatives with which to assuage the anger of the middle-class constituents. In other words, there would have been more equitable and stable development which would have spared the United States, and increasingly the world, an unnecessary crisis.

MMT at DailyKos

I'm promoting this comment by Letsgetitdone (Joe Firestone) on a previous post so it doesn't get lost:

I'm pleased to announce that an MMT Group blog has been established at DailyKos, since the Kos community has many, many more readers than say, FDL. I'm one of the editors. Here's the group blog url:

http://www.dailykos.com/blog/Money%20and%20Public%20Purpose

Please join up and post.

Good work, Joe, spreading the word.

Two New Posts on Hyperinflation and MMT

Cullen Roche (TPC) of Pragmatic Capitalism has posted Hyperinflation – It’s More Than Just A Monetary Phenomenon in answer to the oft-heard objection to MMT based on "printing money."

Bill Mitchell also posted an analysis of the Confederate hyperinflation, Printing money does not cause inflation.

Everything you ever wanted to know about the debt ceiling, but were afraid to ask

Sometime in early to mid April the United States government will run up against the limit of what it can legally borrow. The so-called “debt ceiling” will be hit and without an increase, the Federal government of the United States will not be able to pay its bills unless it resorts to drastic measures such as huge tax hikes and/or spending cuts. (More on that later.)

What is the debt ceiling?

The debt ceiling is a limit on what the government can borrow. It was created back in 1917, which was back in the time when we were still on the gold standard. Under a gold standard the quantity of money that the government could issue was essentially fixed. It depended on the amount of gold reserves we held because gold “backed” our money. If the government issued all the money it could under the gold constraint, but needed more, it would literally have to borrow. Congress created the debt ceiling as a way to limit government spending and borrowing.

In 1933, however, we went off the gold standard domestically and in 1971 Richard Nixon took us off of it for international payments as well. That meant gold no longer backed our money and the spending constraint was removed. Nowadays, when the government needs to spend it does so by merely crediting bank accounts. (Changing the numbers in your bank account.) Under this system the debt ceiling has really become an anachronism—a relic of a bygone age. So why do we still have to go through this dance every year or so?

Because of one little technicality.

To understand why the debt ceiling is still an issue you first have to understand how the government and the Treasury operate. The U.S. Treasury (the financial arm of the U.S. government) has an account at the Federal Reserve just like you have a checking account at your bank. Under rules that have been in place since the time when we were on a gold standard, the Treasury is precluded from running a negative balance in its account at the Fed. (The U.S. Treasury has no overdraft line of credit!!) This means when the Treasury’s checking account at the Fed gets drawn down to a certain level and cash needs arise, it must sell some bonds to raise the level of its cash balances. If it didn’t do this then technically, under the rules, it cannot continue to spend.

But is the U.S. government really limited in what it can spend?

Under the authority granted to it in the Constitution the government has monetary sovereignty and the power to issue currency. The Constitution places no limit on the spending power of the government, but it does require that the government make good on all its debts. Hypothetically, that means the government can spend whatever it wants, but because of this arcane and outdated rule, we have to go through this ridiculous debt ceiling dance every couple of years.

Can the U.S. default?

The United States has never defaulted on its debts and technically, it is not even possible because all of our debts are denominated in dollars and the United States government is the sovereign issuer of the dollar. However, there is a difference between the ability to pay your debts and the willingness to do so. Just because you have the money to pay doesn’t mean you are willing to pay. Any entity can default if they are not willing to pay what they owe.

To raise or not to raise…

This is the crux of the current debate that is raging along partisan lines in Congress. Some members believe that it is the duty of the U.S. to pay its bills and therefore, the debt ceiling should be raised without delay. Meanwhile, other members think that the spending has gone too far and the debt ceiling should be capped indefinitely even if it means putting the U.S. in default. So the prospect of default come mid April is very real given the current political and ideological environment.

It will likely go down to the wire.

If the debt ceiling is not is not raised we could still avoid a default, but Congress would have no other choice than to implement a series of very rapid and very large tax increases and spending cuts to close the gap. The Congressional Research Service estimates that the government will need an additional $732 billion above what it expects to receive in taxes and fees in order to cover expenses over the next six months. Spending and tax cuts of that size and in such rapidity would absolutely crater the economy.

Hopefully, cooler head will prevail and we will avoid the Doomsday scenario, but one thing looks certain: it will go down to the wire in a very huge and very scary game of brinksmanship.

Report on Safety-Net Benefits Conferred on TBTF Banks

In a post at vox.eu, Santiago Carbó-Valverde, Edward J Kane, and Francisco Rodríguez Fernández introduce their NBER working paper, Safety-Net Benefits Conferred on Difficult-to-Fail-and-Unwind Banks in the US and EU Before and During the Great Recession, which "models and estimates ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. They report that "our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions."

This result suggests that current practice increases moral hazard and creates an incentive to undertake excess risk and misprice risk. It also disadvantages banks of lesser size and political clout that do not enjoy this benefit. It also presumes upon public finance in the expectation of preferential treatment owing to systemic risk, which creates a kind of aristocratic privilege. The authors summarize:

Accounting standards for recognising losses make it hard to detect if a bank is going under. The signs of a bank’s insolvency are slow to surface. During the housing and securitisation bubbles that preceded the 2007-2008 financial meltdown, top managers and regulators of US and EU financial institutions claimed that there was no way they could see the build-up of crisis pressures.

Moreover, as the crisis unfolded, these same officials failed to offer timely estimates of the financial and distributional costs of bailing out firms that benefited from open-bank assistance. The result is simple.

• These observational difficulties encourage firms that are large, complex, and politically powerful to plan to shift their deepest downside risks onto taxpayers through the financial safety net.

• The predictability of officials’ panicky willingness in crisis situations to acquiesce in these plans gives banking organisations that are difficult to fail and difficult to unwind what can be termed a “taxpayer put”.

Unless it is perfectly administered and adequately priced, this put supplies intangible capital to every firm that safety-net managers may be expected to protect.

Although these taxpayer puts do not trade directly, contingent-claims analysis offers several ways to estimate their value synthetically from the stock prices of individual systemically-risky firms.

While MMT shows that taxpayers do not fund bail-outs directly, as the authors suggest, since a monetarily sovereign government funds itself with currency issuance rather than taxation, MMT agrees that this does divert public funds from other uses for public purpose, and it constitutes a subsidy to a particular industry segment, owing to its ability to hold the government hostage because of its importance to the economy and political influence.

The authors reject the excuse of regulators that the situation with large banks was too complicated for them to be able to foresee insolvency problems. They conclude that transparency reduces the problem, and that capture, which they label corruption, accounts for ensuing government rescues. The authors conclude:

A useful first step would be to require bank managers to report data on earnings and net worth more frequently – under civil or even criminal penalties for fraud and negligent misrepresentation if they do not. Data on market capitalisation are publicly available in real time, as are data on stock-market returns. If the values of on-balance-sheet and off-balance-sheet positions were reported weekly or monthly to national authorities, rolling regression models could be used to estimate changes in the flow of safety-net benefits in ways that would allow regulators to observe and manage taxpayers’ stake in the safety net in a more timely and effective manner.

UPDATE: To be read in conjunction with William K. Black, Why we need regulatory cops on the beat - and why they make bankers cringe. Prof. Black shows why reporting is not enough. Strict regulation, oversight, and enforcement are required in environments in which fraud is endemic.

I will be doing a regular, Friday afternoon debate segment on Fox. Help needed!

Fox has asked me to do a regular, Friday afternoon debate segment on Bulls & Bears. I will be squaring off against Charlie Gasparino. The format will be a kind of "point-counterpoint" thing.

Please send me ideas that I can propose for topics of discussion. It's an opportunity to get MMT out there. But remember, it has to be simple enough for mass consumption and very topical or related to something topical or Fox won't do it.

You can email me your ideas here.

Minsky and Housing

Prof. Scott Fullwiler explains the basics of MMT in Modern Monetary Theory - A Primer on the Operational Realities of the Monetary System. He cautions that MMT is more than simply an operational description of the modern (post 1971) monetary system.

At its core, there are two parts to MMT. The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).

The Minskian aspect of MMT is often overlooked. However, it lies at the core of MMT macro analysis. Minsky was particularly concerned with the role of private debt and how changes in quantity and quality of debt affect the financial cycle. For example, financial instability rises as risk appetite grows and credit standards weaken to accomodate it. The financial cycle culminates in what Minsky described as Ponzi finance.

Ponzi finance is characterized by a situation in which cash flow is insufficient to service principal and interest without selling assets or borrowing. The housing crisis grew out of Ponzi finance, where buyers and lenders expected loans — mortgages and HELOCs — to be funded from future appreciation of the underlying asset, providing thin or no margin for error. In fact, the probability of error was magnified by lax standards. With no cushion, default was the only option for many, and foreclosures ballooned, while valuation tanked.

Dr. Housing Bubble has just posted an excellent analysis of this with respect to the bubble in residential real estate, as well as how it can be expected to work itself out.

Debt built society – Last decade saw negative real household income gains yet the sharpest rise in home values ever. Household debt and dual incomes hid the collapse of real per capita wage growth. Home values destined for a stagnant decade ahead.

This was entirely predictable based on the sectoral balance macro approach of MMT. The Clinton surpluses set up the debt dynamic by providing too little increase in nongovernment net financial assets to offset demand leakage, with the result that the private domestic sector was force into debt to maintain lifestyle. Creditors obliged with easy credit. The rest is history, which Dr. Housing Bubble summarizes from an insider's vantage. Dr. Housing Bubble lays this debacle directly on lenders, on one hand, and also on the wage dynamic over the past few decades, which has seen real wages either stagnant or falling.

The result of a credit implosion is the abrupt ending of the long financial cycle and an intermediate stage of market clearing before a new cycle can begin. The new cycle starts with much tighter credit standards. Dr. Housing Bubble sees US residential real estate in a clearing stage for the next year or two, with prices dropping further. He sees no return to appreciation in housing for some time after that, owing to the changed credit dynamic and stagnant incomes. Real wages have been declining for some time and are not likely to grow soon, given the current trajectory and climate.

Moreover, growth is occurring in the rental market while home ownership is declining. People are now looking at home ownership in a different light, no longer under the spell that housing values always rise, so that home ownership is the optimal middle class investment. The growth in building permits is now in multi-dwelling units in anticipation of an increase in renters.

Good video explaining gov't debt myths

Collaboration by Prof John Harvey and Tschaff Reisberg.



Send this around to whomever you know.

John Harvey debunks the "Social Security is going bankrupt" meme

Since MMT advocate John Harvey recently had an article published in Forbes, I thought folks would be interested in a blog post by Dr. Harvey. Here it is: Why It's Logically Impossible for Social Security to Go Bankrupt.

MMT Invades Forbes

Prof. John T. Harvey has a column under Leadership at Forbes (3.18.11) entitled The Big Danger In Cutting The Deficit that sets forth the basics of MMT without mentioning MMT. (h/t Mario)

Like Bill Mitchell's article at The Nation, it is concise, precise, and accessible. However, The Nation is a progressive venue, whereas Forbes occupies the other end of the spectrum. Quite a spread in only a matter of days. Word is getting out on many fronts as editors notice and pick up on the growing momentum.

Prof. Harvey's column is a good one to pass on to MMT skeptics in that he anticipates the common objections voiced by neoliberals and conservatives, as well as progressives with neoliberal tendencies. The piece is well argued, and anyone who is open can readily absorb the policy message, regardless of their persuasion. The comments I saw there are positive, at least so far.

Breaking the Intergenerational Poverty Cycle

James J. Heckman, Henry Schultz Distinguished Service Professor of Economics, University of Chicago, has posted an important observation at vox.eu, entitled A post-racial strategy for improving skills to promote equality, While it chiefly addresses inequality and the cycle of poverty and underachievement, this post has direct bearing on employment, too, since poverty increases the number of chronically unemployed, a structural problem.

The chief finding that Prof. Heckman cites is one showing that "supplementing the early years of disadvantaged children addresses a major source of inequality."

An example is the Perry preschool programme that targeted disadvantaged, subnormal IQ African American preschoolers just outside Detroit. For two years, the programme taught children to plan, execute, and evaluate daily projects in a structured setting. It fostered social skills. There were weekly home visits to encourage parenting. The Perry programme was evaluated using random assignment with long-term follow-up for 40 years. Rates of return are 7%-10% per annum – higher than the return on equity over the post-war period 1945-2008 and before the recent market meltdown (Heckman et al. 2010).

Just as it is a mistake to conclude that current employment is structural (insufficient skills) rather than cyclical (insufficient jobs), so too, it would also be a mistake to conclude that all employment is cyclical rather than some of it structural. The structural unemployment due intergenerational poverty results in successive generations lost to poverty, hopelessness, and often crime, with no break in this destructive cycle foreseeable. This is a problem that not only destroys lives, but also constitutes a negative externality affecting society, involving both economic cost and social drag.

Prof. Heckman notes that the current approach is generally remedial — trying to fix the problem when it is already visible. He holds that this is a failed approach in this case, because it is too little, too late, and too expensive — often involving repeated incarceration. The efficient approach to address the problem in the womb, through a healthy pregnancy and gestation, and immediately afterward through early childhood upbringing and education. To be effective, the issue must be addressed in the formative years.

Public policy to promote skills has to reckon with three essential truths distilled from a large body of research conducted in the wake of the War on Poverty.

• First, the skills needed for success in life are many. Success requires more than just being smart. Soft skills are important. Conscientiousness, perseverance, sociability, and other character traits matter a lot, even though they are largely neglected in devising policies to reduce inequality.

• Second, skill formation is a dynamic, synergistic process. Skills beget skills. They foster and promote each other. A perseverant child open to experience learns more. Early success fosters later success. Advantages cumulate. Young children are flexible and adaptable in ways that adolescents and adults are not. It is much easier to prevent deficits from arising in the early years than to remediate them later.

• Third, families play an essential role in shaping the skills of their children. Skill formation starts in the womb. The early years of a child’s life before the child enters school lay the foundation for all that follows. Large gaps in abilities between the advantaged and the disadvantaged open up early – before children enter school.

MMT reveals that where resources are available, government is able to afford them. Prof. Heckman doesn't seem to realize this and proposes private and charitable solutions. However, this is not an area in which the private sector can easily turn a profit, and it is unreasonable to expect that charitable institutions have the required resources for an undertaking of this scope.

This is a fecund area for public investment in human resources that would not only reduce inequality and poverty, breaking a vicious cycle, but also yield a substantial return economically, both through enhanced contributions and in terms of reducing negative externalities. Of course, the government itself would only have to fund the programs and they could be administered through non-profits, using public service employees participating in the job guarantee, which would provide the needed training at the base wage. As skills improved and experience was gained, these employees could be hired up in the service organization or enter the private sector in comparable work.

The Humanity Standard, not the Gold Standard

One of the most appealing parts of the MMT framework is the idea of a Job Guarantee (JG) program, also called the Employer of Last Resort (ELR) program. If one examines MMT literature and discussions available on the web, the topics have tended to be about macroeconomic operational realities. This is mainly because the economic and political arenas are currently dominated by fear of government debt and deficits. Hence, specific MMT policy prescriptions are often given short shrift (a prominent exception being Warren Mosler’s proposals and Tom Hickey’s recent post).The JG idea deserves more attention as it has many positive features that should appeal to individuals across the political spectrum.

The Job Guarantee program should appeal to progressives because it would achieve a high degree of social justice: full employment. The socially corrosive effects of joblessness have been well documented (see here and here). Increases in drug abuse, alcoholism, depression, and crime are all linked to being unemployed. As a countervailing force to these social cancers, the JG would offer a full time job at a living wage to any individual who is willing and able to work.

A Job Guarantee program would be implemented as a non-discretionary spending program. It would be added to the tool kit of already existing automatic stabilizers. This means that it would be largely resistant to the political business cycle and the machinations of opportunistic politicians. Furthermore, the JG jobs could be provided through non-government, non-profit agencies. This should appeal to those who have an innate distrust of all things government.

The most powerful feature of the Job Guarantee program is that it would provide a large measure of price stability, much like the Gold Standard. By governmental decree, the JG wage can be fixed (at a living wage) much like the price of gold was fixed under the Gold Standard. A pool of low skilled employed labor at the JG wage is then created. If firms try to exert downward pressure (below the JG wage) on the wages paid to their low skilled workers, then the workers can join the JG labor pool. If low skill workers demand wages above the JG wage, then firms can obtain replacement workers from the JG pool. In this way, price stability is obtained.

The Job Guarantee program would deliver a perfect trifecta: social justice through full employment, great immunity from political manipulation, and price stability. Why do so many individuals desire to return to the archaic Gold Standard? Instead they should embrace the idea of a Job Guarantee program. Perhaps MMT advocates should use another name for the Job Guarantee: the Humanity Standard.

Read Bill Mitchell's article at The Nation and pass it on

Bill Mitchell has written an article for The Nation entitled Beyond Austerity. I found it to be an astounding accomplishment, even for Bill, who posts amazing MMT analysis daily at billy blog.

In a single article, Bill demolishes the position and arguments of the deficit hawks and deficit doves, and also buries the austerians, while setting forth the basics of MMT in terms that anyone can grasp. The article is a model for popular economic exposition that is concise, precise, and accessible. Bill even concludes with the job guarantee, working it in smoothly and convincingly.

Bill has created a model for talking about MMT to those not familiar with economics, as well as people that are not policy wonks. Just about everyone gets unemployment and what it does to an economy and to the country as a whole. Bill cuts through the fog of economic jargon and policy wonkery to present a persuasive case for mounting an MMT solution immediately, and he does it without even mentioning MMT explicitly.

This is not only a must-read, it is also a must-pass-on. Bill mentions other countries also, so the article is not applicable only to the US.

Congratulations, Bill, on a job well done. Encore.

Thanks also to The Nation for bringing this to its readership and putting MMT on the front page. Let's have more of this fare.

Biden Likens GOP Economic Strategy to Blaming Rape Victims

Vice President Biden is stepping up the rhetoric in the ongoing budget battle (good for him!).

Story at FoxNews here. Here is an interesting excerpt:

"But it's amazing how these Republicans, the right wing of this party – whose philosophy threw us into this godawful hole we're in, gave us the tremendous deficit we've inherited – that they're now using the very economic condition they have created to blame the victim..."

I find it hard to argue with the part of the VEEP's statement that I've highlighted, as it appears that many in the GOP are heavily and increasingly influenced by secular philosophies that, if not "handled carefully", can promote chaos, disorder and anti-social economic outcomes.

Among these philosophies I would include Ayn Rand's Objectivism and forms of Libertarianism.

Warren Mosler: Genius economist and genius supercar builder!

Many people may not know this, but our friend and fellow MMT genius economist, Warren Mosler is also a genius supercar builder. His Mosler MT900S recently won top honors as fastest car in the annual Road & Track "Lightning Lap" cumulative results. Mosler's car beat Lamborghini, Porsche, Ferrari, Corvette, Viper, to name a few. Click on the image below to see the results.



Way to go, Warren!

Here's a shot of the car.

The Bank of England Investigates Credit Cycles and Macro-Prudential Policy

David Aikman, Senior Manager, Prudential Policy Division, Financial Stability Directorate, Bank of England, Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Benjamin Nelson, Economist, Financial Stability Directorate, Bank of England posted on Curbing the credit cycle at Voxeu.

They note, "Credit lies at the heart of crises. Credit booms sow the seeds of subsequent credit crunches. This is a key lesson of past financial crashes, manias and panics (See e.g. Minsky 1986, Kindleberger 1978, and Reinhart and Rogoff 2009). It was a lesson painfully re-taught to policymakers during the most recent financial crisis."

This is an important step forward. When Her Majesty the Queen asked her economists why they did not see the global financial crisis coming, they had no good explanation. In the neoliberal model, which holds that money is neutral, that is, does not impact the real economy, there was no indication that the world was headed for deep recession due to a financial meltdown. The only explanation for such an event in that model is external shock, and the expectation of the model is that the economy will right itself (return to equilibrium) automatically after the shock through the "invisible hand" of the market. Of course, this turned out to be wide of the mark when credit collapsed, bringing the debt-driven boom to an end. A "balance sheet recession" ensued as people struggled to deleverage, thereby curtailing demand.

It is therefore heartening to see representatives of the Bank of England recognizing the work of Hyman Minsky, which, incidentally, underlies MMT. According to Minsky's financial instability hypothesis, there is a financial cycle different from the business cycle. Aikman, Haldane, and Nelson investigate this cycle.

Whereas business cycles culminate in malinvestment and overproduction, financial cycles culminate in Ponzi finance, driven by price momentum. Whereas business cycles result in supply gluts that markets eventually clear, credit cycles result in bad debt that must be restructured or defaulted on. Depending on the level and quality of debt overhang, this can be difficult to clear without resulting in debt-deflation, which can lead to depression if not addressed by appropriate policy. In the recent global financial crisis, the level was high and widespread, and the quality of debt was low, since much of the lending had been imprudent.

Business and financial cycles are inherently different and require different policy responses when they emerge. It is also possible to head off credit cycles to some degree with macro-prudential policy.

Micro-prudential policy, aimed at tackling financial imbalances in individual financial institutions, may also be ineffective for dealing with aggregate credit cycles. That is because bank-specific actions will not, by themselves, internalise the spillovers that arise across banks over the credit cycle. They may even worsen them if they allow individual banks to steal a reputational march over their competitors.

This coordination problem suggests systematic, across-the-system actions are needed to curtail effectively credit booms and busts. This is one dimension of macro-prudential policy. To be effective, these policies need to increase the long-term cost of credit extension to banks during booms and, as importantly, to lower these costs during busts. These actions would help smooth out credit supply over the cycle. There are a variety of macro-prudential tools which could have this effect, including pro-cyclical capital and liquidity requirements, or remuneration packages that tie individual earnings more closely to long term performance (Bank of England 2009, Kashyap et al. 2010, G30 2010).

Credit spillovers occur across borders as well as across banks. This suggests macro-prudential policies need also to have an international dimension if they are to tackle credit externalities. This is recognised in the macro-prudential policy framework currently being discussed by the international regulatory community (BIS 2010). For example, judgements on local credit conditions determine the amounts of capital to be held by international banks on their exposures in those countries. This reciprocity feature should help to reduce the arbitrage risks posed by the internationalisation of the credit cycle.

Their post is short and worth reading in full. It is a welcome relief from the who-could-have-seen-it-coming excuses that have been proliferating up until now from "the experts," even though a few people did see it coming, and why, and said so some time before it arrived. One of these was Wynne Godley, ironically formerly of Her Majesty's Treasury and later one of its "six wise men," although he was long retired from his position there by the time of the GFC. The sectoral balance approach Godley developed at Treasury is integral to MMT. The gathering financial storm was also foreseen by UMKC professor L. Randall Wray, one of the developers of MMT and a student of Hyman Minsky.

Good to see the Bank of England catching up with things. Hopefully, MMT will follow their interest in Minsky.

GOP Senators will introduce a balanced budget amendment

This is the Doomsday Amenmdment. We knew it was coming when the GOP and their Tea Party backed ideology swept into Congress. If it passes (and luckily, there's probably not a big chance, but you never know), we are doomed to years and years of below trend growth and massive increases in poverty across the land.

A balanced budget was achieved in 1937 when we were coming out of the Depression and it sent us right back into a depression. It took a World War to get us out! Isn't that prospect nice?

Now we are about to do the EXACT SAME THING. Read it and weep.

US Trade Deficits = Foreign Purchases of US Treasury Securities

One of the central points of MMT, and one that Mike has tried to make repeatedly (see his re-posted video from the RT below), is that it is not correct to interpret foreign purchases of US Treasury securities as a financing or "borrowing" by the US Treasury of US dollars from foreign entities. Rather, the records of these Treasury purchases are ex-post accounting records of the desire of foreign countries to export products to the US, and take the net proceeds of these exports and park these balances in guaranteed US Treasury securities.

In fact, these events apparently may comprise a functioning, long-term accounting identity. From the link:

"In finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true. The term is also used in economics to refer to equalities that are by definition or construction true, such as the balance of payments. Where an accounting identity applies, any deviation from the identity signifies an error in formulation, calculation or measurement."

So here we can summarize, for a mathematical accounting identity to be true, the terms must achieve equality; and to disprove an identity, you must show how the terms do not result in an equality, the terms cannot be equal.

Fortunately, the US government makes the data available for us to be able to test this identity.

For one side of the identity equation, we can take the total increase in foreign holdings of US Treasury securities over a significant period of time from the Z.1 "Flow of Funds Accounts of the United States" Report, released quarterly by the US Federal Reserve.

The snip below is from the latest Z.1 report, Table L.209 and shows the closing balances of US Treasury security ownership worldwide. Sub-line 11 identifies the amount of Treasury securities owned by the "Rest of the World" (ROW), or what some call "foreigners". This is the line the debt doomsday crowd uses to motivate their cries of: "Foreigners are lendin' us money ...we're a debtor nation!..."

I've identified two points in time that are separated by four years, Point 'A' which is the balance of ROW UST ownership ($2126B) on January 1, 2007 and point 'B' which is the balance of ROW UST ownership ($4314B) on December 31, 2010. Using the data from these two points in time, we can see how much foreign ownership of Treasury securities has increased over the four year period (by computing the difference between these numbers).

Now for the other side of our equation we can go to US Census Dept. data on foreign trade. Below are two snips from the latest US International Trade report, which identify the US trade deficits over our four year period of investigation, 2007, 2008, 2009, 2010.

So now we can test our identity: Over the four year period of Jan. 1, 2007 thru Dec. 31, 2010; does the total increase in ROW holdings of US Treasury securities equal the US Trade Deficit. According to MMT, it should.

ROW UST Ownership @ 'A': $2126B

ROW UST Ownership @ 'B': $4394B

Increase in ROW Ownership: $2268B

2007 US Trade Deficit: $ 702B

2008: $ 698B

2009: $ 374B

2010: $ 495B

Total: $2269B

So how do you like that. Off by only $1B, and this after over $9 Trillion of imports and just under $7 Trillion of exports over our four year period of investigation.

I'd say close enough!

What say you deficit terrorists?

Roubini recommends a "Marshall Plan" for the Middle East

My previous post, Dr. Doom's Latest Warning, put forward Nouriel Roubini's caution that previous stagflations resulted from oil price spikes. Roubini is now concerned that the situation in MENA (Middle East and North Africa) is threatening a repeat, which would result in a double dip for the global economy.

I also cited a post of Mahdi Darius Nazemroaya showing how Pan Arabism is on the rise and could present wider geopolitical problems for the West if not handled appropriately. The demographics of the region are youth-dominated, and the problem is that youth feels left out of the political process and is cut out of the economic picture.

The West must address this challenge creatively. The US especially cannot hang out the promise of democracy and progress without delivering on this promise. Roubini concludes that what is needed to do this is a new "Marshall Plan" for MENA.

... the time to act is now. The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best. In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises.

So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall. Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.

This is an area where MMT principles could play a formative role, especially the employment assurance program. The government acting as employer of last resort extends a job guarantee for anyone willing and able to work in order to provide employment for anyone without a job offer from the private sector.

The wage associated with the employment assurance program would be under the minimum wage offered in the private sector so that government would not be competing with the private sector. The employment assurance program provides a buffer of employed instead of a buffer of unemployed.

(If you are new to MMT and this raises your eyebrows, the employee assurance program has been exhaustively explored and documented by professionals studying employment. See, for example, CofFEE — Centre of Full Employment and Equity for explanation and references.)

The employee assurance program has several benefits.

1. An employment assurance program greatly reduces or eliminates unemployment. Unemployment is associated with many negative social and economic factors, and it is a key factor in the present unrest.

2. An employment assurance program transfers unused resources to the public sector for public purpose, which could be used for public improvements. This would also serve to train workers in various skills that could be drawn on by the private sector.

3. The income from the employee assurance program would increase demand, spur investment, and increase growth in the local, national, and regional economies.

4. The guaranteed wage serves as a price anchor in achieving full employment with price stability, a major objective of MMT.

The new "Marshall Plan" would not be needed to fund the employee assurance program in the MENA countries that are monetarily sovereign, hence, are able to fund themselves with currency issuance. However, the new "Marshall Plan" could provide foreign reserves needed for importing materials needed for projects, as well as enough goods, especially food, to meet increased demand. This would mean that the new "Marshall Plan" would also increase trade with the sponsoring nations, making it a win-win.

Undertaking such an international developmental program would demonstrate that the way forward is through cooperation and coordination in putting resources to work is a sustainable fashion. Failure to do this will result not only in huge forgone opportunity that can never be recaptured, but also it also risks a volatile area of the world spinning out of control with unpredictable consequences.

Debunking Lawrence Kotlikoff

It's just too good. Had to post it again!

Mainstream economics is about to bury Japan

The mainstream economic neo-liberal fascists are at it again, about to impose even more (needless) hardship on Japan when the country faces the most dire situation probably in its history.

They didn't even wait for the devastating tsunami waters to crest before making their ill-informed comments about how Japan was already so loaded up on debt that it was going to have a hard time "borrowing" the money necessary to rebuild.

Leave it to these deficit terrorists to do once again do what they have done so many times in the past, that is, impose unwarranted suffering on people because of their misinformed religious "fiscal fanaticism." It will end up causing more death and destruction than 100 Fuskishima quakes.

Japan is a sovereign nation with its own currency. It spends in that currency. It doesn't "borrow yen from somewhere." It can make any reparations and take any steps necessary to fix its economy given sufficient real resources and labor to do the job.

Whereas the rebuilding of the nation could have been an economic shot in the arm, it's about to potentially become a shot through the very heart of Japan's economy as the government has apparently bought into the admonitions of the debt terrorists lock stock and barrel.

In an article today I read that the government of Japan is considering a tax increase to PAY FOR the cost of rebuilding.

"The government is reportedly considering a temporary tax increase to pay for recovery efforts. It's a natural response -- -- when you have a great disaster, you need to fix the problem. The faster you do so, the better off everyone is -- so-called V-shaped economic recoveries are common after destructive events like earthquakes."

A TAX INCREASE!!!

As if the destruction to the economy were not enough of a tax on Japan's citizens, the government will impose taxes, to raise yen--the very currency that it issues by power of monopoly--because the debt terrorists say that is the only way they will give their blessing???

Are they kidding???

Well, another country has just lost its sovereignty to this neo-liberal fascist cancer. My heart goes out to the people of Japan.

We're next.