Call the Republican's bluff
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Scott Pelley interviews Ben Bernanke:
Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."
"You've been printing money?" Pelley asked.
"Well, effectively," Bernanke said.
This quote captures it all, which is why Warren Mosler used it in his book.
Actually this is what happened under Clinton, the Republicans initially refused to raise the debt limit, and Clinton went on spending.
Who benefits from federal borrowing? Banksters. If their bluff were called they would call back their Republican dogs in a New York minute.
The only reason Obama would give in is because he wants to.
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MMT for me but not for thee
"Printing money" is perfectly fine, as long as you print it, "lend" it 0% to the banksters, and then let them charge whatever they want for it.
But "printing money" for full employment? Forget about it!
Neo-libs Krugman, DeLong are in favor of the Quantitative Easing
They claim it won't be a cause of inflation. The fact is it's causing a massive (re-)inflation of financial asset prices. Eventually the people, who have benefited from the return from the dead of Wall Street's pile of money, are going to want to spend some of it in the real economy and that's going to devalue what little money the working class public is earning to spend at Wal-Mart.
Unless the people who are advocating for the creation of money from nothing can make a case they will be in complete control of future tax policy and be able to raise taxes from the rich when that becomes absolutely necessary to control inflation, their calls to finance substantial government expenditures with conjured-up money, and on an ongoing basis, sound about as smart as plans you might hear kids make to go into a forest that's suffering from a five year drought and play there with their matches and fireworks.
Yes, the two-year Obama stimulus should have been financed with zero interest bonds -- i.e. federal reserve notes aka dollar bills -- but the chance to do that while the money supply was collapsing is largely past. But don't worry, the Fed has been hard at financing its stimulus plan in the meantime.
Er, can you point to some money that is NOT...
... "conjured up"?
It's all conjured up. The only question is for whom and why.
The Treasury
spends money it raises in taxes or borrows by issuing bonds. Now we can go around and around with a chicken and egg argument, i.e. whether the spending comes first. You can say the money the Treasury spends is independent of taxes and borrowing if you want. But that's only true in the sense that the electrons that make the balance sheet notations for revenue are not the same ones that make the notations for expenditures. When the Treasury takes money from the public through taxes or borrows money from the public dollar for dollar with what it spends then government spending does not add to the money stock in circulation or on balance sheets.
When the money stock grows either it will stimulate more business activity in the national economy than that amount of growth or it won't. If it doesn't create more durable goods or the ongoing production of more consumable goods and services then the added money stock ends up making a given amount goods and services generated by the economy cost more in nominal dollars.
The idea that the United States could pay out expenditures equal to twenty percent of its national GDP each year with money it adds to money supply is a non-starter. It would be highly inflationary. But I'll dial it back. Could the United States promote national income growth by adding to money stock with an amount equal 10 percent of GDP - the size of a recent deficit? Maybe, but not year after year.
The idea that we can outflank the too-powerful-to-tax rich with conjured up money that will be funneled to the rest of us is a non-starter, too. If you financed government that way, and didn't wreck the economy while you were at it, you would end up with the same results we've been seeing for the last thirty-five years with wealth continuing to concentrate at the top. Our economic class is in a political competition with the upper economic class for the finite, though perhaps growing, amount of national wealth. There's no gimmick that's going to lead to a decent resolution for our class without stating that a lot of the upper class's wealth belongs to us and we're out to take it from them.
*******************
There is a separate question of how fiat Federal Reserve Note credits, conjured up money, came to be the medium of exchange in America and the reserve currency of the world and that can only be answered only with a long story. For starters, before there were fiat Federal Reserve Notes there were Silver Certificates and other such currencies issued by the [edit- Treasury and later] by the Fed. There was also a history of political stability in the United States and its citizens and foreigners have had confidence in the ability of our country to manage its money responsibly. That's a confidence that can come to be undermined in the future -- and rather quickly.
You're conflating two arguments
You seem to be arguing that MMT's premise is untrue, but if it is true, the truth should never be spoken because the effects would be bad ("loss of confidence"). Let's address the premise:
1) The real operations of how the government spends money. As a matter of fact, as a matter of empirical evidence, governement spending is not operationally constrained by revenues or bond sales. See Stephanie Kelton for a typically lucid explanation here; example -- just in case you don't believe what Bernanke says in the post's quote. Your premise -- "spends money it raises in taxes or borrows by issuing bonds" -- isn't even wrong, and so everything that flows from that premise collapses and there's no point addressing any of it.
2) The political implications (your "the idea that we can outflank") of the idea that "the only relevant constraints are self-imposed constraints," as Kelton puts it. Quelle horreur. Yeah, who would have predicted that politics was involved? Yes, there are big problems there, especially in the context of "MMT for me and not for thee" as practiced by our elites today. But it's no use trying to work ourselves free from elite shackles by reasoning from false premises, no?
UPDATE I still don't have an answer to my basic question. I asked for an example of money that wasn't "conjured up." I'm still waiting.
Of course gov spending is not constrained by taxes or bond sales
1) However, as a matter of de facto reality, government spending is constrained by the inflation that will be created if the government spends money over the medium and long run at a rate faster than it collects taxes, borrows money, and its economy's production increases.
2) I'm stumped as to why you MMT advocates think, when the time comes, you'll be able to put into place a tax regimen that will be fair and control inflation if you can't show an ability to create a fairer tax regimen now while the old monetary theory reigns.
3) In the matter of what would be an example of money that is not conjured up, let's make sure we're talking about the same thing. True, it does take a certain amount of faith for members of a society to begin to accept a particular commodity as a currency. However, if you have a commodity that is widely or universally accepted as the medium of exchange in a society one of its essential qualities must be the belief that its supply is highly unlikely to be dramatically expanded over the short or medium term. That's a characteristic of precious metal coinage, the net total of cigarette packs in a prison, certain European bottles of wine among merchants in the South Pacific in the nineteenth century, etc.
Fiat money is only a useful medium of exchange to the extent that the economic actors in a society are confident that its supply will not be expanded over the short or medium term at such a rate that it will reduce the value of a given unit of that currency in the home (or the international) market. It is true people will accept a certain rate of inflation for a fiat currency but only if that rate is somewhat predictable.
I missed this the first time around
Lambert writes:
We have a central bank and a fiat currency. Those are pretty obvious realities to anyone paying attention and, that they are secrets to anyone, is because most people are just not interested in learning about them. I am in no way advocating we keep it a secret that we have a fiat currency rooted in a fractional reserve banking system.
Fiat currency has a lot of advantages over a commodity based currency in a modern industrial society. The one most obvious drawback, however, is that the central bank, or the sovereign government issuing the currency, can be tempted to expand the money supply faster than the economy can grow and the means to do so are quite effortless.
Let Beardsley Ruml be your sensei
I don't think anyone suggests that Uncle Sam ditch taxes all together, there are valid reasons why we need a fair, equitable tax system. I can't improve on what New York Fed Chairman Beardsley Ruml wrote just months after the end of World War II in "Taxes for Revenue are Obsolete":
The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements...
What Taxes Are Really For
Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
http://www.huffingtonpost.com/warren-mos...
That's a useful list to refer to
Maybe everybody in this thread should read it.
Technical lists like this always miss the power relations
And so the number one purpose of taxes -- to create demand for the state's money (Mosler's "at gunpoint" theory) -- does not appear on it.
Note, incidentally, that every single item on this list --"help stabilize," "express public policy," "isolate and assess" -- says nothing whatever about real operations at all. Throughout, there is no agency.
NOTE Incidentally, that purpose is my answer to the question -- "Show me an example of money that is not conjured" -- that I now ask, for the third time. That's how the conjuring trick is done. As always, it's what is not said, or what cannot be said, that's the most interesting...
I'd file 'create demand' under 1. stablize purchasing power n/t
n/t
You betcha
Great Britain was "broke" after WW II and they still implemented a National Health Care
System. Where did they get the money?
Your question deserves a better answer
But take a look at the one paragraph abstract here.
(And take any conclusions those Chicago Boys try to sell you with a pound of salt.)
Operationally
you're wrong. The Treasury doesn't spend what it gets from taxing and borrowing. In fact, if it gets cash money in payment of taxes, it shreds that money.
Nor does the addition of cash to the economy have more inflationary effect than adding net financial assets to the economy. Treasury spending adds net financial assets to the economy whether or not debt is issued. See here.
Debt issuance has no impact in reducing inflation and does nothing but give welfare to bondholders and provide a safe harbor for the USD they have accumulated.
As far as spending 10% more than we collect in taxes for years on end, no one is suggesting that as any kind of rule of thumb. What is being suggested is that Government spend money on programs that will create full employment, whether those involve a deficit of 10% or 20% right now. As full employment is approached the programs in question will wind down because they will contain automatic stabilizers that will result in decreased Government deficit spending as full employment is approached.
A typical program that will have this effect is Warren Mosler's program for ending the recession and restoring full employment in 90 days. His program involves revenue sharing grants to States of $500.00 per person. A temporary full payroll tax holiday for employers and employees, and a Federal Job Guarantee at $8.00 per hour with full fringe benefits including Medicare coverage.
I'm not sure about Warren's 90 days. But I do think there'd be full employment within 180 days. After that as the private sector recovered, the FJG expenses would decline, and the payroll tax holiday would gradually end as people shifted from public to private employment. Deficits would be much lower.
They might not end due to a 7% of GDP demand leakage due to current savings rates, and another 3.5% of GDP demand leakage due to a negative current account deficit. But they should be somewhat lower than current deficits.
One of us is wrong, that's for sure
Let's writes:
Here's my metaphor for saying that's wrong. Let's say you have a swimming pool in which you want to keep the water at a certain volume level and at a certain level of chlorination. And let's say you cannot add chlorine tablets but rather you can only add chlorine to the pool by adding a chlorine concentrate dissolved in water.
In order to add thousands of gallons of chlorinated water over time you have to drain thousands of gallons of pool water. It doesn't matter if the water that's being drained ends up running down the street in a gutter never to be seen again. Removing the water is a necessary step to keep the water from rising to an unacceptable level when you add the water/chlorine concentrate. To say that the concentrate is not made out of the water that's being removed from the pool does not mean the process can be carried out without removing the water.
why Uncle Sam borrows
The reason the govt borrows is to control short term interest rates. Govt spending floods the banking system with excess reserves which will push down the Federal Fund rate if reserves aren't drained by taxation or by selling Treasuries. There is now a Plan C, by paying interest on reserves (at the same interest rate as the FFR), Tsy can spending new money into creation and the Fed can control short-term interest rates without Tsy issuing any more debt. Curiously, $1 trillion in excess reserves paid 0.25% a year IS NOT public debt, while $1 trillion in Treasury bills payng ).25% IS public debt.
The biggest step towards financial responsibility is keeping govt cost of money near zero (the current FFR/IOR rate is fine). CBO projections for the next decade estimate 5% avg rate for Treasuries with total net interest over that period of $5 trillion. Congress could lock the FFR/IOR rate and tate no Treasuries could yield more than that (currently, 3 month at .13%, 6 month at .17%, 12 month at .26%).
http://www.bloomberg.com/markets/rates-b...
The difference between a net interest rate of 5% and 0.25% is $4.75 trillion, I can think of better uses for the money. There are better ways to control inflation than interest rates.
http://www.correntewire.com/fairy_tales_...
Run that by me again
As I understand it, The Federal Open Market Committee directs ( rather, "delegates...to the Manager of the System Open Market Account [SOMA]") the Fed's Open Market Operations in the buying and selling of existing Treasury debt to establish target interest rates. (As far as I can see, the Fed's recent practice of paying interest on bank reserves which are not being loaned overnight to other banks is designed to transfer wealth to the banks and relieve them of the urgent necessity to find profitable investments in an uncertain economy.)
The Treasury sells new debt to make up the shortfall between its tax collections and other sources of revenue and its expenditures so that when the government deficit spends it does not increase the money supply but rather competes with other borrowers for the money held by the public.
check out this page
# The central bank (RBA) sets the short-term interest rate based on its policy aspirations. Operationally, Budget deficits put downward pressure on interest rates contrary to the myths that appear in macroeconomic textbooks about crowding out. The central bank can counter this pressure by selling government bonds, which is equivalent to government borrowing from the public.
# The penalty for not borrowing is that the interest rate will fall to the bottom of the corridor prevailing in the country which may be zero if the central bank does not offer a return on reserves, For example, Japan has been able to maintain a zero interest rate policy for years with record budget deficits simply by spending more than it borrows. This also illustrates that government spending is independent of borrowing, with the latter best thought of as coming after spending.
# Government debt-issuance is a monetary policy consideration rather than being intrinsic to fiscal policy
http://modernmoney.wordpress.com/2010/09...
To amend one thing you wrote
1) However, as a matter of de facto reality, government spending is constrained by the inflation that will be created AT FULL EMPLOYMENT if the government spends money over the medium and long run at a rate faster than it collects taxes, borrows money, and its economy's production increases.
You're right the tax code should be more progressive, which doesn't necessarily mean raising rates. This paper by UT-Austin Tax Professor Calvin Johnson's paper "How to Raise $1 Trillion without a VAT or rate increase" is awesome.
http://papers.ssrn.com/sol3/papers.cfm?a...
In fact, if I were with the PNHP, I'd plug Johnson's proposals in as the revenue source for a Medicare for All system. HR 676 was rather vague in its finance details, as Bruce Webb pointed out, it really was "unscoreable" by the CBO. Anthony Weiner should be given credit for doing the yeoman's work of turning it into an actual piece of legislation.
http://www.correntewire.com/weiner_not_q...
http://www.scribd.com/doc/23949370/f-Pll...
From his revenue numbers, we can derive the CBO's scoring of the bill, $1 trillion a year in additional revenue and $525 billion in current Medicare/Medicaid spending net cost savings, (p. 25 and 30). In lieu of Weiner revenue provisions (including raising Medicare tax from 2.9% to 14%, that is going from $200 billion to $952 billion). We could just drop in Calvin Johnson's $1 trillion proposal. I'd note (before I run out to a meeting) that Weiner's bill would cut taxes if Medicare for All cost savings are greater than CBO/ Medicare actuary projected,
"...inflation...AT FULL EMPLOYMENT"
That's certainly the basic model of inflation. However, we know from the 70s stagflation experience that the economy can experience inflation without full employment, too. In that case low productivity growth due to the end to what Paul Krugman theorizes was technological business cycle, oil shocks, a reckless cycle of on again off again monetary policy launched during the 1972 election cycle (likely for the political benefit of incumbent presidential candidate Richard Nixon) all negatively reinforced by cost of living adjustments built into union contracts combined to create several years of high unemployment and inflation.
The question in this thread is whether, after a generation of low real wage growth, moderate productivity growth, and several years of high unemployment, can an expansionary monetary policy (in the service of financing government deficits) create an inflation without full employment being achieved. I think that's likely. The direction the commodity markets seem to be headed, the oil market in particular, and the ongoing success of rent seeking behaviors by the powerful would contribute to creating just such an inflationary economy with its falling real wage rates for the median earner.
[I don't have time now but I will take a close look at the links you've included.]
inflation control tools
I won't disagree with you. As I wrote on another thread (linked above), tax rates should be tied to employment rate so they move up (or down) inverse to Dept of Labor's monthly adjustment of unemployment rate, imports should balance exports via a Warren Buffett Import Certificate market, with rate of inflation and gasoline usage regulated via market plans suggested by William Vickrey and Martin Feldstein respectively.
What you said about "rent seeking behavior", reminded me of a point in favor Bill Vickrey's anti-inflation plan, , by targeting gross markups-- it also functions as a tax on monopoly pricing.
http://findarticles.com/p/articles/mi_qa...
wrongwrongwrong
somebody on the internet is wrong! wrong, i say!
HR 676 was rather vague in its finance details, as Bruce Webb pointed out, it really was "unscoreable" by the CBO.
hr676 didn't include ANY financing details, but that does NOT make it unscoreable. the point of getting a cbo score is to try to estimate how much the legislation is going to cost the taxpayers.
the cbo score is mainly just another of those self-imposed conditions that congress has come up with -- as part of the 'paygo' rules, any legislation that involves spending taxpayer money has to be either deficit-neutral or it has to actually help cut the deficit. 'paygo' is entirely arbitrary, and the incoming republicans are planning to ditch the concept and implement 'cutgo' instead.
as for having a financing mechanism written into a bill before introducing it, that's not really necessary either, in the normal course of legislation-making. there's no reason why a bill can't be introduced, then scored to find out how much it will cost, then deciding the financing scheme. weiner only had to come up with an entire completed bill -- including financing method -- because the method he was using to bring it up was as a substitution for the bill that was being debated, and the rules for that particular case meant that only a 'finished' bill could be substituted -- because no further amendments were going to be allowed under the 'substitution by amendment' method that weiner was using.
but yes, mad propz to him for the work he did on that.
true, Paygo rules = Democrats handcuffing Democratic agenda
Of course so are Cutgo rules, but at least that's because the Republicans understand that its their job to handcuff the Democratic agenda without constraining their own.
Since those are the rules of the game (as foolish as they are) I disagree with your statement that a "financing mechanism written into a bill before introducing it, that's not really necessary either".
No doubt bills are usually amended as part of the vote wrangling process, but having written legislation before (albeit at the state and local level), you want the bill you introduce to be ready for passage on an up or down vote "as is". Just like with contracts, there is no deal if there is no paper and if you lose control of the paper (that is drafting the terms), you'll probably lose control of the deal.
Now, its only once in a blue moon that the stars line up so that your bill passes unblemished by other hands, but introducing bill that you know is incomplete (even if everything goes your way, it still has to be amended) just ups the risk of losing control of the deal. Frankly, it may have been an error that those of us who support MMT didn't come up with the language for simple MMT reform amendment to the Dodd-Frank bill that would move the monetary system the way we want. Wouldn't pass, but if just one congressman sponsored it,, that would be progress. I disagree with the terms of Kucinich's monetary reform bill, but he understands that that there is no deal if there is no paper.
the Republicans understand
the Republicans understand that its their job to handcuff the Democratic agenda without constraining their own.
:-)
otoh, you could argue that Paygo rules = neoliberal Democrats handcuffing [what remains of] the liberal Democratic agenda.
iirc there was some arcane rule or procedure or something where whether the bill had the financing mechanism already in it or not affected how or which committee[s] it had to go through to get to the floor. or something like that. kucinich may, in past congresses, have had plans for taking advantage of whatever it was.
ahh, arcane rule = taxing power
Good point. You just reminded me of a story FDR's Labor Secretary Frances Perkins wrote about the creation of Social Security (remembering that Medicare is now part of the Social Security Act).
It is difficult now to understand fully the doubts and confusions in which we were planning this great new enterprise in 1934. The problems of constitutional law seemed almost insuperable. I drew courage from a bit of advice I got accidentally from Supreme Court Justice Stone. I had said to him, in the course of a social occasion a few months earlier, that I had great hope of developing a social insurance system for the country, but that I was deeply uncertain of the method since, as I said laughingly, "Your Court tells us what the Constitution permits." Stone had whispered, "The taxing power of the Federal Government, my dear; the taxing power is sufficient for everything you want and need."
After quoting this, Pat Moynihan added,
And so it came about that on August 14, 1935, when FDR signed the bill, standing at the President's right in the official photograph was Robert L. Doughton of North Carolina, Chairman of the Committee on Ways and Means.
I am not altogether comfortable with what I am about to say, but I will do so anyway in the hope that you will give the subject some thought. I suggest that giving jurisdiction over Social Security to the tax writing committees of the Congress (the Finance Committee in the Senate), has caused the program to be treated as a somewhat marginal concern by its congressional guardians...
.