Randall Wray has been engaged in a back-and-forth with John Carney of CNBC. Their latest exchange touched on the question of the “real” economic burdens of Social Security (distinct from issues of affordability). Wray responds:
“John Carney agrees with me that supporting our elderly is not an ‘affordability’ problem, but he claims that I fail to see the ‘real’ burden—the dependency ratios and all that. Actually I’ve been writing about that since the early 1990s. The ‘real’ burden is the only thing that matters.
Here’s just a short list of easily accessible things I’ve written at www.levy.org:
Everyone from Amity Shlaes to Mitt Romney and the European Commission has been telling us lately that slashing government spending under current economic conditions will depress growth. On “Cross Talk” Dimitri Papadimitriou debates the merits (or lack thereof) of austerity and explains why the United States of Europe needs to become more like the United States of America:
At the end of the last exchange, when Fragkiskos Filippaios asks, with respect to the idea of a common fiscal policy for Europe, “who’s going to be responsible for that?” you can hear Papadimitriou’s reply: the European Parliament. For more on his views about how to complete the incomplete Union in Europe, see Papadimitriou’s latest policy brief, “Fiddling in Euroland.”
The people at Bloomberg appear to have made a curious error on their website yesterday. They have attributed an op-ed to Amity Shlaes that was almost certainly not written by her. You see, Amity Shlaes is a well-known skeptic of Keynes and all things Keynesian, having written the bible for those who like to claim that the New Deal made the Great Depression worse. (For a nice takedown of such claims, as well as Shlaes’ contributions in particular, see this Levy Institute policy brief.)
The Bloomberg op-ed in question contends that the Obama administration’s intention to withdraw militarily from Afghanistan and other places will devastate those countries’ economies. This is because, according to the op-ed, establishing US military bases in foreign countries boosts economic growth there.
The real Amity Shlaes would have carefully instructed us that such public interventions not only cannot increase economic growth (even in the context of a downturn) but will actually decrease it (the New Deal, you see, is what made the regular ol’ Depression “Great”).
Now if this was written by Amity Shlaes, it is a peculiar way of announcing her conversion. But let’s not quibble over ceremony. If it is indeed Shlaes, let’s follow her lead. In order to boost the growth rate in a time of economic malaise here at home, we should invite the US military to occupy the United States; we could even pay them a bonus to do it (Shlaes’ calculations suggest this might still be worth our while).
But if the military is too busy increasing other countries’ growth rates, I have another idea. We could initiate an emergency recruitment drive for the US Army and station the new troops here in the United States, carrying out nation building in particularly distressed economic regions (there are, I believe, a few million people without jobs who would welcome the opportunity). Of course we might need to build some new infrastructure bases to facilitate these operations here in the US, and may have to hire some additional support staff.
And if the threat of being shipped overseas and put in harm’s way is a barrier to recruitment, we could always create a new, strictly domestic branch of the military that recruits civilians to engage in nation building through repairing schools and providing social services. We could call it, I don’t know, the Civilian Conservation Nation Building Corps, or something like that. But none of that Keynesian nonsense please.
The latest chapter in the “why was the original stimulus so small?” story is a memo from December 2008 that reveals Larry Summers’ assessment as to why the stimulus (ARRA) had to be limited to around $800 billion—about half of what was necessary, in Summers’ estimation. There are various conclusions you can draw from this memo, but the aspect I’d like to focus on is this: Larry Summers’ suggestion that $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span (and so the rest had to be made up of tax cuts, aid to states, etc.).
Let’s grant for the sake of argument that Summers is correct about this “shovel ready” figure. The question is: what can we do about it? If you’re looking for short-term results, the answer is probably “not much.” Even things like speeding up environmental impact assessments for infrastructure projects wouldn’t have much effect (at the link, Brad Plumer tells us that only 4 percent of highway infrastructure projects even require such environmental reviews).
But looking ahead, there is more we could and should be doing. Back in 2009 Martin Shubik sketched out a plan in a Levy Institute policy note for creating a “Federal Employment Reserve Authority“—a kind of Fed for employment (yes, I know: the Federal Reserve is the “Fed for employment.” But you don’t need to look very hard to see that the sides of the dual mandate aren’t equally weighted). Among other things, the FERA would maintain state branches that are charged with keeping updated and prioritized lists of potential public works projects (with a preference for self-liquidating projects) and providing constant monitoring and evaluation so that financing can be put in place as soon as unemployment reaches a particular trigger level in that region. Regional public investment would respond to objective employment conditions.continue reading…
Paul Krugman—orthodox economist? Heterodox economist? Pragmatic economist? New Keynesian economist? Michael Stephens recently commented on an article in the Economist that discussed MMT, as well as two other non-mainstream schools of macroeconomic thought. The article contrasted the three relatively unfamiliar and unorthodox approaches with “[m]ainstream figures such as Paul Krugman and Greg Mankiw[, who] have commanded large online audiences for years.”
As Michael points out,
If you step back, what’s slightly unsatisfactory about [describing Krugman simply as a mainstream economist] is that Krugman is, right now, more in tune with the policy preferences of two-thirds of these “doctrines on the edge of economics” than he is with the reigning fiscal or monetary policy stance of the US government.
But as Michael well knows, Krugman is hardly alone among neoclassical scholars in most of his policy views. Micheal’s point is true of quite a few mainstream economists right now—they are far more flexible on the policy issues that dominate the agenda today than they are on many other economic issues. This excerpt from a recent essay written by Marc Lavoie may help to illuminate the very significant differences of opinion that distinguish such forward-thinking neoclassicals from numerous heterodox economists around the world:
Robert Skidelsky runs through and corrects five fallacies about debt that one often hears lazily deployed in the public arena. His third correction:
…the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.
Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites. Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance. Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate.
For some background reading on functional finance, Thorvald Grung Moe recommends this short piece from 1943 by Abba Lerner himself: “Functional Finance and the Federal Debt.” It’s tightly argued and written in a reasonably jargon-free style that’s so rare in economics or public policy writing.
For those who want more of the basics and central contrasts, Mathew Forstater’s primer on deficit “doves,” “hawks,” and “owls” (beginning on p. 6 of this working paper) is a helpful place to start.
Update: Nick Rowe graciously engages in the comments section below.
You may not agree with Alan Blinder when he writes in the Wall Street Journal that the budget deficit should be an issue in the 2012 campaign. But it certainly will be. And Blinder deserves kudos for pointing out that there are no immediate or near-term economic problems stemming from US deficit and debt levels:
“Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately.
Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!”
Blinder also points out that if you accept the CBO’s long-term budget forecasts (James Galbraith notes some problems with the projections here), then the issue is entirely one of healthcare costs. Deficit doves and deficit owls (proponents of “functional finance”) will dispute the optimal or sustainable level of long-term deficits, but if you care about the long-term deficit, then you care about government healthcare costs. And growth of government healthcare costs is largely a function of cost inflation in the private market. So if you have any interest in the long-term deficit, then you have to have a plan for controlling long-term healthcare costs system-wide. If you don’t have such a plan, you’re engaged in some other type of project.
If you haven’t seen it already, this is a great utility that’s been linked to over the years, allowing you to see what the US budget deficit would look like if we spent the same amount per capita as other nations. For the owls, this won’t be a matter of long-term debt and deficits, but of efficiency: what exactly are we getting by spending more than twice as much, per capita, as other wealthy nations?
Randall Wray and Marshall Auerback put out a Levy Institute policy brief in 2010 on their vision for healthcare reform that featured giving people under 65 the option to “buy in” to Medicare (you will recall that at one point during the health reform battle this provision looked like it might be included in the final bill. It was ultimately dumped by Joe Lieberman). Read the policy brief here.
As a counterpoint to the last post on the curious dominance of conservative macro policy ideas in Europe, here is Matías Vernengo getting into the political economy of who benefits from these failed policies and why there seems to be no sense of urgency around the fact that the real economy is broken:
(This is from a Real News Network interview from December, originally highlighted at TripleCrisis)
Also check out Vernengo’s recently released working paper. Vernengo and his coauthor, Pérez-Caldentey, give a post-Keynesian interpretation of the eurozone crisis that places financial deregulation and the core-periphery imbalances that are inherent in the euro model at center stage.
Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably). One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US.
For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising. You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy. But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:
… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.
(To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US. More robust automatic stabilizers in Europe make a “do nothing” policy more fiscally expansionary, even while official or discretionary European policy is dedicated to deficit reduction and tight money. In the US you have almost the reverse: automatic stabilizers play less of a role in counteracting recessions, while official policy—in the White House, if not Congress—continues to feature calls for more discretionary stimulus.)
To add a cute little twist to this tale, the dismal failure of these contractionary policies in Europe could, perversely, help entrench the American right and its ideas for some time. If Europe collapses outright or even continues to limp along, the US recovery is likely to get bogged down, which in turn makes the election of a Republican President in 2012 more likely. And as Ezra Klein points out, if more robust catch-up growth emerges in the US some time in the next five years, the person sitting in the Oval Office, and his policy message, will get most of the credit. So the abysmal practical failure of a set of policy ideas in Europe could actually end up entrenching those same ideas on this side of the pond.
First The Economist, now CNBC. CNBC’s Senior Editor John Carney has put together a series of posts on Modern Monetary Theory at his blog. One of Carney’s objections to MMT is this:
…my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending.
I’m not sure this is a problem for MMT in particular, but you might put the point a little differently. Fully MMT-inspired public policy would require a particular set of political and policy-making institutions. If inflation is going to be fought through raising taxes, for example, we will need a policy-making process that is able to pull this off, and with the right timing.
But having said that, after observing the process since the outbreak of the Great Recession it’s pretty clear that we don’t even have the right policy apparatus for carrying out conventional aggregate demand management. Having a robust set of automatic stabilizers in place during the crisis would have been far more preferable to forming fiscal policy according to the whims of Susan Collins and Olympia Snowe (or catering to Congress’ anxiety about a thirteenth digit).
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