In recent days both Brad DeLong and Paul Krugman have written good pieces arguing against the austerity marketed by deficit hyperventilators. We can thank Thomas Herndon’s muckraking that pushed the topic front and center, showing that there is no empirical evidence in support of the austerian’s claim that big government debts slow growth.

Here’s Krugman’s argument. To briefly summarize, historical experience has demonstrated that the “growth through austerity” argument is false. Further, the monetarists have also got it wrong: monetary policy won’t get us out of this recession trap; what we really need is a good dose of fiscal policy. Given that we are in a “liquidity trap,” we can safely expand government spending without worrying about the usual downside to deficits. And in a liquidity trap, there is really no difference between Modern Money Theory and the conventional ISLM analysis. It is only once we return to a more “normal” situation that budget deficits would “matter” in the sense that they’d cause problems.

DeLong amplifies the argument here. Once we’re out of the liquidity trap, then sustained budget deficits will push up interest rates and crowd out private spending (especially investment). This is basic ISLM stuff. For those who have not taken intermediate macro, it is enough to know that in current conditions increasing budget deficits will not raise interest rates because the private sector welcomes all the liquid and safe government debt it can get. Further, flooding the economy through Quantitative Easing will not cause inflation because, again, everyone wants liquidity and would rather hold it than spend it. In more normal times, budget deficits and money helicopters would cause inflation and rising interest rates. And that would be bad.

Note, both of them raise additional good arguments against the R&R results and against austerity more generally. I am focusing in on the one point about the liquidity trap for the purposes of this blog simply because it seems to be the sticking point that prevents them from fully embracing MMT. From the perspective of Krugman and DeLong, MMT is fine for the liquidity trap, but wrong for the normal situation—when deficits will matter. continue reading…

Victoria Chick, a student of Hyman Minsky’s, elaborates on an issue that often strikes non-economists as somewhere between scandalous and baffling:  the absence of any substantive acknowledgment of money in much of contemporary economics and economic modelling.

(Particularly interesting around the 12:10 mark, where Chick argues that faulty or outdated language in relation to banking helps reinforce misunderstandings about deposits, lending, and the relationship between the two.)

(via David Fields)

For more on this question of how to understand money and its role in our economic systems, see this working paper.

[This is the fourth part of a series (1, 2, 3) on sovereign deficits and debt.  The series was started in response to Ed Dolan’s original post detailing agreements and possible disagreements with the MMT approach.]

To recap very quickly, we agreed that sovereign government cannot become “insolvent” and forced to involuntarily default on commitments in its own currency. We moved on to “math sustainability” and agreed that so long as the interest rate paid on sovereign debt is below the GDP growth rate, then government does not necessarily face explosive growth of deficits and debts. And we agreed that the overnight interest rate is a policy variable, so that the central bank could keep it below the growth rate if desired. And we agreed that Treasury could use a “debt management” strategy to ensure that its average rate paid would be “low”—near to the Fed’s target rate, and if the Fed was pursuing a low rate strategy then on likely growth rates usually used in these types of models then the Treasury’s rate paid could be kept below the growth rate.

(Of course in recession the growth rate can go below zero but the interest rate would remain at zero or above; however this argument about sustainability is about the long term, not about cyclical problems.)

Now that always leads to the question: but if the Fed did pursue such a low interest rate policy, we’d get inflation that would force the Fed to raise its target rate above the growth rate to fight the inflation. Here was my one sentence response from last week:

“Here’s the preview: if deficits increase inflation rates, then “g” (GDP growth rate) rises so that even if the Fed raises “r”, we can keep g>r.”

Ed Dolan responded in the comments section this way:

“I think the part that will be more interesting to me is coming in Part 4. It will need to explain two things:
1. Even if it is possible always to keep g>r (both nominal) as inflation accelerates, would we really want to do so? Is there always some steady rate of inflation that guarantees g>r, or does it take continuously accelerating inflation? Are there any conditions under which accelerating inflation itself can undermine real output growth?
2. Suppose inflation is initially triggered not by monetary policy, but by an exogenous shock to real output (say, a natural or man-made catastrophe), or by attempts by the government to increase spending even after the economy has reached full employment (as in the “mission to Pluto” example of your MMT text). How can we be sure that the monetary policy operations needed to hold interest rates at an arbitrarily low nominal level will not induce further inflation?”

So let us begin to answer these questions. Today I’ll tackle question #1, or at least part of that question. continue reading…

So far, a large part of the discussion of whether the Treasury should mint (or convincingly threaten to mint) a trillion-dollar platinum coin in response to the congressional threat to refuse to raise the debt limit (see here for background) hovers around questions of legality or ill-defined “seriousness.”  (On the political front, the administration’s press secretary passed up an opportunity on Wednesday to explicitly rule out the idea.  On the legal front, Matthew Yglesias suggests a theory in which the government is not just permitted but obligated to mint the coin.)

But the platinum coin discussion actually touches on fundamental issues that go beyond legality or political decorum; issues about the understanding (and misunderstanding) of money.  (Recently, both Joe Weisenthal and Paul Krugman moved the conversation in this direction.)

One suspects that some objections to the large-denomination platinum coin on the grounds of “silliness” are motivated by simple incredulity about the nature of money.  Behind a lot of the Dr. Evil-themed snickering there lurks a very common “metallist” conception:  an insistence that money must always be backed by something like gold, or in the case of the trillion-dollar coin, that its value is given by the value of the platinum in the coin; something other than the mere fiat of government.  To those who are moved by the argument that the US government has “run out of money,” the reality of money, as laid bare by the platinum coin discussion, must appear deeply unserious and fantastical (we might as well just grab a bunch of sticks and call those money!).

For many people, these themes take us beyond the realm of reasoned argument and well into what Krugman called “a collision of worldviews.”  Or as Stephanie Kelton put it:  “Money scares the bejesus out of people.”  To Randall Wray, a deeply entrenched misunderstanding of money underlies a host of views about debt and the role of government; successfully confronting this constellation of beliefs and assumptions, he argues, requires an exercise in meme-building.

The platinum coin debate is helping lay bare a set of facts that is proving to be uncomfortable for many observers:  that the debt ceiling, and the rules requiring the US Treasury to issue debt rather than money when it spends more than it raises in revenue, are merely contingent rules, not reflections of the scarcity of some finite commodity.  But moving back to the level of operational end-arounds, we need not fixate on the platinum coin.  As Wray suggests, there is an additional way of getting past debt limit hostage-taking.  continue reading…

This Saturday at 5pm Eastern, FDL will be hosting an online discussion (here) with the Levy Institute’s Randall Wray on his lastest book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems:

In a challenge to conventional views on modern monetary and fiscal policy, this book presents a coherent analysis of how money is created, how it functions in global exchange rate regimes, and how the mystification of the nature of money has constrained governments, and prevented states from acting in the public interest.

Stephanie Kelton was interviewed on RT’s “Capital Account” with Lauren Lyster on the subject of Modern Monetary Theory:

Research associate Stephanie Kelton made an appearance on Harry Shearer’s “Le Show” over the weekend.  In the interview they managed to cover just about all of the major themes related to the debt and deficit anxiety that commands our civic dialogue (solvency constraints, inflation, interest rates, the gold standard, and so on; all the greatest hits).

Kelton gave a particularly concise response to the claim that we are leaving ourselves at the mercy of China when we run up public debt.  Kelton explained that the Chinese are not the main holders of US government debt (not by a long shot), and that their holdings are not some nefarious long-term blackmail setup, but basically a function of China’s export-led growth strategy (this segment begins around the 21:40 mark):

[W]hen the Chinese send us more goods and services than we send them, they end up with US dollars. … So, we get the stuff, and they get the credit to their bank accounts.  Now, what they do is they say “we have all these US dollars in our bank account, but they don’t pay us any interest, so why don’t we flip these out of our checking account into our savings account,” which is basically what the US Treasury is to them …  They get interest, and because the US government is only promising to pay US dollars, and because it’s the issuer of the US dollar and it can never run out, it can always pay the interest, it can always pay back the principal …  So they just keep flipping it back and forth from checking into saving, all the while, they’re toiling away the day in conditions none us would want to be working in, producing things … sending them to us to enjoy.  And what do they get in return? They get more credits to their checking account that they flip into their savings account.  And we act like they’re winning and we’re losing, and we send convoys of high level government officials over there to tell them to stop allowing us to abuse them this way.

Listen to or download the full podcast here.

Harry Shearer also mentioned Stephanie Kelton’s appearance, and those of several other Levy Insititute scholars, at the “Modern Money and Public Purpose” seminar series organized by the Columbia University law school.  Next Tuesday (Nov. 13, conditions permitting) will feature Jan Kregel and John T. Harvey on “Debt, Deficits or Unemployment? Identifying Real Threats to Growth.”

This old post on the question of how to make sense of the claim that government debt places a net “burden” on future generations—the question of whether there’s an economic case to be made that supports the common claim that today’s public debt levels are an immoral burden on our children and grandchildren—generated a fair amount of discussion here.  The issue has been revived again in a recent back-and-forth that some of our readers might find interesting.  The latest round began with a post by Dean Baker, who said this:

A moment’s reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates’ grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution. …

As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment.

Nick Rowe took exception, kicking off the discussion here.  Brad DeLong responded to Rowe here; Mark Thoma responded here; and Baker responded here and here. Paul Krugman also weighed in, and then addressed the particular issue of foreign ownership of debt.

On the surface, the data from Argentina look awfully good—among the top performers in the world over the past decade. And she’s apparently done it without a run-up of either private sector or government sector debt. In other words, Argentineans have bucked the trend among developed countries, that saw (mostly) tepid growth fueled almost entirely by debt.

And that seems to be at least in part due to a policy choice. Argentina had been the poster child for Neoliberal policies all through the 1990s—they adopted virtually the whole Neolib agenda lock-stock-and-barrel. They even adopted a currency board. And unlike Euroland (which also adopted something like a currency board as each member adopted a foreign currency—the euro), Argentina would have consistently met the tight Maastricht criteria on budget deficits and debts over that period. The main purpose of the austere budgets and currency board constraints was to kill high inflation. It worked. But, over that period unemployment grew and GDP growth was moderate. I won’t go further into the problems encountered at the turn of the new decade but the whole thing collapsed into a severe economic, financial, and political crisis. In a last desperation move, the government abandoned the currency board (or, you could say the currency board abandoned the government!), defaulted on its debt, and created a Jobs Guarantee program called Jefes.

(You can read more here and here; or if you want a first-hand account by Daniel Kostzer who played a major role in bringing Argentina out of crisis by helping to create and implement the Jefes program, read this.)

Starting from the depths of a horrible recession, then, Argentina climbed back to recovery—not only making up for ground lost in the downturn, but also in many ways by rectifying problems created by the Neoliberal experiment. continue reading…

Columbia University is hosting a seminar series on “Money and the Public Purpose.”  The seminar, open to the public, begins this week and features a number of Levy Institute scholars.  From the overview:

Modern Money and Public Purpose is an eight-part, interdisciplinary seminar series held at Columbia Law School over the 2012-2013 academic year. The series aims to present new perspectives and progressive policy proposals on a range of contemporary issues facing the U.S. and global macroeconomy. Seminars will feature a mix of academics and practitioners on topics ranging from the history of debt and money and the structure of the financial system to economic human rights for the 21st century.

Tomorrow’s session features Randall Wray and Michael Hudson on “The Historical Evolution of Money and Debt.”

Full schedule here.  Background reading here.