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Paul Doubles Down On Ignorance, Misconstrual, and Vague Scenarios

letsgetitdone's picture

After the scorching he received in many of the comments on his printing press post Paul Krugman decided to dig his MMT blogging hole even deeper.

He says:

“. . . I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets?

The most important thing to note about this scenario illustrates Paul's penchant for simplistic examples that mean nothing without further context. There are many ways in which Paul's scenario can be fulfilled, and they would make a big difference in the reactions of the bond markets, even if the Government chose not to manage bond interest rates to drive them down to zero. For example, let's say that the world still desires to send the United States more goods and services than it receives from us, about 3% of US GDP more, and let's also say that the US private sector wants to run a surplus of 3% of GDP; then the Government will be running a deficit of 6% because its deficit must equal the sum of the absolute value of the negative current account balance, and the private sector savings surplus. In that realization of Paul's scenario, would the US have any trouble selling bonds? It's very doubtful, since what would those who exported to us do with USD they received in payment for their goods and services, except to buy our bonds?

What would the context of the 6% deficit in 2017 have to be for the bond markets to refuse to buy bonds? I don't know, but if Paul is claiming that such a scenario can happen, I think he needs to fill in the blanks. Blanks like: what is the current account balance in 2017? What is private sector savings as a percent of GDP in 2017? To what extent is the full employment he cites attributable to Government jobs? How can we know if the 6% deficit is inflationary or not, unless we know these things.

Even if we did know them, however, and even if the bond markets would rather see their USD sit in their reserve accounts at the Fed; rather than in their security accounts at the Fed, then what what does Paul mean by asking whether it would matter? Of course it would matter in the sense that it would change how we deficit spend; but unless the Congress voluntarily defaults on US obligations, then it would not matter for solvency, because Congress could authorize any of the following: 1) allow the Treasury to run a negative balance at the Fed; 2) place the Fed under the Treasury, so that Treasury can freely spend/create money to implement Congressional appropriations without issuing debt; 3) allow the Treasury to print notes of unlimited value; or 4) encourage the Treasury to use the US mint's current coin seigniorage authority to issue jumbo coins to supply whatever amounts of currency are needed to cover the gap between tax revenues and Government spending.

Would any of this matter for inflation? It depends on whether Federal spending went beyond what was necessary to create full employment. If it did, then yes, that would create inflation. MMT advocates that inflation can be controlled by increasing taxes. Given the distribution of wealth in the United States, inimical to the sustainability of democracy as it is, restoring truly progressive taxation would not only control inflation, but would begin to reduce the inequality which has grown to unacceptable levels since the early 1970s.

As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.

There Paul goes again. Is he really incapable of reading with any semblance of accuracy? MMT people don't say that perceptions about future solvency of the Government are not an issue; only that their perceptions are not dictated by the economic and accounting facts. In fact, people who use the MMT approach are constantly trying to explain to others that their perceptions that a default is possible are misplaced, and that as a matter of accounting, there is no possibility of default. We do that because we recognize that the possibility of politically determined default due to false perceptions exists, and we want to explain to people that default, if it occurs, won't be due to economic and accounting necessities, but only to political decision making by people who want to cause default for reasons of their own, or who don't understand that a Government sovereign in its own currency like the US can never be forced into default by accumulated public debts, because these don't affect its constitutional capability to create additional currency.

I disagree. A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.

I think Paul needs to tell us what “normal conditions” are. We now have a negative current account balance equal to at least 3% of GDP, and we know that the private sector wants to save right now probably at a rate much greater than 3%, perhaps even as high as 7% of GDP. This means that a full employment deficit, other things being equal, is about 10% of GDP, not 6% as Paul posits. Given the state of private sector balance sheets and the austerity program about to be implemented, this 10% leakage of aggregate demand from the private sector may well be the new normal for awhile. So, rather than being inflationary, a 6% deficit may be deflationary.

As far as tight money policy is concerned, you'd have to be an idiot to pursue that with an output gap of 4% which might still exist under Paul's 2017 6% deficit scenario. Again, it's not realistic to say that the US will lose access to the bond market with a current account balance of 3% or more. But if the nearly impossible were to happen, then the US could adopt any of the expedients I listed earlier, and this would not cause demand pull inflation.

Finally, throughout this debate with the MMT economists, Paul Krugman has posited scenarios that are highly ad hoc and either inconsistent with macroeconomic theory, or contrary to common sense in order to conjure up first the possibility of insolvency, and as the debate has worn on, the possibility or serious or hyper-inflation. This is not serious debate if one's purpose is to honestly criticize MMT-based economics. If he wants to pose an effective criticism he needs to make sure that it is detailed, contextual, and that its various parts hang together consistently. For example, it is not realistic to posit a case where the private sector is providing full employment and the Government is still deficit spending to the tune of 6% of GDP unless there is considerable leakage of demand to private savings and international trade. To do that not to point to a case where MMT doesn't work; it is to point to a case in which policy makers are acting against the advice that MMT economists would certainly be giving them.

So, Paul, if you want to take down MMT, by all means have at it, but do a little reading first and don't distort the MMT position on things. Karl Popper, one of my favorite philosophers used to say that when criticizing someone else, the first thing one should do is to state their case as strongly as one could, even if this meant strengthening the case they made beyond what what they were able to accomplish. Then, if you can still effectively criticize their position you will know that you have refuted the strongest version of it that you and they were capable of formulating. It's easy to attack and destroy a strawman. It also proves nothing. But if you can show that the real MMT is baseless, then you will have accomplished something. Paul, I'm afraid you haven't done that yet.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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Submitted by JuliaWilliams on

What a marvelous, elegant takedown!! Thank you for your posts, your explications, your ability to describe MMT and its effects, so clearly! I want you to know that your work and energy is helping me to spread the word, to educate my friends and fellow Greens. I also want to give props to selise, whose post at FDL (alongside yours) just validates and strengthens the message you are spreading. What is it about the mandate that the Fed has to " promote full employment" that people do not understand? And if I could ask, humbly, could you please give a short statement as to that mandate and how it should be carried out? And also TY to all who contributed and created the MMT conference, and documented it in its many forms, it was, and remains, a touchstone for a new paradigm.
And as for Paul..Hugh's comment re: Upton Sinclair holds true:
"It is difficult to get a man to understand something when his job depends on not understanding it. "
Upton Sinclair

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Submitted by letsgetitdone on

I'm glad we're helping you to spread the word. I hope you run again in 2012. We need people in Congress who understand MMT.

And if I could ask, humbly, could you please give a short statement as to that mandate and how it should be carried out?

Short statement: The Fed has the dual mandate of fighting inflation and unemployment. The current legal basis for this is the Humphrey-Hawkins bill, passed back in the 1970s. The fighting unemployment part of their mandate has been mainly ignored by the Fed. But none of its officials have been brought to account for this. Perhaps it's because the Fed, using only monetary policy, really can't do very much about unemployment. It's not authorized to engage in fiscal policy which is what is needed to fight unemployment.

What to do: Place the Fed within the Treasury Department and allow the Government to deficit spend without debt issuance. Pay interest on reserves in order to target interest rates. Pay off all the old bonds and notes as they fall due, extinguishing the national debt that way; not through taxation. Use the Fed for payments and for regulation of the banking system. But don't use monetary policy on the economy. It is always a blunt instrument, and has unintended side effects. It also most often advantages the haves and not the have-nots.

Submitted by lambert on

The nut graf:

In fact, people who use the MMT approach are constantly trying to explain to others that their perceptions that a default is possible are misplaced, and that as a matter of accounting, there is no possibility of default. We do that because we recognize that the possibility of politically determined default due to false perceptions exists, and we want to explain to people that default, if it occurs, won't be due to economic and accounting necessities, but only to political decision making by people who want to cause default for reasons of their own

Exactly.

Submitted by JuliaWilliams on

"politically determined default "for reasons of their own"!!!

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Submitted by lookin206 on

Krugman's attempts to engage with MMT are disappointing. One can't really engage what one doesn't fully understand.

It is interesting to think a bit about why Krugman seems not to understand. It could be, as suggested above that he is "paid not to understand". But I wonder if the failure comes from different sources.

In "The Structure of Scientific Revolutions", Thomas Kuhn observes that ultimately new paradigms win out not so much from accumulating devastating quantities of supporting evidence as from the holders of the old paradigm dying out. A genuinely new paradigm is a new way of looking at the world and there is no third dimension vantage point from which to directly compare and assess the virtues and defects of the old and the new, because they are looking at the world in different ways. Ultimately, Kuhn says, it is (mostly) the young who adopt the new paradigm and develop its theory and applications, and the established careers (mostly) who inveigh against the new and tinker around the edges of the old, trying to solve remaining problems with it.

The reason for this may have to do with cognitive inflexibility developing as we age. Using myself as an example, I was long tutored in the gold-standard model of budgeting and economic thinking, and, while I think I have a decent layman's grasp of MMT, I keep finding my thinking running aground because of old style assumptions slipping into my current economic thinking. Its not so easy to shift from one paradigm (one world view) to another.

Another obstacle to accepting MMT is that old style economic thinking of fiscal restraints still applies to households and all non-federal levels of government: Intake must not be greater than output unless future obligations are undertaken (bonds). You can't just move from old to new. Economic thinking requires both paradigms to be applied to different levels, so there is continuing tension and cognitive dissonance.

Then there are psychological and moral obstacles in the way of accepting MMT because of the ways it could be applied. Yes, we can abandon the pretense of SS trust fund. It wasn't a pretense when it was first set up, but now post 1974 the Feds could just pay out SS benefits without without the charade, pay them out because we want to care for our retired people, rather than because they have "earned" it, which no longer makes conceptual sense under MMT. Hear the screams of giving people "something for nothing" (moral turpitude to some), or the corresponding fear that with no trust fund I won't be entitled to anything at all, it will all be at governmental whim.

And then the larger issues. Many of what we have convinced ourselves are restrictions on governmental fiscal operations are myths. If taxes are unnecessary to support spending, if full employment can be guaranteed by government (maybe 2% who are between jobs), if the natural rate of interest is 0, if the bond vigilantes are mere bogie men trying to impose their rents on the government, if.... Well what are we to do? We'd have to wake up and actually take control of our collective future. What kind of society do we want to be. How do we create it without overstimulating the economy and creating inflation. How do we eliminate the 50 little Hoovers in our state governments when there is a downturn, short of the Feds simply assuming responsibility for state spending.

I think these prospects daunt many. They daunt me. Embracing them is revolutionary.

I don't know whether any of these motives apply to Paul Krugman, but they are issues I've had to grapple with in my study of MMT. As I've talked with people about MMT I see these things evoking visceral rejections and closed minds many times, and from people who can hardly be described as tools of the oligarchs.

And Joe, thank you so much for your efforts to get the word of MMT out. Even if the theory of MMT were to be accepted by all today, there would still be a long path to using it to make a better world.

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Submitted by letsgetitdone on

lookin206, You describe the difficulties of the paradigm shift very well. It's hard not to slip back into certain assumptions, particular, for me, the idea that taxes don't, and are not needed to, fund anything. One of the reasons why this is hard is that every institution except for the currency-issuing one does need money to fund spending. So, the economics of California, for example, are very different than economics at the Federal level.

This is particularly disturbing when you consider that a primary training ground for the Presidency is State Office and particularly being a State Governor. We often elect State Governors who were prominent businessmen to the Presidency, and if they were good Governors then they know how to manage budgets to control spending and manage taxes and borrowing to get a balanced budget. They're totally unprepared to deal with an economic regime in which we should not be aiming for balanced budgets. They're unqualified for this task, and most people don't realize it.

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Submitted by beowulf on

This is particularly disturbing when you consider that a primary training ground for the Presidency is State Office and particularly being a State Governor. We often elect State Governors who were prominent businessmen to the Presidency, and if they were good Governors then they know how to manage budgets to control spending and manage taxes and borrowing to get a balanced budget. They're totally unprepared to deal with an economic regime in which we should not be aiming for balanced budgets.

Well that's not quite true of EVERY governor.
The North Dakota Industrial Commission consists of three members: North Dakota's Governor, Agriculture Commissioner, and Attorney General.

According to North Dakota Century Code 6-09, the Industrial Commission shall operate, manage, and control Bank of North Dakota, locate and maintain its places of business, of which the principal place must be within the state, and make and enforce orders, rules, regulations, and bylaws for the transaction of its business. The powers of the Industrial Commission and the functions of the Bank must be implemented through actions taken and policies adopted by the Industrial Commission.

Submitted by Randall Kohn on

The fighting unemployment part of their mandate has been mainly ignored by the Fed. But none of its officials have been brought to account for this. Perhaps it's because the Fed, using only monetary policy, really can't do very much about unemployment. It's not authorized to engage in fiscal policy which is what is needed to fight unemployment.

Isn't industrial polcy even more paramount?

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Submitted by letsgetitdone on

because I think the US should be strong in the production of certain goods and services to safeguard its future ability to adapt to challenges in the International and natural environments. But, full employment can be achieved with fiscal policy alone.

beowulf's picture
Submitted by beowulf on

I'd like to see someone like Sherrod Brown advocating Warren Buffett's "import certificate" plan... or better yet the Levy Institute iteration of the Buffett plan. Auction off import certificates and use revenue to cut payroll taxes (2008 estimate was it allow a revenue-neutral cut of 4.8 points from 15.3% FICA rate). Call it the "Fair Trade Tax Cut". :o)

This paper considers a plan proposed by Warren Buffett, whereby importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods, which could then sell certificates to importing firms on an organized market... They also consider an alternative version of the plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes.

http://www.levyinstitute.org/publication...

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Submitted by quixote on

From Krugman's post, he says the main issue that's a flaw in MMT is that

if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

To me, that seems like an obvious truth. You do. Someone has to want to hold that currency.

Since IANAE, I didn't manage to catch where you answer that. (I mean that. I'm sure you do. I just don't get it.) He's in agreement that in our current, up-against-the-zero-bound, liquidity trap situation, printing money is not inflationary. In a normal situation (which I think he construes as not-zero-bound, not-liquidity-trap), printing money without regard to fundamentals has in the past led to Bad Things.

What is there that would prevent money from becoming increasingly worthless if it's printed without being limited by the underlying wealth of the printer?

I was under the impression that MMT did say that the underlying wealth of the economy was the limiting factor, and that the reason the US could print money to its heart's content just now is because there's enough unused wealth to back it up. By printing it, that wealth would be made usable again. Which is good.

But if my understanding is right, then Krugman and MMT are pretty much in agreement, although using different words somewhat. Since they say they aren't, I'm NOT understanding something. If you can see what it is and make it clearer to me, all help is gratefully accepted! :D

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Submitted by letsgetitdone on

in his assumptions. It isn't true that there will be a monetary base problem. See Scott Fullwiler's post here. I'll also be posting it at Corrente when I get a chance.

In addition, see Bill Mitchell's critique.

quixote's picture
Submitted by quixote on

for the links!

beowulf's picture
Submitted by beowulf on

Joe, interested in your thoughts on an idea RSJ mentioned as an alternative to Fed paying interest on reserves (a tax on non-monetary base assets held by banks), Warren's site makes it impossible to link to individual comments in most cases. But I'll copy below what I wrote back to RSJ, you can scroll down from there at link to back and forth I had with Warren.

"beowulf Reply:
March 27th, 2011 at 12:56 pm
IOR is horrible. Levy a tax of 4% on any non-monetary base assets held by banks instead, if you want interest rates of 4%. Put the “cost” back in “opportunity cost”.

"RSJ, that’s a very interesting idea, would that really anchor Fed Fund rate? If so, it would make interest rate maintenance costs a net credit to Tsy instead of a net debit... consider if Congress authorized Tsy to spend by issuing interest-free US Notes (“Lincoln Greenbacks”) with interest rate anchored by a tax instead of IOR. Even if half of CBO’s avg rate of interest was the yield spread between FFR and 10 yr Treasuries, its a swing from a $5 trillion Tsy debit [what CBO projects Tsy will spend in debt service over next decade] to a $2.5 trillion Tsy credit. Of course we’d have to cut taxes by $750 billion a year (more than is collected by Social Security FICA) to keep fiscal stance neutral, but that’s a sacrifice we should be willing to make. :o)

"Of course, instead of a “tax of 4%”–only Congress can levy taxes– it’d be simpler to call it a “user fee of 4%”, which can be set and adjusted by Fed governors (“The Monetary Control Act of 1980 requires that the Federal Reserve establish fees to recover the costs of providing priced services”). Of course, Fed’s net earnings end up at Ty General Fund anyway."
http://moslereconomics.com/2011/03/24/us...

letsgetitdone's picture
Submitted by letsgetitdone on

But I agree that it is a good idea that would work. I'd certainly just like to stop debt issuance, however. That has great political advantages given the fuss about the debt. Randy's proposal here reminded me of coin seigniorage in some ways. But we wouldn't need any more Congressional action to do coin seigniorage.

beowulf's picture
Submitted by beowulf on

Kinda sorta :o)

United States currency notes ("US Notes) is both legal tender and public debt (essentially its a zero interest bearer bond) that is not counted against the statutory debt limit. If Section b of US Notes statute were deleted, Tsy could substitute issuance of US Notes for public borrowing (presumably "in a form.. Secretary prescribes" includes electronically). Without open market operations to anchor Fed Fund rate, Tsy can either pay interest on reserves or (as RSJ suggest) impose a tax on non-monetary base. If I had my druthers, Congress would just lock Fed Fund rate at current 0.25% target, but if the Fed still wants to fiddle with interest rates (prime rate is 3% over FFR, sub-prime borrowers face higher markups), they could adjust the bank "user fee" and the higher they set interest rates, the more Fed will drain reserves and forward to Tsy. So its jerry-rigging a monetary tool to make it a fiscal tool. The selling point is, since Tsy would not longer have to pay interest on its own money, taxes could be cut substantially without increasing the deficit.

update--- Just read Randy's article, hmm... "With the full faith and credit of Uncle Sam standing behind it, the warrant is a risk-free asset to balance the Fed's accounts... Congress would mandate that these warrants would be excluded from debt limits since they are nothing but a record of one branch of government (the Fed) owning claims on another branch (the Treasury)."
That looks very familiar. To paraphrase Chief Justice Roberts, And the US Note doesn't work why? Instead of starting from scratch, just cut section b from below statute:
31 USC 5115. United States currency notes
(a) The Secretary of the Treasury may issue United States currency notes. The notes—
(1) are payable to bearer; and
(2) shall be in a form and in denominations of at least one dollar that the Secretary prescribes.
(b) The amount of United States currency notes outstanding and in circulation—
(1) may not be more than $300,000,000; and
(2) may not be held or used for a reserve.

letsgetitdone's picture
Submitted by letsgetitdone on

Wouldn't it be great if we could just get rid of it.

beowulf's picture
Submitted by beowulf on

You have to think like a corporate lobbyist. They are always angling for legislative changes that gives them what they want while making the least amount of waves. Just amending a few words in existing laws can have a huge impact. Let me tell you about a perfectly drafted bill (which alas, was ahead of its time). In 1991 Congressman Sam Gibbons proposed a bill that would have eliminated Medicare premiums, expanded its benefits, oh and opened it to every American regardless of age. He did all this in one page, followed by two pages of tax code changes. Both Clinton and Obama would have had a much easier time if one or the other of them had made that their HCR plan.
http://www.scribd.com/doc/24875006/Medic...

As for section 5115(b) , if it went away, the debt ceiling 12 suddenly become less important.
Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less the Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency called United States Notes, as well as Debt held by the Federal Financing Bank and Guaranteed Debt.
http://www.treasurydirect.gov/news/press...

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