The House That Sumner Built
For those who don’t follow these things, Mugato would say Scott Sumner is so hot right now. Now even Krugman endorses Sumner’s general worldview.
I was reading Brad DeLong’s take on the whole affair, and found this excerpt revealing:
By contrast [with the Fed buying assets with new money], the alternative expansionary policy is for the government to print money and spend it buying useful things. Then:
1. The buying of useful things raises spending.
2. Financing it by printing money rather than issuing bonds means no increase in interest rates to crowd out private spending.
3. Financing it by printing money rather than promising to levy future taxes means no increase in the present value of future tax liability to crowd out private spending.
4. Financing it by printing money means no worries about any increase in fears of some future government default.
….
To try to target nominal GDP using either only monetary policy or only fiscal policy seems hazardous. To coordinate–monetary and fiscal expansion, money printing-financed purchase of useful things–seems to be the winner.
Maybe I’m naive, and these views were always lurking in the background. But before this crisis–and the ascendancy of the “market monetarist” view–I don’t recall economists pointing out the advantages of running the printing press to literally pay the government’s bills. I think that would have been routinely denounced as incredibly irresponsible and a recipe for (yes) hyperinflation.
But 9/15 changed all that, apparently.
Best way to shut down the Fed’s printing press: replace Obama.
Joe Weisenthal, who hates Ron Paul and Tom Woods, loves the hot Scott Sumner:
http://articles.businessinsider.com/2011-10-18/markets/30292677_1_monetary-policy-goldman-inflation
Stephen Williamson has a post pointing out that NGDP targeting is just inflation targeting in different clothes: http://newmonetarism.blogspot.com/2011/10/nominal-gdp-targeting.html
Also take a look at David Beckworth’s response in the comments section of that post.
Brilliant! I can’t believe no one’s thought of this foolproof plan before!
It’s kindof disappointing that people can study economics for 6+ years, get their PhD, and the best they can come up with ultimately amounts to “print money,” although they might try to hide it with convoluted econo-speak (maybe this is where the degree comes in handy?). Any further debate revolves around finding the “optimal” amount of money to print.
Some flaws with this “plan,” line by line:
1. Government doesn’t buy “useful things,” and what they do buy they overpay for. And of course he falls for the fallacy that spending creates growth
2. Interest rates could easily rise if lenders expect higher inflation in the future; aka the “rational expectations” model
3. Inflation is itself a tax burden, just in a different form. Consumers could divert their spending towards commodities, financial assets, and other inflation hedges.
4. Though we could easily repay our debts nominally under this plan, it could invite a “speculative attack,” requiring ever-increasing amounts of money printing to cover our obligations since actual investors will be running from US bonds like the plague.
Really, this is the kind of idea I’d expect from someone who specifically has NOT studied any economics. I appreciate his candor though, even Bernanke was reluctant to admit that expansionary monetary policy involves “printing money.”
Ron Paul has Delong’s back.
I agree that DeLong’s plan would involve a role out of the state and a further hampering of the free market.
However Delong is not a Market Monetarists – none of whose main spokespeople are calling for direct state spending. Market Monetarism is free-market orientated and its main theories are closed aligned with Monetary Equilibrium Theory which is supported by many Austrians. Many Market Monetarists are also opponents of central banking.
The cornerstone of MM thinking is that we need a flexible money supply in order to accommodate changes in Aggregate Demand is a more optimal way than relying in price adjustments that can take time. Under free banking this would happen automatically. In a regime where free banking is outlawed a “second-best” option is to have the CB follow a NGDP-target that to a large extent takes policy decisions out of the hands of the government.
From an Austrian perspective there is nothing that is either inflationary or likely to lead to boom/bust scenario.
I recommend that readers of this blog actually check out what market monetarism is rather than attacking it based on their pre-conceptions of what they think it is. They may still reject it but at at least their views would be based on understanding and not second-hand views.
I think a lot of times you see this kind of (very basic) reductio of inflationist ideas.
Right here we see, “If NGDP targeting is good, then printing money to buy stuff for the government must be good.” Most people would take that to mean NGDP targeting is worse than an already bad policy.
In another case, I’ve seen people advocate, “We need to get consumers to increase spending on stuff they wouldn’t otherwise buy — to help the economy.” I then point out that, “An equivalent policy would be to steal money from the public, give it to producers, and then lie to them, saying, OMG demand is about to pick up big time, better ramp up production”, because they both do the same thing: transfer money from consumers to producers, provide no benefit to the consumer, and give producers a false signal of what’s in demand, setting off unsustainable production. Again, in a sane world, this would be a seal-the-deal reductio.
Similarly, I’ve pointed out that instead of just giving consumers money to spend, to jack up the artificial NGDP metric, you could just pass a law saying that people have to purchase things that they normally got via non-monetary transactions: you can’t cook at home, you have to eat out or pay a chef; you can’t teach your children anything, you have to pay a tutor to teach them everything; you can’t use your spouse’s “marital services”, you have to visit “midnight cowboy/girls”, and so on. This would get spending back up, but without the distortions involved in “who gets the new money first?” It’s stupid, yet better than a serious proposal. Case closed … but the case is still open.
Finally, I’ve pointed out that if lending banks money at non-positive interest rates is a good idea, why not do the same to consumers? Most people would realize that this demonstrates the stupidity of ZIRP and NIRP (since it implies that interest rates play no role whatsoever), yet Scott Sumner has actually said “great idea!” in response!
I feel like the world around me is getting crazier by the day.
(Dagnabbit, this should have gone on my blog as a post.)
Silas,
One of my favorite things about the internet is knowing that there are real people out there who aren’t caught in the tide of crazy. Of course, we may be caught in our own. But it’s great (insanely great!) to hear other people say things better than I could have.
Cheers,
Rick
Thanks, Rick_Hull!
“provide no benefit to the consumer”
The second case is different. In the first case, you are just lowering the real interest rate to a market clearing rate. It’s not true that the consumer gets no benefit from the consumption. You are just changing price of consuming today as opposed to tomorrow. Since the real rate of interest is lowered to a market clearing rate, real GDP increases. Both short and long run consumption end up increasing.
Certainly there is stuff to argue with in there, just not with your silly story.
“to jack up the artificial NGDP metric”
The cases are different. The first is raising the price level, while the second is just transferring services from unmeasured NGDP to measured NGDP. If you go to the store in the first case, bread will be more expensive. In the second case, it won’t be.
“Finally, I’ve pointed out that if lending banks money at non-positive interest rates is a good idea, why not do the same to consumers?”
I agree, at least putting aside risk! I think you are suffering from money illusion here. If you are talking about nominal interest rates, obviously it can be optimally negative in a time of deflation. If you are talking about real interest rates, it just means everyone wants to save. Everyone is willing to trade 1 sandwich today for 1 sandwich tomorrow, a zero percent interest rate won’t clear the market. Maybe there aren’t many sandwiches tomorrow compared to today. The market will clear at a lower rate, 1 sandwich today compared to half a sandwich tomorrow.
In order of your replies:
1) Why is one interest rate clearing the market while the other isn’t? If people aren’t spending or lending, there’s a reason for that, and if you make them do more or less, you’re just taking away the benefits that come from their decision to hold more money.
2) That’s a complete redefinition of the concept of NGDP. NGDP specifically counts *money changing hands*, and this mechanism is an integral part of the all the results “market monetarists” derive from it. So you can’t save this proposal from absurdity by claiming that there’s some (oxymoronic) “unmeasured NGDP”.
3) But negative or zero nominal rates destroy the relevance of risk! A zero interest rate means that I can just take the “loan” and start paying it back in infinite years. That’s indistinguishable from a cash gift, paid from the printing press. If the cost of borrowing money plays any role whatsoever, then you are simply covering up this cost, not eliminating it, by “loaning” free money out.
Would there really be no downside from everyone taking out arbitrarily large “loans” they don’t have to pay back until the heat death of the universe?
1) The real interest rate determines investment. In an economy with money, the nominal interest rate is bounded by zero. If the real interest rate is lower than 0 minus the inflaiton rate, the market won’t clear. The price can’t move to the “right” price.
2) NGDP is P*Y by definition. The price level times the real value of output. In reality, we don’t measure all output.
3) You seem to think if the interest rate is some value this year that I can borrow for as many years as I want at that rate. That’s not how it works. In reality there is a yield curve. If you go to Bloomberg.com and look at bond data, you’ll see that the 30 year rate on U.S. treasuries is higher than this years rate over 30 years.
When you originally said, lending to banks at 0%, I assume you are talking about the fed funds target between 0 and 25 bps. That’s an overnight rate, of course, it’s not true that banks can borrow at that rate for an infinite amount of time.
A plane is struck by lightning. The force rips apart the cabin and empties the plane’s passengers into the night sky. The plummeting passengers thrash and flail in terrified futility with the exception of one man. He falls cross armed, looking on with irritation at his fellow passengers. “We need to fly, idiots” proclaims the man wisely.
Quick, think back to what we were doing when we were flying! I was reading a magazine, Captain Joe was playing with a stick between his legs. Hustle up and main your stations!
Yes, it does bring to mind http://www.lhup.edu/~DSIMANEK/cargocul.htm
Also, just think of the fantastic numbers we can generate!
🙂 OK, I’ve got one.
MMTer says X and states that X describes reality.
Austrian points out that X does not describe reality. Y describes reality.
MMTer pauses for a moment and says “Aha! When I say the words of X, the words actually _mean_ Y. What else could they mean? X describes reality!”
Marris,
Can you provide examples.
Oh no, please don’t make me go through that again.
The statement is
The private sector would not have money if there were no deficit spending.
I am actually quite worn out from the previous discussion, especially since some really crazy MMTers showed up to talk about bankers and Hamilton and List, and I tried to contest every nonsensical thing they were writing (never a good idea.on the internet).
BTW, you seem much saner than them.
Marris,
I replied to your example on the other thread. Perhaps I am mistake, but I don’t think it says what you think it says, and furthermore, I don’t see how it is comparable to what MMTers are saying.
>The private sector would not have money if there were no deficit spending.
This is false, and the use of the word ‘money’ is ambiguous.
MMTers and Post Keynesians define money as a financial asset, so it is someone’s liability. Anyone can create money the key is getting it accepted.
The private sector can create money, which is either bank liabilities or non-bank liabilities. However the marketability of these liabilities varies. So, they talk about a hierarchy of money, with state money at the top, bank money below, and non-bank money below that.
When MMT says that the money used to purchase government bonds and pay taxes must come from the government, they are referring to state money, a liability of the government. If government liabilities are required to pay taxes or purchase bonds, then the government must issue its liabilities (either by treasury spending or a central bank loan) before taxes can be paid or bonds purchased.
The reason why this is stressed is because this reverses the commonly held view of causality. In a previous post I mentioned that this can be thought of as an ex post interpretation of the government bud constraint identity.
MMTers argue that the private sector does create its own ‘money’ and the historical work done by various anthropologists, MMTers, and sociologists, shows that periods of state money have existed alongside private sector credit systems. Furthermore, MMTers are supportive of Minsky’s Financial Instability Hypothesis. A key idea of FIH is that money is linked to banking, and banking to finance, and finance to the liability structure of the economy. Whilst credit performs an important function, it can also be used for unproductive measures. Private sector money is an important key to explaining business cycles, so your statement cannot be attributed to MMT.
What you may be taking issue with is the MMT statement that deficit spending provides net financial assets for the private sector (assumed closed economy for simplicity). This statement is true by definition. If government currency is a liability of the government, then spending into another sector (outflow), will match dollar-for-dollar private sector net saving (inflow). If we look at the balance sheet (stock) of the private sector, then the inflow will accumulate as a financial asset with no matching liability (because this is on the government’s balance sheet), so a net financial asset has been created. Whether or not this matters is an empirical question. MMT argues that the size and distribution does matter, but perhaps Austrian’s can contribute to the framework and provide a case for why it doesn’t matter.
Now I know you’ve read all of this before, and perhaps I am misunderstanding you, but I’m struggling to make sense of your objection.
My general thinking on the matter is as follows: A large part of MMT is a description of the various financial flows within the economy. Theory is required to interpret these identities, the causality, and the significance of the various identities. Ideally I’d like to see Austrians working within the descriptive framework and providing their own insights (for instance on the structure of capital).
BTW, apologies for the length. If you don’t wish to continue the discussion then that is fine. I have maths exams that I need to be studying for.
> When MMT says that the money used to purchase government bonds and pay taxes must come from the government, they are referring to state money, a liability of the government. If government liabilities are required to pay taxes or purchase bonds, then the government must issue its liabilities (either by treasury spending or a central bank loan) before taxes can be paid or bonds purchased.
Yeah, this is the point of dispute. I argued that treasury spending with bond issuance does not change the quantity of money in private holdings. Only the central bank’s asset purchases can do this. Such purchases increase bank reserves.
The definition of money here is monetary base [something like M0].
Now if you care about “net financial assets,” then it’s clear that deficit spending will do this. The government will add as much money as they removed with the bond sale. And they will add the bond.
This thread is really old. Try and find me on a more recent thread. Or just mail me.
Ugh, please don’t make me go through that again.
The statement was “the private sector would not have money unless the government issued bonds and/or did deficit spending.”
I’m a bit worn out from refuting this so many times, but you seem more intelligent than the average MMTer. Please don’t write some giant post of the form “well, you can think of…” or “what MMTers say is…” Please don’t defend the statement unless you really think it is true.
You never refuted anything, buddy. Doesn’t seem like you bothered to understand what you were told.
OK, reset. Deficit means spending in excess of income. For any entity. Correct? For govt the income is called “taxation”, correct? So, govt deficit is govt spending in excess of taxation. Now, for any entity to be in deficit means the rest of the world is in surplus with respect to hat entity. Correct? Who would be the rest of the world with respect to the govt? The non-govt sector, by freaking definition. Thus it is trivial that govt deficit = non-govt surplus. By definition. If you want govt to tax in excess of spending (aka “running a surplus”) the non-govt sector by definition gets taxed in excess of its income. Try to wrap your head around this, it is not rocket science.
Austrians have redefined the meaning of refuting.
They think it applies to strawmen and axioms.
The refuted statement above is about the stock of existing money in private accounts. The second refuted statement below is about how stock _changes_ occur.
Re: above, I already explained that the current stock does not exist because of the “current deficit” [the $15T number], “prior deficits,” or any such nonsense.
It comes from notes that were initially redeemable in gold, credit expansion from fractional reserve banking [back when we had a reserve requirement system], and Fed asset purchases. Please do not flip out and interpret what I wrote as “we have a reserve requirement system now.” I am aware that we do not.
Let me know when you identify another source of USD getting into private holdings. Always happy to learn new facts.
>Re: above, I already explained that the current stock does not exist because of the “current deficit” [the $15T number], “prior deficits,” or any such nonsense.
Current deficit is not $15T. Deficit is a flow, debt is a stock. Current debt is $15T or rather $10 because $5T is intragovernmental.
Deficit is the excess of spending over taxation. Since the only way that which pays taxes can enter the system is from the govt (in the US it is notes, coins and reserves) and cannot be created by the private sector – thru credit expansion or whatever (well, maybe by counterfeiting 🙂 ) – then you have to admit that there is no sense of taking about deficit of anything that is not acceptable as payment of taxes (because of definition of deficit) and thus US govt (yes, consolidated with the Fed) is indeed the only source of that which pays taxes in the current system.
Now, yes, the private sector can create its own liabilities – this was never denied. When banks extend credit an asset and a liability is created simultaneously. So, privately created funds always come with a liability attached. Net funds for the private sector can only come from outside the private sector – again, by definition – that is from the govt.
Fed asset purchases are not a source of funds for the private sector unless the Fed overpays relative to fair value. Which is what NGDP would involve. And which is fiscal policy in disguise, whether people like Sumner realize it or not. If the Fed buys a private sector asset that becomes worthless, the private sector gets a net asset (reserves in this case) and the loss is recorded as a hit to the Fed’s capital. The Fed is always recapitalized by the Treasury – which leads of course to increase in deficit and debt. So, overpaying for private sector’s assets is a form of fiscal policy.
Sorry, it should be
Re: above, I already explained that the current stock does not exist because of the “current debt” [the $15T number], “prior deficits,” or any such nonsense.
Current stock of what? Replay to this simple question.
The stock of money in private holdings.
This is not a reply. Money is not defined. If I have a deposit of $X with the bank I could say that I have $X but if it came from a bank loan, then I also have a liability of $X. You really need to start looking at net assets. Assets that are also liabilities of another entity in the private sector net out and leave private sector with 0 net worth.
I think we’re teetering on the edge of another MMT confusion here:
“The private sector has zero net worth.”
I think this confusion comes from the way you’re treating private money holdings. On planet Earth, my money is an asset on my balance sheet. The “liability” side just says “equity” (since I own it).
On planet MMT, my money balance is not my asset. It is a liability.
Normally, this would not be funny because we’d just say that you guys are speaking a different language. The word “liability” in your language means asset or something.
It’s funny here because I *think* you guys _actually_ think of it as a liability. When I save and build up my cash balance, I’m actually building up my liabilities!
Building a $5 cash balance… $5 dollars.
Learning that MMTers think it is a liability… priceless.
Wait, you’re not saying that _all cash_ is a liability. You’re saying it all “nets out” in the private sector? I think it is also false, but I wonder if you this is true.
Sorry, should have written
You’re not saying that _all cash_ is a liability. You’re saying cash holdings all “net out” in the private sector?
That cash is never equity?
I think this is also false, but I wonder if you think this is true.
Confusion is only in your head, marris. I specifically said that if your money comes from a bank loan then you have a liability. But you need to step out of your little myopic vision for a second and think of the private sector as a whole. That dollar note that you have, you either earned it or you loaned it from somebody. If you loaned it from somebody then it is your liability, no confusion here or on Mars about it. If you got it from somebody, then this somebody should ask herself the same question – where did she get the note? And like this we’ll arrive at the source of this note and unless it comes from the printing press in the former Saddam Hussein palace, you’d have to admit that this note was printed by the govt sector. And if you do accounting like this on all the financial assets of the private sector, you’d see that those that don’t get cancelled with liabilities of somebody else in the private sector, have to come from outside the private sector. And “outside of private sector” is called what?
Net financial assets of the private sector, denominated in the government currency are a liability of the government (+ Fed): cash, reserve balances and govt bonds.
All the rest nets to 0.
> Confusion is only in your head, marris. I specifically said that if your money comes from a bank loan then you have a liability.
Certainly. Please see my retract post above. I don’t think you believe cash is necessarily my liability. You think it _is_ on the asset side of my balance sheet.
Do you think it can be balanced by equity on my balance sheet? I think the answer is yes, but you should be pedantic here and state whether you think so.
If it is my asset and my equity, then it cannot be a government liability, right?
>>If it is my asset and my equity, then it cannot be a government liability, right?
Of course. Your equity is your assets in excess of your liability. Those assets themselves are someone else’s liability. Suppose you just loaned somebody $10 . This is your asset and, say, you have no liabilities. then your equity is $10, right? But these $10 are now liability of the other guy!
Similarly, net financial assets of the private sector are liabilities of the govt sector.
Meant to say “Of course it can“.
OK. Let me also trace through your loan example. The liability side of my balance sheet is my equity and my debt.
Before the loan, I would say
My asset side has $10
My liability side has an equity entry marked at $10
As long as this continues, I don’t need to “remark” my equity.
Once I make the loan, I would say
My asset side has a claim for $10
My liability side has an equity entry marked at $10
If I do mark-to-market accounting, then I need to adjust my equity entry every time the market value of my claim changes.
The loan recipient’s balance sheet [after the loan] shows:
Asset side has $10
Liability side has $10 debt
Liability side has no equity
Does this match what you’re saying?
>>Does this match what you’re saying?
Yes
OK, I’m really asking for trouble. Another statement:
The public gets new money from new government bond issuance.
Same request. Please don’t defend this statement unless you really think it’s true.
“The public gets new money from new government bond issuance.”
Wrong. I wonder where you got it. You probably paraphrased something you you did not understand. The public gets “money” from govt deficit spending, yes. Since “money” is a very badly defined term, the exact statement should be the public’s net financial assets go up with govt spending. I even linked to a post showing this on a level of balance sheets for you but seems like you did not bother to read it.
Yes, I also think I refuted the claim that the public gets new/net money from the government’s deficit spending: the amount of spending that is covered by selling bonds.
If the government did $1 dollar of “deficit spending” in 2011, they would not have added $1 to private holdings by year end. Private holdings would be unchanged.
New money only enters the system when the Fed buys assets.
Let’s not play out the joke once more. One time was enough.
God, last try for me, I think.
First, the Fed is part of consolidated govt sector. That is and always was MMT premise. I said so several times.
>>If the government did $1 dollar of “deficit spending” in 2011, they would not have added $1 to private holdings by year end. Private holdings would be unchanged.
You obviously too lazy to follow the accounting in the post I linked. OK, you really need to think about it. Start with time zero when there is no money in circulation. By “money” I mean that which is accepted in payment of taxes. Why? Because when we talk about govt deficit we have to ask: deficit of what? The answer is in the definition: deficit= spending in excess of taxation. So, you have to talk about “money” here as something that is accepted in payment of taxes, there is just no other consistent way of talking about “money” and govt deficits.
OK, at point 0 there is no notes, coins and reserves (as those are the only things accepted as payment of taxes in the US). If there are ,we’re not losing any generality, because those that are there by the very definition become the govt deficit. Otherwise whose asset and whose liability are they? The govt now spends $1. How can you claim that this one dollar did not add to private holdings? If the govt taxes that $1 later (runs a balanced budget) then yes, the private holdings go down by $1 but then there was no deficit spending over that period either. If the govt issues $1 bond and soaks $1 form the non-govt sector, the non-govt sector is still left with the $1 bond in net financial assets. So, either way your claim that $1 of spending – whether covered by bond issuance or not – is not adding to non-govt sectors holdings is wrong.
Now there is a comment of mine still awaiting approval on the other thread which also explains (or rather links to explanation) as to why the so called “helicopter drops” by the Fed are fiscal operations. I think that was another question of yours.
Dude, come on. If you really understood how the current system worked, you would not write
“Start with time zero when there is no money in circulation.”
If there was not money in private accounts, no one could buy bonds, right? So how could the Treasury possibly engage in deficit spending? The Fed would need to buy some other private asset, create some USD in the former owner’s account, and that owner would need to buy a government bond. These steps are required before the “government sector” could do “deficit spending.”
What you are doing here is just playing out the joke, with X’s of “deficit spending” and “fiscal spending.” Does the accounting link do the same? Joke get less funny when you repeat them.
No, dude, the joke is on you for being too thick and not realizing that the Treasury really, operationally, spends by telling the Fed – another agent of the govt – to credit private accounts first. It does not need to acquire that $1 out of nowhere because it creates it ex nihilo that very moment. Yes, for millionth time, the Fed is part of the govt – the relationship between the Fed and the Treasury is husband and wife.
>>So how could the Treasury possibly engage in deficit spending?
The same way it always does – by changing numbers on a spreadsheet at the Fed.
>>The Fed would need to buy some other private asset, create some USD in the former owner’s account, and that owner would need to buy a government bond.
No! 100% wrong. The Fed would simply credit the account of the private entity getting the funds. If the entity is a SS payee, then there is nothing even acquired in the act of spending – it is a simple net injection of fund into the private sector. You keep thinking about the things backwards.
I cannot identify what is stopping your understanding, maybe others will have better luck.
>>Does the accounting link do the same?
Just read it for cristsake, it is short. I also don’t know what’s holding up my other comments, but I think one link in a comment should go thru, so I repeat it here:
Helicopter Drops Are FISCAL Operations
http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html
Wow. The dispute is not about whether the Treasury could ask the Fed to credit the account without issuing bonds, or what buttons need to be pressed in what order, etc.
It’s about whether such an act would conceptually be deficit spending. It would not be. It would be a net money drop. That concept is applicable to the Fed’s current asset purchase programs.
I understand you guys want to use the phrase “deficit spending” differently from everyone else. That is the joke. [No longer funny now that I’ve explained it].
A marginal Fed asset purchase does not increase the “deficit for this year,” or the debt over time.
The only actions which can do this are the issuance of new debt, the debiting of private holdings when the debt is sold, and crediting of private accounts when the government makes a fiscal purchase.
These are _not_ net money drops. Such actions cannot change the amount of private money holdings.
I understand you will lose MMT cred if you back down. I promise I won’t tell anyone.
>>It’s about whether such an act would conceptually be deficit spending.
It would. Because when the Fed drops money on the private sector it changes its net worth (increases its net financial assets) – this is exactly the same result as from deficit spending. And it would even lead to “recognized” deficit spending because either the Fed would need to be recapitalized by the Treasury or the the Treasury would get remitted less of Fed’s profits (if the money drop was actually a purchase of assets at premium). It is all spelt out in the helicopter link, which you obviously did not bother to read or understand.
Helicopter drops, asset purchases at premium or deficit spending all change net worth of the private sector. The effects on the economy would be different depending on the exact details, but that is true of the exact detail of deficit spending as well. Each comes with its own multipliers. When you recognize that, you also recognize, for example, that the debate between NGDP targeting and fiscal stimulus is not a debate between fiscal and monetary policy effectiveness, but a debate between effectiveness of two different types of fiscal policy.
Let me ask you. If tomorrow the Congress decided to move the printing press tot he Treasury, and the Treasury printed $1T and literally thru it out of helicopters would you consider it “deficit spending”?
> If tomorrow the Congress decided to move the printing press tot he Treasury, and the Treasury printed $1T and literally thru it out of helicopters would you consider it “deficit spending”?
No. I would not.
Not unless they sold bonds along with the process.
We would call these money drops (literally). And we would say that these actions increased net private holdings of money.
>>We would call these money drops (literally). And we would say that these actions increased net private holdings of money.
OK. So, we’re progressing.
I guess you also presumably not call deficit spending if the Treasury simply credited accounts of social security payees. Right? These are also money drops, right?
So, OK, let’s not call it deficit spending, even though the effect on private holdings is the same.
And I guess you’d say that you have problem not with deficit spending alone, but rather with any money drops on the private sector? In other words, all this talk about running balanced budget is not really about that but about the fact that any money drop on private sector is undesirable? Is that correct?
Or is only spending followed by issuance of bonds undesirable?
By the way, Mr. Murphy, if you want to use this line of reasoning in your Sumner debate – feel free. NGDP is supposed to work thru the same channel as fiscal stimulus – increase in net worth of the private sector. Sumner fails to recognize that because he fails to follow the accounting in the link above.
> OK. So, we’re progressing. I guess you also presumably not call deficit spending if the Treasury simply credited accounts of social security payees.
Yes. I would call these net money drops. Same as the helicopter [I forgot to include the word “net” up there. I should have.]
> OK, let’s not call it deficit spending, even though the effect on private holdings is the same.
OK. Wonderful.
> And I guess you’d say that you have problem not with deficit spending alone, but rather with any money drops on the private sector?
I would personally like to see lower taxes, lower deficit spending, and few to no net money drops on the private sector. I would probably be open to most policies which tried to do that. I don’t think we should cut these all to zero tomorrow, but I think a slow unwinding would be good.
For example, we might start by replacing some government services with a negative income tax and letting recipients buy services on the market. Once that “settles” for some services, we might try to move more. I’m not sure how this thing should be indexed. You want to include changes in purchasing power in case prices sharply rise. But you also want to keep it stable enough that supporting recipients becomes less of a burden on payers as productivity improves.
I would probably cut military spending even more aggressively.
>>Yes. I would call these net money drops. Same as the helicopter [I forgot to include the word “net” up there. I should have.]
OK, it is good to know that you consider social security spending not deficit spending but simply a money drop. Not the way everybody treats it, but that’s fine – those are just fancy names, the effect is what’s important. For example, for some obscure reason when the Treasury mints coins those are also not considered deficit spending, or at least deficit spending subject to debt limit, something like that (beowulf, correct me if I am wrong), as if there was any difference between coins and notes.
But this of course means that the govt indeed adds to private sectors net financial assets when it does money drops, as you call them. And when it issues bonds to cover those drops – which in your definition miraculously turns them into “deficit spending” – then all it does is swap one asset (the bond) for another (HPM), that last one itself a result of previous money drops. And the private sector is still left with the net asset intact – it just swapped HPM for a bond. So, deficit spending does add to private sector’s holding, as MMT correctly claims.
>>I would personally like to see lower taxes, lower deficit spending, and few to no net money drops on the private sector. I would probably be open to most policies which tried to do that. I don’t think we should cut these all to zero tomorrow, but I think a slow unwinding would be good.
And here you still need to do more thinking. I have no problem with lower taxes but deficit being defined as govt expenditures in excess of taxation, you cannot have lower taxes AND lower deficit spending. Lower tax rates may spur economic activity and in turn cause higher tax receipts, which is indeed the MMT view of automatic stabilizers – when the economy is booming the deficit goes down by itself, but this would still by mean that the non-govt sector is paying more in taxes than it gets from the govt spending. So, if you continue on this path and keep lowering spending while, say, keeping tax rates steady, you might at some point actually produce a govt surplus, like during Clinton years. And this surplus, again, by accounting, just means that the non-govt sector ran a deficit in that period. and if it is done for a long enough time, private sector’s net financial assets drop and this is empirically associated with financial instability and recessions. And the reason govt spending can avoid this problem is because govt is the only actor in the economy that doesn’t need to turn profit. The non-govt sector doesn’t like to earn less than it spends. It wants profits. The govt is not run for profit – it is run for public purpose. It should provide the private sector with its desired savings by running a corresponding deficit – but no more than that or it will cause inflation.
>>For example, we might start by replacing some government services with a negative income tax
Negative income tax being, of course, a form of deficit spending.
Look, these are all political choices in the end. MMT is agnostic as to the actual services that the govt should provide – you can have both a very big and a very small govt. But it should be ready to supply the private sector with net financial assets that satisfy its savings desires.
I don’t think the stabilizers will be automatic. Part of the reason is that I don’t think [as most Keynesians] do that crises are caused by increased liquidity seeking. I think they are either from inflation [due to government price controls] or the fallout of malinvestments which are revealed when price controls are removed. The key price control here is the interest rate.
> Negative income tax being, of course, a form of deficit spending.
Definitely. I’m hoping that this system will be “cheaper” [the government will be able to cut the amount of “net financial assets” it adds to the private sector over time].
Financing it by printing money means you will probably not sell any more treasury bonds (except to the Fed, and even then only when they print money to buy them).
Financing it by printing money means that current holders of US dollars (in various forms) will look for ways to offload all over the place, only serving more countries to make arrangement for bilateral trade agreements denominated in local currency.
Financing it by printing money means commodity prices will go up, thus further throttling production.
Why do Austrians always mix flows and stocks?
So remark is so vague and unrelated to what I said, that there really is no answer. How about you try to be specific about what you are saying.
Which stocks?
Which flows?
Show me the units.
In theory, yes, but the government has been doing something similar since the crisis started, and yet the bond markets still haven’t gotten a damn clue that they should be demanding higher interest rates.
Neither does Bob, who invests a lot of money in long-term low-interest fixed-income securites via a whole life insurance plan.
yet the bond markets still haven’t gotten a damn clue that they should be demanding higher interest rates
Hilarious! But not nearly as funny as Ron “End the Fed” comments about QE
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
What a day!
As I have stated elsewhere so many many times before, It really is a waste of time “debating” with someone so dense as to not understand the concepts of economic calculation or the knowledge problem.
Roddis! Ron Paul is as clueless as you are:
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
So, where’s the graph?
I know this is tough for you to grasp since you don’t seem to understand our position but what Ron Paul means when he says something like that is that without the Fed the government wouldn’t be able to run up these absurd deficits. This is why he calls the Fed the great facilitator.
Wrong! He literally said
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
I laughed so much I could barely breath.
I know what he said. I explained to you what that means but I’ll try again. The QE programs together were well over a trillion dollars. So he is saying that if the Fed wasn’t there facilitating the debt by buying for the government
No, he said the Fed’s quantitative easing programs increased the national debt by trillions of dollars., which can only mean what it means.
And that is total nonsense.
Hit send on accident…
So if the Fed wasn’t there buying all of this debt then Ron Paul believes that the interest on the debt would rise and the government would be forced to cut back right away.
This is why people are abrasive with you. It’s not that you diagree with us it’s that you don’t even challenge our ideas. You challenge some creation of your own mind. I mean Ron Paul has critized the Fed for facilitating the debt. He calls them the great facilitator. He says all the time that without the Fed the government would be forced to scale back right away. So when you understand his position the statement you posted makes sense.
Now you can disagree with his position on the Fed being the facilitator of the debt, that’s fine. Instead you attack the sentence rather than the idea. You want to make it sound like Ron Paul is unintelligent rather than challenging his actual position. This is why threads with you devolve into just insults in the end.
I’m not sure what he meant. But the idea is not exactly incorrect. QE debt is still on the Fed’s balance sheet, so it has not “disappeared.” It will probably be rolled until the Fed decides to unwind its balance sheet. I know some people want them to tear up the debt, but that’s not the current state of the system, right? So the debt is still there.
Further, QE hopes raise government bond prices [lowers yields], which always gets all the “low yield” junkies clamoring for more government spending. Sort of like “the government should take advantage of low yields” to spend more on infrastructure, etc. So the government may spend more today because the yields show QE expected in the future.
He meant the Fed’s quantitative easing programs increased the national debt by trillions of dollars.
LMAO!
Well, that’s false,
But I think people who oppose government debt increases could probably oppose QE for good reason. It seems likely that if you could run two parallel worlds, one with QE and one without, the QE world could easily end with more government debt.
Marris, you’re view is Ron Pauls view. Mammoth just doesn’t want to argue the point that the Fed is the facilitator of the debt. In the whole paragraph from that article Ron Paul says as much.
“The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to “just do something” often outweighs all other considerations.”
Mammoth is boring and would rather avoid debating what a person actually stands for.
Sorry but there is nothing to debate.
It is quite different to say that
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
than
The Fed’s quantitative easing programs has helped increase the national debt by trillions of dollars at very low rates.
So there are only two options. Ron Paul clueless or a scaremonger.
And both options are not mutually exclusive.
No I think he just assumes that since he has spelled out his views on the debt, Fed, money, etc. in detail for 40+ years that he doesn’t have to talk down to the lowest common denominator every time he talks about it. I was able to understand what he was saying. So was Marris. seems like you are the one having trouble.
Here is Ron Paul in a previous article this year. “The truth, however, is that fiscal and monetary policy have always been tightly intertwined. In fact, the Federal Reserve has served as the enabler of bad economic policy for many decades. Without the Fed’s relentless expansion of the money supply during both the Greenspan and Bernanke eras, the U.S. Treasury never would have been able to issue the staggering sums of debt that now threaten our economic well being. This Treasury debt is the very lifeblood of deficit spending, permitting one Congress after another to spend far more than the Treasury collects in taxes. It is precisely this unholy alliance between the enabling Fed and a spendthrift Congress that I hope our witnesses will address today.”
Now I guess you’ll continue to ignore the obvious and just throw around an insult.
Right, Ron Paul is not the only clueless scaremonger, this blog is a proof of that.
But he is the one trying to run for office.
He is a honest and admirable person, but he’s still wrong…
Not sure about his honesty. It seems to me his strongest point at this time is his crusade against the Fed.
And being wrong about it is functional to his aims.
http://www.youtube.com/watch?v=-pKb4U5qDsc&feature=youtube_gdata_player
One of the arguments that Sumner has used in promoting his ideas is that central bank actions are easier to reverse than government spending programs if it turns out that they aren’t helping. Level targeting would presumably help ensure that the policy doesn’t lead to hyperinflation since overshoots would also need to be corrected. Conflating these ideas with Brad Delong’s suggestion that to print money and let the government spend money is a bit unfair.
Good arguments as to why central bank behavior will be hard to reverse or why level targeting won’t work are a better way to refute his ideas. Emphasizing how the numbers for the US’s NGDP were recently revised drastically would be a good start for attacking the level targeting part of the argument.
That is very good point. When I asked how the Fed will be able to “target NGDP”, someone responded that Sumner wants the Fed to create a market in NGDP futures contracts [not sure about the details]. Maybe NGDP revisions make that difficult? At best, we can build a market on initial measurements and/or revisions.
The contract for 2011 Q4 NGDP would need to settle at some price. If we settle on the initial measure, then this market will estimate the “wrong thing.” We want estimates on actual figures. If contract settlement is done in terms of revised prices, we will reward actors who “accurately predict,” but the economy has moved on. That price is just a historical fact/backward looking thing rather than an estimate of the system’s current behavior.
Bob: to target NGDP, the Fed doesn’t print money. It *threatens* to print (unlimited amounts of) money, conditional on NGDP being below target. If the threat is credible, and NGDP rise to target, the actual size of the Fed would almost certainly shrink. A fully credible threat like this would not need be carried out.
“Oh, no! The Fed is threatening to print money if we don’t have enough dollar transfers between us that get counted as a purchase! I better take one for the team and start spending!”
Couldn’t we just transfer the same dollar between us very rapidly? I note that under the method of:
Y = C + I + G + (X − M)
Purchase of software counts as Investment (I) but if I purchase from you it would also count as M for me but X for you. I’m sure there’s something you would want to purchase back from me again, thus adding to Investment (I) on your side and overall the X and M will cancel. Between the two of us we can do a bit of our own NGDP targeting.
*eyebrow*
*eyebrow*
On my tax return it would balance out as evens (I can deduct the expense) and pay the same tax as normal, because you know I would dearly hate to be paying the wrong amount of tax.
Yes, this is a point I’ve raised a lot with Sumner (and other lost-purpose economists): you can achieve whatever NGDP target you want by transfering a single dollar between people multiple times in sham purchases, thus showing that the correlation between NGDP and “genuine economic health” can easily break down. (Or, if the Fed prints the entire amount necessary to hit the target and buys junk with it.)
The only response I’ve gotten from Sumner on that is “Screw Goodhart’s Law”, basically.
Tel and Silas: read up on: intermediate goods; value added, in National Income accounting.
Nick_Rowe: Read up on: Goodhart’s Law, public goods problems, the difference between aggregate demand and demand for a business’s products, the benefit of holding cash instead of spending it every second.
As I stated above:
Y = C + I + G + (X − M)
… is expenditure accounting, not income accounting.
I accept that by comparison of various methods you can estimate the errors but what to do then? Split the difference?
Nick,
Is the idea that all the other things people care about (employment, stable prices, higher physical productivity) will reach “good levels” by the time the Fed hits its NGDP target? Why should this be so?
For example, suppose we’re in a stagflation environment like the 1970s. We have rising prices, high unemployment, etc. It is possible that RGDP is falling over time. If unemployment does not go down, or the prices of consumer goods starts rising above affordable levels, won’t there be a push to make the Fed stop it’s printing threat? Like “Stop threatening to print money already! We need store keepers to stop raising their prices in response to your threats! We need to stop producers and factor owners from wasting their time guessing what the Fed’s next move will be!”
marris: if the problem were a deficiency of Aggregate Supply, rather than a deficiency of Aggregate Demand, then you would of course be right. An AD policy won’t fix an AS problem.
Good point, Nick_Rowe, and after all, it’s not like a huge chunk of the economy was just revealed to have been producing junk or anything (such as unnecessary homes; complex, risk-hiding financial products; worthless educations…).
I see. I did not understand because I typically don’t think of recessions as either AS or AD problems. I think of them as coordination disasters.
Your response is helpful. Thank you.
No, 9/16 changed all that.
why does sumner/delong want to go thru the banksters or govt crony routes? why dont they propose increasing electronically,all bank accounts in the country by the amount of dollars they deem necessary.
i mean ,why benefit the banksters or cronies. or does ngdp targetting involve enriching goldman/solyndra compulsarily?