This is the last post in my analysis and commentary on Bruce Bartlett's testimony to the Senate Budget Committee. There's one very significant issue left to discuss, and that is the issue of fiscal gap and generational accounting and whether it should be institutionalized in legislation. I'll begin this post with that discussion and then end the series with my overall evaluation of his effort.
Fiscal Gap and Generational Accounting
15. Generational accounting exaggerates the burden of debt. Intergenerational accounting attempts to assess financial burdens through time, especially with a view to claiming that financial decisions taken in one generation can impose burdens on another. But this argument refuses to count as real assets the infrastructure and other national assets that the current generation will leave for future generations, and it does not understand that federal government debt never needs to be retired. In real terms, there obviously are no intergenerational transfers, except for the knowledge, the physical assets and the larger environment, which the present leaves to the future. The real goods produced in 2050 will be distributed to those alive in 2050, regardless of the public debt in existence at that time. Meanwhile, the U.S. government can always meet its payments when they come due. . . .
We can see the positioning and the messaging on the Democratic side beginning to take shape for the 2016 elections. Bernie Sanders and Elizabeth Warren with nods to Thomas Piketty and various economists have stepped forward to offer the themes of salvation for the middle class, moderating the extremes of inequality in American society, and doing something real about jobs and wages.
Clinton World seems to be responding, not yet with forthright statements from Hillary Clinton, but recently with articles by stalwarts of neoliberal Clintonism (and veterans of the Obama Administration) such as Larry Summers and Peter Orszag, expressing concerns about inequality and proposing measures to alleviate it, even including increased taxation on the wealthy. Read more about Will We Ever Get Change if We Keep Electing People Who Represent Special Interests?
Well, the legislation implementing “The Buffett Rule” has been voted down in Congress as we all knew it would be. But so what? The Federal Government doesn't really need your money, since it can generate all the money it needs to pay off the national debt and also close any gap between tax revenues and Federal spending that Congress may want to legislate for the foreseeable future.
There's no problem of Federal solvency. There hasn't been since 1971, when the US went off the Gold Standard! The idea that we risk insolvency is just a fantasy of people who won't acknowledge that the US Government is the monopoly supplier of fiat currency to the non-Government sector of the economy, including all of the private sector.
However, even though your money isn't needed by the Government, it is very badly needed to help fund two things, I'll describe below. But, before I do that, since your patriotism has moved you to advocate for higher taxes for yourselves, I hope and expect that you will be motivated to spend the same amount in the two areas of activity where your money is most needed and would be much more effective in bringing the United States back to the state of a healthy democracy, than it would be if you and and other similarly situated patriots paid it to the Government in taxes.
I know you've frequently heard the Republican response to your proposals for higher taxes on very wealthy people like yourselves, namely that if you're so sure that higher taxes on the very wealthy are the right thing to do, then you can always contribute the additional money to the government, if you really want to. Well, my view is that you can equally well, and with much greater effect on restoring fair and effective functioning to our democracy, contribute that money directly to activities that will change key background conditions that are driving our democracy towards plutocracy right now. Here are the two areas of activity. Read more about Hey Patriotic Billionaires, You Can Do Better Than the Buffett Rule, Anyway!
During the past few months the results of polling suggest that Barack Obama will be re-elected. But they also show that his support is shallow and could be shaken easily by an economic downturn during the next 6 months. Read more about Avoiding A Debt Ceiling Election Sellout!
In my last post, I discussed the first part of Beowulf's post entitled: “(MMT - JG) + Medicare for All = MMT,” and also some dialogues between Jamie Galbraith and both TomThumb and Beowulf related to the MMT Job Guarantee at one of FiredogLake's Book Salon's featuring Jamie's n Read more about (MMT - JG) + Medicare for All Not = MMT
A few days ago my friend Beowulf decided to exercise his wry sense of humor with this title of a post he offered for our consideration: “(MMT - JG) + Medicare for All = MMT.” Beo then goes on to talk about some details of a comment exchange with Jamie Galbraith at one of FiredogLak Read more about Dialogues with Jamie Galbraith and the MMT Job Guarantee
This is the third and last installment of a critical review of Dean Baker's second reaction to the debate kicked off by the WaPo's piece on Modern Monetary Theory, written by Dylan Matthews. Read more about The WaPo MMT Post Explosion: Dean Baker's Second Try On MMT (3)
This is the second installment of a critical review of Dean Baker's second reaction to the debate kicked off by the WaPo's piece on Modern Monetary Theory, written by Dylan Matthews. The first installment discussed Dean's views on using the monetary channel to boost aggregate demand, and began criticism on his views on devaluing the currency and increasing exports. This post continues that critique, and later takes up his views on work sharing.
Expanding US Exports at the Expense of Decreasing Real Wealth? (continued)
Dean goes on:
”To see this point, imagine a more extreme case. Suppose that we had a trade deficit equal to 50 percent of GDP. If the countries who were buying up dollar assets then decided that they had enough, so we could no longer rely on imports to meet half of our domestic demand, does anyone believe that the U.S. economy could quickly and painlessly replace our imports with domestic production?”
No, of course not! But, why do economists like Dean and Paul Krugman insist on relying on far-fetched scenarios to try to argue against simple truths that may apply today? The current account balance will probably be around 4-5% of GDP this year. As the economy recovers it will probably rise to 6% of GDP again, which represents a very real benefit to the United States. But there's no reason to expect that this growth would continue indefinitely or ever reach 50% of GDP. Why should it? What are the dynamics that would drive things this way, and make other nations value the dollar so much, that they will keep their own populations barefoot?
China, India, and Japan are all under pressure domestically to change their policies and make more of their production available to their own people. Europe may also abandon austerity soon, as they experience its ravages.
The long-term trend in the current account balance won't be up, It will be down, gradually down, for reasons I mentioned above. It just doesn't make sense for foreign nations to continue giving more than they're getting from the US. So, the 50% GDP scenario is just ridiculous. Why even bother suggesting it? What does the thought experiment prove, except that Dean Baker isn't thinking through a realistic model of the forces accounting for the international trade patterns we see?
In fact, Dean isn't even really serious about suggesting that this scenario somehow corresponds to a result of MMT economics. He says:
”I would not attribute this view to the MMTers, but then the question becomes one of a degree. Perhaps a trade deficit of 6 percent of GDP is okay, but presumably somewhere between 6 percent and 50 percent we get into a problem. It seems the question then has to be how quickly the U.S. economy could adjust to a much lower trade deficit and what is the risk that foreign countries will slow or stop their purchases of U.S. assets? We may differ on the answer to these questions, but they are the questions that must be asked.”
I think these are important questions. We should ask them. But, has Dean answered them? And do his answers indicate any serious problems for the United States economy? And if so, how does that relate to MMT? If these changes could possibly produce cost-push inflation in the United States, then MMT has some answers for that kind of problem. On the other hand, if other nations stop exporting so much to the US, then that may create less demand leakage for our economy. In which case, MMT predicts that we will get closer to full employment and also that we will have to moderate deficit spending as full employment is approached.
Dean continues with more scenarios about what would happen if foreign nations began to charge us more from imports. I won't reproduce each of these here or critique them. But, invariably, there is a general pattern to them. Read more about The WaPo MMT Post Explosion: Dean Baker's Second Try On MMT (2)
Matthew Yglesias posting in Slate, also gave us a few words on Dylan Matthews's post about Modern Monetary Theory (MMT). He starts with this thought: Read more about The WaPo MMT Post Explosion: Matthew Yglesias's Reaction to MMT
Kevin Drum, posting in Mother Jones, also threw his hat into the ring of discussion about Dylan Matthews's post about Modern Monetary Theory (MMT). Kevin begins by characterizing MMT as “. . . . Read more about The WaPo MMT Post Explosion: Kevin Drum's Take on MMT
I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
After stating his general approval for Dylan Matthews's, MMT post on Ezra Klein's blog, and his agreement with MMT on the issue of solvency, a big point that MMT's been trying to get across to the mainstream for years, Jared brought forth a number of points of disagreement, which I'll reply to based on my interpretation of the MMT perspective.
Tax Cuts Hard to Unwind? Not If You Legislate Properly! Read more about The WaPo MMT Post Explosion: Jared Bernstein's Cool Up To a Point
This post concludes my critical evaluation of Dylan Matthews's, post published on Ezra Klein's blog called “You know the deficit hawks. Now meet the deficit owls.” Read more about WaPo Covers MMT, But Does Its Usual Bad Job: Part Four, The Victory
After reading one of my rants about the stupidity of policies aiming at a balanced budget, somebody in my Facebook environment, commented by saying: “1 + 1 = 2.” Here's my answer.
Yes, 1+1 = 2.
Now here's an accounting identity from macroeconomics, called the Sectoral Financial Balances (SFB) model:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.
It's like 1 + 1 = 2. But just slightly more "wonkish." Read more about One + One = Two (Not Too Wonkish)