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Fiscal Sustainability Teach-In Counter-Conference Live Blog

[Friday: I've now gone through and fixed most of the typos, added some links, and made the structure, especially the Q&A, more clear. The program, which this live blog conforms to, is here. If you want to cut to the policy chase, it's here. -- lambert]

[That was a day that went fast. I need to edit this, but tomorrow for that. And I feel like we all came away from the day with some great analytical tools, but also a policy: Jobs Guarantee (JG). Sometimes what seems too simple is true. Thanks to all the participants, but especially to Correntians (in alpha order) BDBlue, DCBlogger, Letsgetitdone, and Selise, without whom this Teach-In would not have been conjured from nothing. -- lambert]

Well, here I am at GWU ready to do some live blogging, and waiting for tech. It's always about the cables, isn't it? Anyhow, I have two duties: One is to turn the audio recording On; and the other is to turn it Off. Simple. I like that.

Intro by Bill Halal, GW management prof [and futurist]: "Any business person knows you can't get out of a crisis by austerity alone." Acknowledge the help of Howie Klein and the Blue America team.

WARNING: I'm typing fast and can't claim to have mastered the material, let alone our current financial system. So take this for what it is: A live blog, and don't quote or attribute this as anything more than a quick, and quite possibly inaccurate, paraphrase!

* * *
Bill Mitchell
"What is Fiscal Sustainability"?"

CofFEE Centre for Full Employment and Equity. Thanks amorphous group. First grass roots event. Lineage Vietnam teach-ins, resistance where people didn't have a voice. "All the way with LBJ" historically stopped by community action. People eventually got a voice by banding together. Top people have a voice, they've got the money. Alternative views don't have any of that and rely on a groundswell of public opinion.

Overview of FS (Fiscal Sustainability). ...

$80 billion injected into economy and nobody said a word. Suddenly fiscal policy not a passive partner. Two years later fiscal policy saved world great depression and destroyed all the textbooks yet after the handouts have been received by those at the top we're seeing this mass hysteria, this daily barrage of financial data, ratio fever, setting ourselves up for the next crash.

Alarmist talking points:

* US next Greece
* China financing America
* National security threatened
* Advanced world living beyond it's means

From financial ratios divorced from context. All apply logic related to a monetary system that ended in 1971. Economists know this, that the constraints of Bretton Woods, so dig further and realize the whole rhetoric is ideological, and so they've blurred the history and blithely go on teaching economics as if it's gold standard economics.

FS becoming defined in terms of rigid rules

* Maastricht Treaty
* Fiscal Responsibility Act in UK
* Balance national budget on average over course of business cycle
- even progressives believe this

No comprehension of what these fiscal aims really mean. All independent of context.

Meanwhile, what relates people to the real economy, employment, is on the back burner. AU 1950-1975 permanent federal deficit in peace time unemployment below 2%. Governments would lose office if unemployment went over 2%.

This policy abandoned in mid-70s as opportunistic monetarists seized control of policy and suddenly for the first time deficit became a concern.

US always ran deficits until recently. The surpluses always terminated because so much drag on the economy.

What is FS?

What is not: Analogy between household budget:

- GBC - basis of mainstream thinking

Intuition: "We have to balance our budget just like you." (Ron Paul)

Flaws: A national government that issues its own currency doesn't have to do that!

- Numerical ratios are irrelevant (largely -- Budget/GDP, Public debt/GDP)

- Never find in a basis for FS in an invariant fiscal rule.

Starting point: Why do we have government in the first place?

"public policy" advance the interests of all of us in ways that we acting as individuals cannot do.

Goal: Zero waste of people.

Corollary: Everybody who wants to work should work.

Once private sector has made its spending decisions based on its expectations of the future, the role of government advancing public purpose is render those decisions consistent with full employment. That is FS.

Bad deficit -- driven by automatic stabilizers and private sector spending if govt doesn't maintain aggregate demand, bad because you've got a recessed economy. And then apply a fiscal rule and make all worse.

Good deficit (FS) -- achieve high employment and run deficit if circumstances require. If e.g. Norway doesn't need to run a deficit.

Can't define FS independently of the real economy.

Need to understand the monetary environment. Makes no sense to apply gold standard logic (Rogoff) to a fiat monetary system. It's a "fraud."

Ideological nature of fiscal policy constraints. Govts have imposed voluntary restraints that mimic gold standard constraints. These ideological should be exposed as such.

In a fiat monetary system, national govt need not issue any debt.

Fiat money, govt is sovereign. It is the only body that can issue the national currency.

It is a monopoly issuer. No revenue constraints in a technical sense (see "mimic" above).

What then are the limits?

It can only buy what is available for sale. (Unemployment means that labor is available for purchase. A good place to start! Unemployment == no resource constraint).

Rogoff's ratio isn't a statement of costs, it's numbers on bits of paper. The cost of a govt program are the extra real resources required for implementation.

Persistently high unemployment mean an abundance of under-utilized real resources available. Low opportunity costs!

The role of taxation:

Taxation is the basis for demand of the currency; it regulates aggregate demand growth. An effective counter-stabilization tool. It's got nothing to do with funding.

In general the fiscal outcome is "endogenous," determined by spending decisions of non-government sector. Consequence: Fiscal rules never sensible.

Inter-generational debate

Right wing colleagues wouldn't talk, they hid in their rooms, after the fiscal rescue, but emerged to say we have long term problems.

The only issue is, is there enough titanium for the knees? The only issue is whether the pension check will be able to buy anything!

The irony is that everything that the mainstream wants us to do will undermine our ability in the future -- for example, attacking education, which increases productivity.

A new narrative: We have to abandon the focus on financial matters and reorient the debate toward the real side of the economy.

We need to get these ideas out to the people. I get these emails from Americans, "you can't possibly have 2% unemployment." Yes you can. What these neo-liberals want to do. IMF on work on unemployment in South Africa: "Manifestly complex." What's complex about giving people jobs? There's not a shortage of work, there's a shortage of funds to provide the work, but there's no shortage if your government is sovereign in its own currency. Sometimes what is simple is right. [Again, FOX on ratios].

Panel comments

Wray: On government inefficiency: Only relevant when unemployment is so low that it's hiring people away from the private sector. Let's get to full employment and then we can talk about efficiency.

Auerbach: MMT convinced me because it's an operational reality for me. Many of us spend time working in the markets and seeing MMT daily, so we aren't intimidated by the junk in the media. Some of us have made money on the lack of understanding

Mosler: None of us are household words because if we were we wouldn't be having this crisis. We only need to get one person who has national media attention and then things change very quickly. Government checks don't bounce.

Kelton: James Galbraith could. My students don't understand what running a surplus means to them. There are two sides to the ledger. If the government runs a surplus, the private sector runs a deficit.

Pavlina: Elaborate. Govt liability is somebody else's asset. So every private sector portfolio loses a very valuable risk free asset! So in return for bonds with interest, you get cash.

Kelton: National debt not O.W.E. but O.W.N. (assets)

Mosler: No understanding that the large deficits are causing increased savings. [balance sheet again]


Q: Recently learned MMT, what about inflation? Taxation?

Mosler: You don't get inflation 'til you've used up the resources. There's also the question of what's inflation and what's increase in costs. I don't attribute success in war on inflation to monetary system but to dereg nat gas that broke OPEC.


Q: Lynn Parramore. I feel like we're talking about the Copernican Revolution. On the 15th, when people pay taxes, ask where money went, people say went to build things, funding expenditures. Not sure what the alternatives narrative is. "Taxation determining aggregate demand" not something average person can't hang hat on. Will people want to pay taxes?

Mosler: Government has to take away our spending power to balance the economy correctly.

Mitchell: Do you want to get into a car and negotiate a contract with each road your drive on, or do you want take those road resources off the market? Easy to understand use of public resources for public good. "Public provisions has its place"

Q Kettle Pond Institute: Voluntary constraints, not enough discussion of how manifest in real economies. Are we really a monopoly if GS is creating its own money? Is there a list of restraints?

Mosler: Obama says we've run out of money. That's not true. Flying to China to fund Afghanistan and health care from banks is one constraint.

Kelton: Debt ceiling.

Mitchell: AU boasts on increasing interest rates and underutilized youth (26%)

[??] The way you constrain the government is by budgeting.

Q: Erickson. When there is a compelling reason, people can change ideas rapidly, e.g. WWII. We can't win by fighting in economics profession. Need to get outside, get info to right people will change faster than fight in economics.

Mitchell: Committed to writing blog. Cut my number of refereed articles in half, much more readers.

Ed Harrison** My ideological predisposition against big govt. You should understand that's not going to go over with a large population in the United States.

Two compelling arguments:

1. My deficit is your surplus;

2. We "own vs owe" the debt is a key selling point (the grandchildren)

Mosler: No small or large government implied

Harrison: Deficit hysteria not factual, let's get away from it.

Mosler: Fed govt does not get revenues. Once you accept that, what size of govt we want and what's the appropriate level of taxation.

Mitchell: If the private sector thinks govt is too big, they should invest more.

Q Markov?: Do you really believe that nobody in the mainstream economists understand how a monetary based based on fiat money and flexible exchange rates works? And what about Japan?

Kelton: Japan getting it right so far (twice reduced deficit, twice FAIL). "Tell the Eisner story."

Knoxville TN conference, Robert Eisner wrote a lot about SS. When Bill Clinton President goes to the White House, and Clinton asks: "What do you think of my economic policy?" Eisner: "You've got to know you're dead wrong on SS." "I know Bob. But you know this is politics."

Mosler: Bernanke spills the beans, it's just electronic debit and credit. So when it suits them, they tell the truth.

"Are there spending constraints on govt sovereign in their own currency?"

Not theory. We are describing operational reality. We are describing the institutions that are set up. We are describing a balance sheet.

What is money?

Open textbook, begins with barter and there is no currency so you lug clay pots where the only way exchange is "double coincidence of wants." We should find some "thing" that is universally accepted -- pebbles, shells, later precious metals which have nice properties that fish do not have.

But the story is always told this happened spontaneously, and the private sector decided. No state. "The money is stateless" in the textbooks. Then paper with gold backing. "Good as gold." Then the story gets more difficult for this group ("the metalists"). Why do people, however, accept fiat currency?

We prefer Modern Money Theory, traced to the early authorities -- temples, nation states. Trace money to some power and authority. Authority establishes that you all must pay to me in my unit of account and then I tell you your tax liablity. Now you need to do something to eliminate your obligation to me. That gives value to otherwise useless purpose money. Our textbook counterparts have no real answer to why fiat money is accepted. They have no answer (an infinite regress).

The currency derives its value from the state's willingness to accept it as payment for obligation. (Tobin, 1998: "willingness to accept a designated assert in settlement of taxes.") That's why the govt's IOU is special. It is the most generally accept.

The Government-Household Analogy

Ross Perot, "The government, just like every American household, has to live within its means." Obama: We are out of money.

The household budget constraint

How much can you spend: earned + unearned + borrow

In the US, there's only one way to make final payment: At the end of the day, done with currency.

Govt is not like a household

The government is the issuer of currency.

Those of us in the private sector have to earn or borrow US dollars before we can make purchases

The Federal govt must spend first

Govt spending is not operationally constrained by revenues

The only relevant constraints are self-imposed

How does the Federal govt spend?

tax + bond = "pay for" purchases. Wrong!

Govt spending creates new money. Halliburton eg.

[Kelton very fast, missing a lot]

Why bother collecting taxes

Demand for its currency

Regulate aggregate demand.

Why does the govt sell bonds?

Bonds are a savings account at the Fed

National Debt Clock

Call it the World Dollar Savings Account

Can the govt run out of money?

The govt can't run out of money any more than the Washington Nationals baseball stadium can run out of points. "Hey Johnny! We're running out of points!"

So are why Greece etc in trouble?

The Euro is a stateless currency but it is not sovereign. Default is a legitimate concern! Every one of them could default! They must borrow! They are all users of their currency, much like states in the US use the dollar. They are not issuers.

The US can control its currency, and therefore its economic destiny.

Does that mean we should spend without limit?! No, NO!

As economy recovers, avoid inflation. Time to take advantage of a modern monetary system and avoid unnecessary human suffering.

Q Harrison: Argentina and Russia, what happened?

Mosler: Ruble fixed exchange rate, but borrowing dollars. With fixed exchange rate, interest rates are controlled by the market. There was no interest rate where people would rather have rubles than dollars so they defaulted, could not borrow. Most countries would have let the currency float [??] In Russia, they just shut down the computers and went home. Months later, balances still there when computers went up again. In Mexico... In Argentina, interest rates up because of option to convert, in mess that followed, let the peso float.

Mitchell: Only one example of a sovereign country that defaulted is Japan in WWII, who said they weren't going to pay their enemy. The book [who??] being used by commentators but a limited number of cases.

Mosler: Ability to pay vs. willingness to pay. They are now downgrading on willingness to pay at S&P

Pavlina: Argentina good example of how to launch their own currency, but in Argentina states issued their own local currency. Patacones [here and not here], pay your utility bills. Once they floated, no need.

Mosler: In Russia, after the banks shut down they traded "arrears."

Q: What happened in Germany or Zimbabwe?

Later presentation, with Marshall!

Q: Erickson. Treasury bonds, why does anybody bother selling Treasury bonds? Is there any country that doesn't?

Auerbach: A legacy of Bretton Woods, legal connection was not severed. There is no operational reason for it. We do conflate the descriptive with the normative. Sometimes legal constraints. Why not just let Treasury run an overdraft facility instead of bonds?

Q: Any stop selling bonds?

Mitchell: AU, the "tap."

Q Many people have blamed the last 30 years on dereg, it seems that everything else dereg when hyper-reg financial sector. Isn't this inconsistent?

Mitchell: Totally consistent. Freedom for private sector, hamper public sector (ideology)

This is the purpose of the myths; actually, it's that we don't trust democracy, because that is what will control the politicians.

Q Why is gold on the fed balance sheet?

Mosler: It's like the national forests, an asset they don't want to sell.

Q Teresa Svenko, invest journalist: Is the Euro a problem a problem right now, because there is no state. Is it a scheme, or lack of information?

A The hope was that the use of a monetary union would lead to a political union. This is long been recognized. There is awareness, but political constraints.

Q Harrison: My understanding Treasuries used to keep interest rates at a certain level. If you prefer fiscal over monetary policy.... Don't you need a constant flow of treasuries to keep the market liquid?

Mosler: From an operational point of view, just set the rate like Canada and AU.

Mitchell: It's corporate welfare. AU government continued to issue debt even when it was running surpluses. And the same guys the "top of the town" was also trying to cut Social Security!

Q: "Some sort of distributional question." Change the question from "Can we afford this" to "What should we spend it on." Democracy can only last until voters figure out they control the purse strings of the Treasury

A: Do you want the govt to devote real resources. Get it out of deficit hysteria. Do we want to devote an ever-rising percent of national income to care of old people? Let people vote.

A: Let's at least get past the operational issue. Affordability is defined in very selective way -- we don't ask about war, for example. Reflection of our skewed values.

A: On distribution. Really do need to make the national debt frame distributional. What we're talking about is a shift of income from people paying taxes from people holding bonds. That becomes a discussion we would want to have.

Warren Mosler
"The Deficit, the Debt, the Debt-to-GDP, the Grandchildren, and Government Economic Policy"

How do I turn litter into money? Force ("the man at the door with the machine gun").

Buckaroo story, U Missouri, one hour of student labor, provisions school with public money [here]

What is money?

We are not on the gold standard

But we act like we are.

Balanced budget, balanced trade, Federal trust funds and reserves

The P word ("printing money", still used, same connotations)

3 ways to spend with a gold std: Tax, debt, money financed (p word)

No longer applicable

Gold std thinking: Why did the Ds put SS and Medicare 'on the table'?

Gold std thinking: They think the govt has run out of money.

They think govt spending is now limited by borrowing from China eg

What is purpose of a currency in the first instance?

Provisioning the public sector: Command economies (conquer somebody, enslave) Brit Navy (impressment), today's monetary economies


Unemployment is people looking for paid work

Taxes "create" unemployment (because you need money to pay taxes)

govt spending employs these unemployed

Unemployment is the evidence that the budget deficit is too small.

Unemployment can always be eliminated with a fiscal adjustment

Monetary operations

Fed govt neither has not doesn't have dollars

Like Bernanke, mark up, mark down

WARNING: OVERSPENDING CAN CAUSE INFLATION ("now my conscience is clear")

Debt management

Reserve accounts are checking accounts at the Fed

Treasuries are savings accounts at the bed

Cash is the same information written on a piece of paper.

Money spent by govt always appears in one of these three forms: Cash, checking, savings. No other choice.

All this equals the world's net savings of dollar assets [??].

All that Fed operations do is shuffle cash, reserves, treasuries. This is all accounting. It has to add up "to the penny."

Example: Deficit spending to pay a consultant

Deficit spending adds to our savings

you have $100 in checking

you buy $100 treasury ("It's better than money or you wouldn't have bought it.")

Now govt pays you $100 consulting fee

You now have the treasury security AND the 100 back in your checking account

Nothing is "crowded out."

FS Review

spending is not constrained by revenues

spending numbers up

taxing numbers down

There is no numerical limit, there are no nominal constraints.

The risk is inflation, not solvency.

Is Social Security Broken? Define broken

Public purpose: Provision seniors at a level makes us proud to be Americans

Collection provision vs. individual provision

What is the presumed problem?

Are seniors living too well? No.

Are the opportunity costs too high? No.

Is the trust fund a limiting factor? No. It's not "the money." It's a record, not a constraining factor.

The real problem is "the dependency ratio";

ratio of workers to retirees

Mainstream economists say the only real thing that will be useful 50 years from now, knowledge and education.

Because we think it's a money problem, we need to sacrifice

Ironically, first thing we cut is education.

More on SS

Trust fund is record keeping

SS contributions are regressive taxes

SS payments progressive distributions that add to [public purpose. Why cut?]

"Because they think they're running out of money."

We've seen a D administration preside over the largest wealth transfer, why? They don't understand money.
What happens if SS checks too high?

Unemployment too low (whatever that means)

Economy grow too fast (whatever that means)

Seniors would be living too high (whatever that means)

It's all "a tragic mistake of epic proportions." [Why should I believe this, as opposed to believing that they hate me and want to kill me? -- lambert]


"In Ponzi from day one."

What's wrong?

No credible bank deposit insurance

No credit worth govt entity to act counter cyclically


Q: Why presume "tragic mistake" as opposed to deliberate policy?

Mosler: More effectively rhetorically.

Mitchell: Europeans chose explicit choices when they set up the Euro and knew the weaker in trade countries would have happen to them what did happen. They aren't innocent and took an ideological decision. (Also North vs. South, WWII issues).

Q: [taxes... ]

In fact, taxes never reduced income at the top. They have too much political power. "Prevent the income." That's the way.

Q: Europe...

All the same people who caused the crisis are still in charge. If I go to a doctor and he amputates the wrong arm, I'm not to go back to him because he's more familiar with my body.

If Euro blows up, classic overreach, neo-liberalism's last stand. Maastricht is as neo-liberal as it gets. As this thing meta-statizes people will ask who was right [the hippies!]

Q: We need more cross-talk between professions.


Marshall Auerbach
"Will the US turn into a modern-day Weimar?"

Abba Lerner, the father of functional finance, progenitor of MMT "If the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done."

Abba Lerner, look at policy impact not doctrine (eg ratios).

History lesson


German deficit 1919 was half 50% as well as foreign claims for war reparations (1/3 govt spending in 1921 and payments demanded in gold)

In US deficit 8%.

German trade union membership quadrupled 1914 - 1920 and more political power. Unions negotiated COL adjustments and fed inflation. We don't have that. (Not making judgment unions are bad!)

What finally broke Wiemar?

1921 London ultimatum, $2 billion in gold plus 1/4 of exports. Germans attempted to fulfill and mark went into freefall. Then FR and BE occupied the Ruhr. Workers went on strike as passive resistance. The central bank printed money but no goods and services and off to the races.


Zimbabwe had a civil war. Huge destruction economic capacity even before land reform. Legacy of colonialism. 250,000 whites control best land in 6M population. Not sustainable, but change was also an economic disaster. (Need to address income inequality that does address an extreme political response. Legacy.) Unemploymnent rises to 80%. To avoid mass starvation, use foreign exchange to buy good. Then mfg collapses without imported raw materials.

Govt then uses remaining reserves as a personal piggy bank for Mugabe.

Result: Inflation and then hyper inflation


No valid basis of comparison between US and Weimar or Zimbabwe

Any bad govt can wreck an economy

A wise govt using FS can always generate full employment yet sustain price stability

Govt job guarantee best way of creating productive workforce. Long term unemployment creates social pathology

"Default" need to be called out much more. Means what exactly?

Mitchell: Simple. Take an economy, trash 60% of its productive capacity, then any spending will create hyper-inflation. They trashed their supply, and the alternative would have been mass starvation. ["real supply side economics." -- bdblue]

- Confederacy. You've got to have the taxes to match the resources you're withdrawing. [??? More detail, please, for the Confederate flag-wavers -- lambert]


Q Harrison: Indexing of SS. SS is effectively indexed to inflation. Impact?

If index causes seniors to get too much food, it's a problem.

Q Harrison: Hyperinflation. In terms of country with sovereign currency... If currency goes down, price of oil goes up, creating inflation, you'd expect interest rates to rise.

Interest rates are politically set by Fed.

Q H: That's short term, what about long?

They can do long to.

Q H: I find that kind of intervention something I would not support. Fed going out the yeild curve and setting rates.

Either way the Fed is setting rates, by policy or default.

In theory, I see reason to think 0% is deflationary. On supply side, cost of inventory is low. On demand side, lower rates reduce income directly.

Mitchell: First premise disputable. A depreciation in the currency is not inflation, it's a once-off price adjustment. For that to become inflationary there have to be secondary effects where participants in income distribution don't agree to share.

Q H: If your currency goes down, doesn't that naturally mean that eg oil goes up?

That's a one time loss that's not inflation. Inflation is a continuous increase in the price level.

Q H: You're arguing definition. [Uh huh. --lambert]

Mitchell: It's a myth that a one-time increase is inflation. Second point is there's no necessary relation between fiscal balance and exchange rates.

Plot US currency against deficit. No relation. Even though central bankers think so.

Q Rebel Capitalist: For years we had a link between wage growth and productivity. Sometime in the 70s this link was severed.

Mitchell: Same the world over. Then capitalists figured workers had to buy products they made. Then in the 80s figured out how to load them with debt and steal the surplus. [??]

Basic game theory: Labor market isn't fair, since workers have to work to eat, but businesses only hire to make a profit. You have no more bargaining power because you're the last guy hired. I don't see any support for NAIRU. No reason to expect real wages to do anything but stagnate.

Q New Deal 2.0: Danger is inflation. In the US, are we going to run the risk of inflation or are we safe?

Risks of inflation are political not economic. Most studies show that inflation helps us, but you lose at the ballot box.

Galbraith, asymmetry of risk. If you don't spend enough, could have a 1937 relapse. Spend too much, more employed, at some point inflation, fix with a tax. The risks are so stunningly asymmetric.

Keynes, "true inflation" only occurs when aggregate demand is too high. Way to fight that is by reducing aggregate demand. What happens with an oil price shock? Fight by reducing demand? No, makes no sense. In US arrangements, oil price shock ends fast since we don't have indexing. If we did have a spiral, change institutions and figure out how to share costs.

We just had 2 billion people [China] come into the market economy and willing to work at low wages. Inflation is not plausible.

Mitchell: Its telling we always talk about inflation when 7% of resources unemployed and we're worried about inflation????? Risks are asymmetric and so are costs. Costs of unemployment dwarf anything else. "Question: How many Harberger Triangles [here] can you fit into one Okun gap?" [here]" Answer: "Lots." Massive. And you're sitting by, wasting forever, billions of dollars every day. This is the big success of the neo-liberal era. Now unemployment is a policy tool!

Costs of unemployment in the last two years greater than all of our wars combined. "The output gap." Now we're talking about moving NAIRU up to 6-8%.

Keynes: Pay people to dig ditches and then fill up. There's a minimum profit margin that the private sector demands, and don't want govt competing. When we repealed the laws against usury, [we made the greatest returns there, so people become bond traders, not engineers.]

Mosler: The financial sector a complete waste of human endeavor.

What Keynes wanted was full employment and euthanasia of the rentier. [Somehow I don't think either topic was on the agenda over at the Peterson Foundation. Or at CAF. --lambert]

Randall Wray
"Policy Proposals for FS"

I think this is 1931.

Short run unemployment problem

lost opportunites: new entrants, involuntary part time, career advancement

If we do a careful assessment of jobs we need, 20+ million (Obama promised 2-3M, far too little. Nobody is thinking on the scale we need.)

Washington focused on Wall Street not Main Street.

Confusion about financing and affordability is the major barrier to sensible policy.

Deficit hysteria is the main barrier.

Long run unemployment problem

Unemployment is not a problem but a policy tool to deal with the supposed problem of inflation. (NAIRU; reserve army of the unemployed. Keep wages down, hence prices low, hence inflation low. So Friedman adopted Marxist ideology....)

Structural unemployment problem. ILO, 2007 at peak of business cycle 200M unemployed world-wide despite strong growth.

Growth not a solution. Growth fuels productivity (up 26%) but not new jobs (up only 16.6%). David Ricardo's "machine problem"

We could put this off for a long time by opening new markets and new sources of demand but this no longer works.

Goals of sovereign govt

Ensure continuous full use of domestic resources

Econ growth alone does not do this.

More important to have labor fully employed than, say, agricultural

Full employment and price stability policy goals (latter for political purposes only)

Costs of unemployment

Labor under-utilizaition (un- + under-) creates huge net income losses.

Social costs even greater --

poverty, social isolation, crime

regional deterioration

loss of human capital ("two years unemployed, can't take a chance")

hysteris: Long term unemployed become unemployable

Benefits of employment

Produce goods and services

skill development, poverty alleviation, inter-generational stability

social, political, and economic stability

Multipliers: The total impact exceeds sum of each benefit (Forstader would cover this, not here)

Lessons from the New Deal

1. Finance downsized and constrained. Galbraith, The Great Crash. Familiar. The markets downsized finance, but this time we stopped them.

2. Direct job creation (WPA 8M, CCC 2.75M, NYA 2+ etc.)

First eroded, second abandoned (ideology: growth is enough).

Postwar: Golden age of Capitalism

no financial crisis

Highest sustained growth

Low unemployment for most, creation US middle class, jobs with good wages

Minksy: Stability is destabilizing (starts 1957).

War on Poverty

Minsky predicts fail: Reform yourself first [was the ideology, so FAIL]

If we just provided one minimum wage job per family would eliminate 2/3 poverty.

"Just give them jobs!"

Americans will not support welfare but will support work.

Poverty rate fell '62-'73 in half due to SS to the elderly and not War on Poverty, and the other was the civil rights at increased labor market comes for African-Americans.

Poverty stopped falling in 1973.

Full employment abandoned

Rise of "free market" ideology

Reagan: "welfare queens," "govt is the problem," "trickle down"

Clinton: "end welfare as we know it," see as deserving poor, this is good, but he provided no jobs!

Bush: "ownership society," "compassionate conservatism"

Under Clinton, Dems became the party of fiscal responsibility

Clinton/Rubin budget surpluses -> fiscal tightening.

Clinton boom household debt boom

Finally raise of Predator State [under whatever name:] Financialization, neo-conservatism, neo-liberalism, Minsky "Money Manager Capitalism."

Pavlina Tcherneva
"Policy Proposals for Fiscal Sustainability"

We have a Smith-ian vision, wealth of nations is in its people

Using our operational knowledge....

Features of responsible fiscal barrier

Do not use human livelihoods as means to check inflation

Measure by its employment-creation effect (not the ratio)

Plug the labor demand gap, not the output/GDP rate

Does so directly (more bang for the buck) How large deficit need to be? We don't know. How many people put to work? You know the costs!! (Why go backwards by producing growth and "trickle down")

employment stabilization through direct job creation. We see this as a permanent feature of fiscal policy

Job guarantee in theory

Alternative to the NAIRU An employment buffer stock program

Job Guarantee (JG)

Unconditional offer of a public sector job at the minimum wage for anyone who wants to work


"bubble up" policy Hires off the bottom

Operates with loose labor markets via a "buffer stock" mechanism

Addresses cyclical, structural, seasonal, unemployment, new entrants

Creates an employable pool of capital (maintains and enhance human capital)

Targets distressed areas: takes the contract to the worker, takes workers as they are.

Employees perform valuable work.

Features of JG


Spending always at the right level

transformative impact on workers, firms, communities, economy

"Lift the floor" (redistribution issue)


the JG and macro stability

the compensation package determines the floor

Fix the price of labor and let the budget float. When the economy grows the budget contracts

High quality anchor -- effective labor supply at minimum wage

not a panacea but better than unemployed buffer stock!

JG in Argentina JEFES [cf]

4 hours community work for unemployed heads of household at minimum hourly wage

2 million jobs in less than a year; 13% of the labor force showed up for work.

Considerable impact on the poor, especially on women and minorities


- stabilized output, prices, currency

- cost <1% GDP launched 8-12% GDP growth

- govt budget surplus

- many transitioned into private sector job

JG in practice

- Federally funded locally administered (with federal data)

I like to see this as a new form of micro-finance. Don't lend, just fund a project.

formalized the informal sector (under the table workers get SS cards)

established a wage floor.

Full employment and growth

Growth itself is not an appropriate goal

We can do it!!!

We have done in the past... as have other countries (South Africa, India, there is a movement out there).

Access to a job as a basic human right.

The wage bill for 20M is $350-$500 billion

Deficit in conviction and cleverness, not in ability to fund.

"The liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living." -- FDR

"The Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense....." -- Keynes


Q: Our friends at Cato would love doing away with the minimum wage...

Mitchell: What's the minimum price you want to be able to do business at? And if the private sector isn't paying that, you don't want them in your country. You don't do away with the minimum wage, the [jobs guarantee] becomes the minimum wage.

Q: How get motivation for jobs guarantee in India?

Mitchell: Urban crisis since no jobs in rural sector.

Q: How make Congress aware?

Has to come from the grass roots. Can't get this out of our current political system. Incredibly difficult. The right wing has an incredible noise machine. No reason left can't do the same [How? Access blogging? --lambert]

Could be a winning idea, get much more political acceptance than you think.

Q: Politics... America is genetically adverse to anything that sounds "socialist," too much noise. If this becomes the min wage, why not all go to work for govt?

We're going to have fiscal policy so industry will have ability to hire. If we conduct policy to keep it at 2-4% employed, as opposed to 4-6%, we're actually shrinking govt, since the unemployed are in the public sector (as unemployed). An employed buffer stock is better than an unemployed one, let alone gold. "A buffer stock always anchors a monetary system."

Yes, they can be fired. They're going to have to work!

We're not talking about the govt owning the means of production. We're talking about building public infrastructure. In Argentina, over half in the JG program transitioned to private sector (!!).

Mitchell: Wool price stabilization program. "No sheep was unemployed." All employed, wool either stored in a shed or in the private sector. So use a buffer stock for workers. Often give talks to right wing business groups: "Where are the unemployed now?" Eventually, they get to understand: "The unemployed are already in the public sector -- they have benefits. That tells you where they are. Well, what are they doing in the public sector. They chant Nothing. No, the bastards. Wouldn't you rather have them doing something productive? In the end, they become supporters because their ideologies and prejudices would rather see them doing something then nothing.

"Put 'em to work, and they'll pay taxes." This resonates.

Can be administered at local level but must be funded at the Federal level.

Mitchell: JG is an unconditional offer, not a compliance program (no "pound of flesh"). JG is an ongoing guarantee. Q: What if the people stay in? A: "What's wrong with liking your job." Q: So the private sector will have to restructure jobs? A: "What's wrong with that."

Tchnereva: Workfare a success only because the welfare roles went down. [That was what they measured, and not if they actually have jobs!]

Q: How can you promote these ideas at Harvard?

You can't. You have to hide until you get tenure.

Notre Dame. The Fighting Irish imploded.

Q: How get in mainstream? The SS commission has no budget, and so are outsourcing to the Peterson Foundation! [This is the most disgusting thing I have heard about the Obama administration yet, and I've heard a lot. June 26 date, might be open to the public, but could be pre-screened -- lambert] Infiltrate "America Speaks."

Mitchell: Health care is crazy. The poorest person in AU has access to first class health care whenever they want. Environment: Market-based ridiculations [I'm not sure this was the word Mitchell used, but if it wasn't, it's still a great word. --lambert]. Rules based, e.g. no coal in 20 years. Financial: Banks need to go back to being financial intermediaries not speculators. Only speculate connected to the real economy, e.g. manufacturing across borders. Dependency ratio: The answer is first class education at all levels. Massive injections of public spending into education, as our dependency ratios rise.

Q: Social unrest was the driver in 3 countries. Is there resistance to discussing these ideas in AU than in the US?

Mitchell: No. FOX would not survive in AU. Even the extreme right in AU is more civilized than FOX news. One difference there's much less religious zeal in AU -- we were criminals after all. At the end of the day, the neo-liberals invaded us too, but our welfare state has been degraded but not destroyed. Still have UHC, public ed, too culturally embedded. We are a more collective society -- we have a concept of "mate-ship," even your enemy is a mate. At the end of the day, we won't allow a fellow worker to go without health care.

Q: Why do right wingers do what they do? Is it like two-year-old who crawls over you not knowing they can hurt you?

Mosler: Funding.

Q: For fun, too.

Little stories about each one of these sectors. We can step back, add all together, it's a disaster. I do believe in conspiracies, but CT not always needed.

Mosler: You've got a lot of people who think [their financial success] was their own doing. Just human ego. Then they fund [ideological cheerleading for what they see as accounting for their success.]

Mitchell: We kept regulation in AU. Not one bank failed. We didn't have a recession. The other big difference, when did we get the debt meltdown? Good debt became toxic debt when people lost their jobs. IOW, the answer was earlier fiscal intervention. In AU, we had early intervention, and good debt did not become bad debt.

UPDATE Once again, I exhort you to get that widget clicked. If you already have, don't again. But ask somebody that you know if they will!

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beowulf's picture
Submitted by beowulf on

Thanks for live blogging this lambert!

I'm curious, is "Fiscal Sustainability" being used as a replacement name for "Modern Monetary Theory"?

A commenter at billyblog recently wondered whether the name was "authoritative enough" because MMT sounds like its "only" a theory. So maybe it should be rebranded to something catchier...

In homage to Bill (and to Peter Allen, of course), I'd call it Australian economics or perhaps, Australian Rules economics. Nothing more authoritative than Rules, no?

Either way, it'd be sure to piss off the Austrian economists. :o)

letsgetitdone's picture
Submitted by letsgetitdone on

No FS is not a replacement for MMT. Rather, the proper approach to FS is an area of application of MMT. Warren Mosler and I had an exchange a couple of nice ago and came up with Public Purpose Economics as a more popuar name for MMT. That's still to be broached with a broader MMT group.

beowulf's picture
Submitted by beowulf on

Public Purpose Economics does sound better. As crazy as this sounds, I'd use Frank Luntz's memos like a thesaurus and see if there are any terms he discusses that sound evocative (might as well jump on his "words that work" before the Republican House caucus gets there first). That Luntz really does have an ear for the catchy phrase.

Here are pdfs of Lunt'z healthcare memos

and his financial reform and climate change memos.

Submitted by hipparchia on

luntz is sharp, and you're right about his ear for the right words or phrase.

beowulf's picture
Submitted by beowulf on

From Henry C.K. Liu's piece, Why China must buy US Treasuries with her Trade Surplus Dollars:

When issuing fiat money, the government owes no one anything except to make good a promise to accept its money for tax payment. A central banking regime operates on the notion of government-issued fiat money as sovereign credit. A central bank operates essentially as a lender of last resort to a nation’s banking system, drawing on sovereign credit. A lender's position is a creditor position... Technically, a sovereign government needs never borrow. It can issue tax credit in the form of fiat money to meet all its liabilities. And only a sovereign government can issue fiat money as sovereign credit.

If fiat money is not sovereign debt, then the entire conceptual structure of finance capitalism is subject to reordering, just as physics was subject to reordering when man's worldview changed with the realization that the earth is not stationary nor is it the center of the universe. The need for capital formation to finance socially-useful development will be exposed as a cruel hoax, as sovereign credit can finance all socially-useful development without problem. Private savings are not necessary to finance public socio-economic development, since private savings are not required for the supply of sovereign credit.

JG's picture
Submitted by JG on

I have a couple questions that maybe you could ask:

1. From a MMT perspective, how is government borrowing different from taxation? Specifically, since tax revenue plus borrowing is nearly balanced with spending plus debt service, why doesn't the MMT perspective consider the government to have a "balanced" budget every year (i.e. one with zero net creation of money from fiscal policy)?

2. In the mainstream perspective, where balanced budgets (over the long term) are the goal, this provides a clear way of evaluating the credibility of a politician's promises. If the goal should be full employment without excess inflation, is there a clear framework for evaluating projections of fiscal policy, or is this a more difficult task than current budget forecasting?

letsgetitdone's picture
Submitted by letsgetitdone on

It's a great job Lambert.

selise's picture
Submitted by selise on

or why they need the intellectual tools from the teach-in in order to challenge the economic premises of the deficit hawks.

james galbriath: Why Progressives Shouldn’t Fall For the Deficit Reduction Trap

Thinly disguised as a program for “deficit reduction,” the proposed commission will meet its first test today, when the Senate may vote to authorize it as part of a bill to raise the national debt ceiling. A large progressive coalition is already on record against it. But the progressives’ case is flawed; it’s not tough enough. Here’s why.

According to a press release issued by the Campaign for America’s Future on January 20, describing the progressive coalition:

Speakers stressed the need for a long-term deficit reduction strategy…. Joan Entmacher of National Women’s Law Center noted that responsible ways to cut the deficit were available now if austerity activists weren’t only interested in attacking Social Security and Medicare…. Hillary Shelton of the NAACP said the responsibility for debt reduction should remain with democratically elected representatives from each congressional district…

Now, when our civil rights leaders speak of deficits, no one supposes they do so from deep conviction. It’s a political move. They are intoning phrases calculated to lend a tone of respectability to a larger and more important cause. That cause — in this case protecting Social Security and Medicare from predators on Wall Street — is a good one. But good political purposes don’t guarantee good economics. And, let me argue, if the economics are based, as they are here, on a false premise, then you can’t make the politics work in your favor.

The CAF coalition concedes that “long-term deficit reduction” is vital. But why? No reason is given. Are they worried about a threat of inflation? If so, why not look at interest rates? Last December’s average 20-year Treasury bond rate was 4.40 percent — lower than it was before the crash sent deficits soaring. Clearly, the markets aren’t worried — or the government would have to pay more to borrow. Equally obviously, the markets aren’t worried about “default” or “national bankruptcy” either. Investors know those concepts don’t apply to the government of the United States.

And once you concede that deficits are actually bad, you’re boxed in.

my bold

selise's picture
Submitted by selise on

more from james galbraith, In Defense of Deficits:

To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.

To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues.

Submitted by hipparchia on

they do have some smart people blogging there, but i'm inclined to think the whole thing is mostly just another access blogger exercise. we'll see.

Submitted by hipparchia on

yes. alas.

letsgetitdone's picture
Submitted by letsgetitdone on

But Alex Lawson of CAF was really pissed off at The Peterson Conference.

madamab's picture
Submitted by madamab on

I think I'm starting to get it a little.

Seems like if we're differentiating between fiscal and monetary policy, and arguing that monetary policy is better (I say "if" because I'm not sure I'm getting it right), then perhaps a future title for the next conference(s) would focus more on the word "monetary?"

Just a thought - I know how quickly this came about and that the message is getting more and more refined and focused.

letsgetitdone's picture
Submitted by letsgetitdone on

The Feds essentially abandoned fiscal policy in favor of Monetary Policy in the '70s. Actually, MMT theory represents a return to very activist fiscal policy. It's called MMT partly because it analyzes the role and impacts of Government as the monopoly issuer of currency in fiat money systems, but it leads to or suggests policies about Government spending for fulfilling public purpose, rather than cobtrol of inflation through manipulation of interest rates which is the traditional area of monetary policy.

I think a better name for MMT is probably "Public Purpose Economics." I'll be discussing that with the MMT group that worked with us on this conference.

madamab's picture
Submitted by madamab on

I really like "Public Purpose Economics." It's very descriptive - I think it has good soundbyte potential as well.

selise's picture
Submitted by selise on

i thought i was from randy's book, but was just guessing. am i wrong about that?

mmt isn't just about vertical money -- there is horizontal too. and depending on one's politics it could mean less taxes instead of more fed spending (taxes are fiscal policy too) or some combination of the two.

Submitted by hipparchia on

This brings us to those heretic economists, who held a counter-conference in much more modest circumstances at George Washington University as a Vietnam-protest style "teach-in." They call the Peterson crowd "deficit terrorists" for trying to scare us into drastic government spending cuts. Read more on the teach-in Web site.

way cool!

Valley Girl's picture
Submitted by Valley Girl on

I struggled for over an hour with connectivity problems, damnation I was gonna post this info on Corrente. And, I finally did, as a blog. And, then, I come back and see that DCBlogger and Hipp already linked. Sure didn't mean to step on anyone's toes. Glad you picked up on that part Hipp- and feel free to edit my piece, or whatever.

Submitted by hipparchia on

also, a real post, as opposed to something buried in comments, is best. thank you!

Valley Girl's picture
Submitted by Valley Girl on

I can only get the absolute slowest DSL where I live, and also have a really old computer, nada memory, which likes to seize up with some "nav" error. Kinda like being back on dial-up, the DSL has gotten so bad.

letsgetitdone's picture
Submitted by letsgetitdone on

Rebel Capitalist attended the Conference and will probably be blogging soon. He loved it.

letsgetitdone's picture
Submitted by letsgetitdone on

Covered it too, and did interviews with at least Warren Mosler and Pavlina Tcherneva at the end of the day. They might have interviewed Bill Mitchell too, but I was too occupied trying to get stuff out the venue to notice.
Lawson of CAF showed up at the end and was very enthusiastic. He wants us DC locals to join with him in activist actions against PGPF meeting sin this area.

CMike's picture
Submitted by CMike on

Jason Rosenbaum writes:

In the case of Germany, their debt was as big as 50% of their GDP and their government spent a third of its money buying gold to pay foreign countries war reparations....

Needless to say, with U.S. debt peaking at around 10% of GDP and America maintaining a productive workforce, our current situation is just not similar, and thus the specter of hyperinflation is just more myth than eventuality.

This will read like I'm making a big deal over what was a proof-reading error but I'll make my comment anyway.

Rosenbaum has written "debt" twice when, at least in the second instance, he certainly means to use the term "deficit." A deficit is the difference between government expenditures and its tax revenues in a given year. Take a look at the figures for 2009 in Table F-2 of this 13 page Congressional Budget Office pdf. The U.S. national debt held by the public at the end of 2009 was equal to 53% of GDP and, using $14 trillion as the GDP number, a quick check of the up to the minute Treasury figures says publicly held federal government debt is now equal to 59.7% of GDP. (And that's not counting the intra-governmental holdings, i.e. the various trust funds the government holds, which is now equal to 32% of GDP.) It's the deficit that was "peaking at around 10% of GDP" in 2009.

Most people reading this thread know all this all ready. But here's a fun fact you might not know. Publicly held debt includes debt held by the Federal Reserve and:

Unlike private banks, the Fed does not exist for the purpose of making a profit, though it inevitably does so.

To hold down long-term interest rates and support the housing market, the Fed greatly increased its holdings of Treasury securities and acquired mortgage-backed securities and debts owed by Fannie Mae and Freddie Mac, the mortgage-finance companies that are now controlled by the government. The Fed made $20.4 billion in interest on those mortgage-related securities and debt holdings in 2009.

All told, the Fed’s comprehensive income was $53.4 billion in 2009, a $17.9 billion increase from 2008. After deducting operating expenses, the Fed transferred $47.4 billion to the Treasury.

As for Rosenbaum's reference to Germany, I'm not sure what he meant to cite. I wasn't able to find a source for the German debt to GDP ratio in one of the relevant years. I did find a reference which said the Weimar Republic financed 50% of its 1922 outlays with printed money. What with its reparation obligations and the government's self-financing through money creation I wouldn't how you would arrive at a debt to GDP ratio for Germany as it slipped into hyperinflation but, no doubt, that ratio is available in the literature and, perhaps, that figure was provided at the teach-in. In any event, in '23 France and Belgium declared Germany in default and the troops of those two creditors became bill collectors, deploying to take the Ruhr valley industrial region into receivership.

[When its outlays are greater than its revenues and reserves, a government will finance its expenditures by some combination of borrowing money from the public and/or by printing, or otherwise creating, currency for itself to spend. A country's national debt is the total amount of money it owes for the bonds its Treasury has issued over the years and which remain outstanding, i.e. held by the public (private individuals, institutions, and governments). We're at $8.355 trillion as of this morning.]

BDBlue's picture
Submitted by BDBlue on

Via Ian Welsh, Mandos came to the comments and posted his notes. They are quite detailed and you can find them - here.