Modern Monetary Nonsense
Mar 4, 2019 KENNETH ROGOFF
A number of leading progressive US politicians advocate using the Federal Reserve's balance sheet to fund expansive new government programs. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions, and could have unpredictable and potentially serious consequences.
CAMBRIDGE – Just as the US Federal Reserve seems to have beaten back blistering tweets from President Donald Trump, the next battle for central-bank independence is already unfolding. And this one could potentially destabilize the entire global financial system.
A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates. Prominent supporters of this idea, which is often referred to as “Modern Monetary Theory” (or MMT), include one of the Democratic Party’s brightest new stars, congresswoman Alexandria Ocasio-Cortez. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions.
Fed Chair Jerome Powell could barely contain himself when asked to comment on this new progressive dogma. “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell insisted in US Senate testimony last month. He added that US debt is already very high relative to GDP and, worse still, is rising significantly faster than it should.
Powell is absolutely right about the deficit idea, which is just nuts. The US is lucky that it can issue debt in dollars, but the printing press is not a panacea. If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either. If that country tries to dump a lot of it on the market, inflation will result. Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.
On Powell’s second point, that US debt is already high and rising too fast, there is far more room for debate. True, debt cannot rise faster than GDP forever, but it may do so for quite a while. Today’s long-term, inflation-adjusted interest rates in the US are about half their 2010 level, far below what markets were predicting back then, and far below Fed and International Monetary Fund forecasts. At the same time, inflation has also been lower for longer than virtually any economic model would have predicted, given current robust US growth and very low unemployment.
What’s more, despite being at the epicenter of the global financial crisis, the US dollar has become increasingly dominant in global trade and finance. For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates. How to exploit this increased US borrowing capacity is ultimately a political decision.
That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt. These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar. As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis.
The right approach to balancing risk and reward is for the government to extend the maturity structure of its debt, borrowing long-term instead of short-term. This helps to stabilize debt-service costs if interest rates rise. And if things get really difficult, it is far easier to inflate down the value of captive long-term debt (provided it is not indexed to prices) than it is to inflate away short-term debt, which the government constantly has to refinance.
True, policymakers could again resort to financial repression, and force citizens to hold government debt at below-market interest rates, as an alternative way of reducing the debt burden. But this is a better option for Japan, where most debt is held domestically, than for the US, which depends heavily on foreign buyers.
Having the Fed issue short-term liabilities in order to buy long-term government debt turns policy 180 degrees in the wrong direction, because it shortens the maturity of US government debt that is held privately or by foreign governments. Contrary to widespread opinion, the US central bank is not an independent financial entity: the government owns it lock, stock, and barrel.
Unfortunately, the Fed itself is responsible for a good deal of the confusion surrounding the use of its balance sheet. In the years following the 2008 financial crisis, the Fed engaged in massive “quantitative easing” (QE), whereby it bought up very long-term government debt in exchange for bank reserves, and tried to convince the American public that this magically stimulated the economy. QE, when it consists simply of buying government bonds, is smoke and mirrors. The Fed’s parent company, the US Treasury Department, could have accomplished much the same thing by issuing one-week debt, and the Fed would not have needed to intervene.
Perhaps all the nonsense about MMT will fade. But that’s what people said about extreme versions of supply-side economics during Ronald Reagan’s 1980 US presidential campaign. Misguided ideas may yet drag the issue of US central-bank independence to center stage, with unpredictable and potentially serious consequences. For those bored with the steady employment growth and low inflation of the past decade, things could soon become more exciting.
Writing for PS since 2002
176 Commentaries
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Comments
There are still some 'gold-bugs' out there who think fiat money is a sinister conspiracy. Similarly one can still find paranoid people who denounce fractional reserve banking. T
Mainstream economics embraced floating exchange rates a long time ago because of downward price and wage stickiness so the 'gold standard' is old hat. Neo-Classical thinking is still around as a sort of knee jerk reaction. Everybody is uneasily aware that Money isn't exogenous and that the 'marginal efficiency of Capital' is hot air. The real world is complicated and only a couple of Econophysicists claim to have a handle on it- but they may be lunatics or fraudsters, we simply don't know.
The big problem with moderate MMT is that it assumes things most of us believe to be false- viz.
1) the Govt. can implement infrastructure or other socially beneficial projects in a timely and cost effective manner and these will have a higher return than the interest rate. Most people don't believe this will happen because of rent-seeking and incentive incompatibility and plain old fashioned incompetence.
2) Both Governments and Central Banks are subject to 'due process' type Juristic checks and balances. They have to prove that both their methods and proposed outcomes meet all sorts of statutory, constitutional and equitable tests. Doing what has always been done is the safer option because any innovation could precipitate a law suit and, if it is found that you have acted ultra vires, then it is your head on the chopping block.
3) no crowding out effect on private investment. This seems reasonable when there is a liquidity trap as well as credit rationing because of uncertainty. However, the problem is, private money may chase after Govt. contracts instead of doing useful, but more risky, stuff. The result is 'rent dissipation' or crony capitalism.
President Xi reckons he can get rid of these obstacles by ensuring all decisions are made by Party members who know that if they mess up, they will be taken away and beaten until the confess everything in Court. Who knows? This may work but only in a country like China with a very well entrenched one party system. We don't have that option because our Courts are independent and no respecter of persons.
This is not to say that Obama didn't make mistakes. Still, at the time, we appreciated his prudence. The big problem Western Democracies are facing has to do with collapse of the bipartisan consensus which accompanied the 'Great Moderation'. Budget hawks can be of either party because both sides have crazy profligates in their number.
Economic theory has salience only where preference diversity is not too great- or too little. It appears that society has become more polarized at the same time as it has become less thoughtful and so everyone wants change even though unanimity on this point militates for that change to be for the worse.
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JOHN MESROBIAN Mar 10, 2019
Alexandria Cortez - AOC - has little if any understanding on what she says and proposes.
Some of the people who have been behind her, such as MMT of GND people also have little if any creditability. I noted an interview by one of AOC resources/authors behind her program, from Cornell Univ. and many of their statements were incorrect or misleading, that person has not returned to the show, event though he was invited back.
GND is a non starter, even refer to one of the founders of Greenpeace comments on AOC's ideas. MMT's they live in another universe.
Many of the MMT's and GND's are associating with AOC, in order to get noticed.
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JOHN DOYLE Mar 10, 2019
AOC is not an MMT knowledgable. She just refers to it but doesn't understand it properly. Most of the negative comments here are not knowledge based, just opinions from half digested readings. However, she is right to refer to it though as it duds the mainstream [as represented by Rogoff and Krugman etc] economic agenda. They certainly see the danger to their mainstream fantasies and failed models and are now desperately trying to salvage their position. They just lose face instead. MMT is called a theory, as Gravity is a theory, not an hypothesis. It is rather a lens through which the real workings of the economy are revealed. The GND is not going to work. but that is another story.
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BARRY ROSENFELD Mar 10, 2019
Standard basic macroeconomics indicates that the central bank can "accommodate" government deficits by buying bonds. Is there a limit? Who knows? However, as the US no longer is on the "Gold Standard", or any other fixed exchange rate standard, and can devalue relative to other countries, there is no clear upper limit to central bank accommodation - as there was no clear lower limit to price deflation when the exchange rate was fixed. A reduction in the exchange value of the US dollar also will do more to balance the trade deficit and create more US jobs that any amount of tariff manipulation.
Rogoff has made his political biases well known, e.g., "destabilize the entire global financial system" and "Powell is absolutely right about the deficit idea, which is just NUTS [my emphasis]." Apparently several years of huge central bank purchases of private sector junk bonds - quantitative easing - by both the FED and the ECB - were OK as long as it financed private sector "investment",i.e., financial and real estate speculation, but somehow it will be the harbinger of end times if it were used to finance public investments that benefit the large majority of Americans.
Perhaps if a few "grains of truth" were planted they would yield a harvest - if not smothered by tons of "fertilizer."
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TOM W Mar 10, 2019
Dr. Rogoff will now be written off by the AOC "progressives" as an old man committed to the status quo.
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DOUGLAS UNGREDDA Mar 10, 2019
Countries don't go bankrupt. Where did I read this from? Its the FDR New deal mantra with a paint job remake. Nothing new under the sun,really.
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JOHN ELLIS Mar 10, 2019
No that was not FDR's new deal mantra. He was actually in many ways an economic traditionalist and his monetary policy was fairly modest in hindsight. His attempt to push the budget back to balance in 1937/8 after GDP returned to pre crash levels in 1936 nudged the country back into recession. Conservative propagandist love to quote this as proving the New Deal failed ignoring the facts up til 1936.
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LAWRENCE KRAMER Mar 10, 2019
There is a theme to every hatchet job on MMT. They all start with the smallest possible admission that the theory is sound. Maybe it's "some validity," (Summers) or "a grain of truth" (Rogoff), but it's always there, because MMT, as a description of sovereign finance, is completely accurate. The problem is that , as a tool of sovereign finance, it is like a book of matches, and there has probably never been, not may never be, a sovereign with the maturity to play with it.
MMT is dangerous because it relies on either a trailing indicator that signals too late (inflation) or a leading indicator that is impossible to measure (the output gap) as its bogey. We can point right now to the debt/GDP ratio. It's real, and its measurable. It may be a poor measure of what we can, but from a certain perspective, it's the only game in town. How could Profs. Rogoff and Reinhart have written "This Time is Different" if there were no measurable leading indicator to compare?
I agree completely that extending the maturity of government debt is a good idea, but that's because the further out maturity goes, the more like a tax the debt becomes, and taxes are a far more powerful tool for reducing spending than short-term debt. US debt is so liquid that its maturity only matters when rates rise. Then, the debt falls in value, i.e., its purchasing power is reduced, and the loan becomes a tax. In other words, fully within the notions of MMT, long-term debt is better than short-term debt because long-term debt is a form of contingent taxation. This is what happens if you water the "grain of truth" instead of pissing on it.
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JOHN ELLIS Mar 10, 2019
There is of course a gap between much economic theory and actual practice. What you call a hatchet job is simply explaining the nature of this gap which you obviously understand. Because MMT like Laffer's famous curve has some superficial validity but in reality is a dangerous oversimplification as you also clearly understand, pissing on it is probably a good idea when it comes to advancing the public good. Haha. And yes long term debt is notionally better than short term debt but that's a bit of an oversimplification as well.
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LAWRENCE KRAMER Mar 10, 2019
Mr. Ellis - Would you say that putting MMT in the Overton window is a bad idea? Is it like race and intelligence? I don't. I believe that we need to get rid of the notion that supply is a constant, which is inherent in the current approach to government spending.
Maybe we just need to put some assets on the national balance sheet so that financed projects can be seen to make us richer rather than poorer. But a "balanced budget" is what poor people and poor countries are forced to practice. And paying off debts is what mortal beings must do. Neither is an appropriate notion for the United States of America unless we want to admit now that we are done being a superpower.
MMT is also wrapped up in Triffin's Dilemma. The USD is the world's reserve currency because we are who and what we are. We run a trade deficit because we can; only a country whose money is a world reserve can buy stuff without selling stuff. But if we want the dollar to remain a reserve currency, we must import more than we export, and if we don't want our trading partners to own all of our real and corporate assets, we must offer them Treasury securities. MMT explains why this is a stable arrangement unless, of course, we elect an unstable leader. (I attribute the GFC precisely to Clinton's reducing the deficit when the trade deficit was creating demand for AAA-rated USD securities. Wall Street financed a Potemkin Village with liars' loans to fill that void. CRA and liberal political pressure notwithstanding, if there had been more Treasuries to buy, so many bogus mortgages would never have been issued.)
Politics is the art of the possible, and MMT is the theory under which the most is possible. I am not ready to say that our pols cannot come up with MMT by another name. Aren't we already practicing it while rejecting it? How else do we explain the effect of the recent tax cut on the deficit and inflation? The trade war has, so far, made our trade deficit larger, but the dollar is not weakening, probably because the world knows that if it wanted to spend its dollars, the US could easily ramp up production to absorb them. All of this is easily understood through the lens of MMT. Calling it "nonsense" leaves too much potential production unproduced.
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JOHN ELLIS Mar 10, 2019
Krugman provides a simple and more easy to understand primer on why MMT is bunk.
https://krugman.blogs.nytimes.com/2011/08/15/mmt-again/?
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LAWRENCE KRAMER Mar 10, 2019
Krugman's article is unpersuasive. He does a thought experiment that adopts as a premise that "for whatever reason" the sovereign's bonds won't sell on the market. What on earth is "for whatever reason"? Does he mean if pigs fly or Hell has frozen over? Does he mean that people won't buy Treasuries but will buy investment grade corporates and Munis?
There is no "whatever reason." There is only one reason: loss of faith in the currency. And MMT does not support printing more of a currency in which the vending public has lost confidence. We might as well be talking about that town where the barber shaves all the men who don't shave themselves. There is no such barber, and there is no "whatever reason" consistent with a functioning economy.
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JOHN ELLIS Mar 10, 2019
Rogoff should have just done a demolition job on MMT which is complete nonsense. There is a limit to how much seigniorage you can extract and even the dollar would reach that limit at some point. If it was all that simple Venezuela would have no problems.
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LEN CHARLAP Mar 10, 2019
Venezuela's problems did not start with the creation of too much money. Since its economy was almost entirely dependent on oil, it currency was essentially a coupon on the price of oil. When the price of oil fell, what was it 60%, the bolivar's value fell correspondingly. Thus instant hyperinflation. This all fits into the MMT framework.
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JOHN ELLIS Mar 10, 2019
So why haven't they experienced hyperinflation in Saudi Arabia or Norway?
http://www.fao.org/3/Y4325E/y4325e0a.htm
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LEN CHARLAP Mar 10, 2019
Norway produces other products mainly associated with fishing. Also the country was clearly better run and prepared. I have no idea about the SA economy.
The idea the the fall in the price of oil started the Venezuela inflation is not mine. It seems to be generally accepted. For example:
"Then the global price of oil dropped. Foreign demand for the bolívar to buy Venezuelan oil crashed. As the currency’s value fell, the cost of imported goods rose. The Venezuelan economy went into crisis."
http://theconversation.com/what-caused-hyperinflation-in-venezuela-a-rare-blend-of-public-ineptitude-and-private-enterprise-102483
"Owing to high oil reserves, lack of policies on private property and low remittances, by 2012, of every 100 dollars, more than 90 came from oil and its derivatives. With the fall in oil prices in early 2015 the country faced a drastic fall in revenues of the US currency along with commodities"
Wikipedia
"The most recent plunge in oil prices—falling from more than $100 per barrel in 2014 to a low of under $30 per barrel in early 2016—has sucked Venezuela into an economic and political spiral, from which it could take decades to recover.
A number of grim indicators tell the story.
Oil dependence. Oil sales account for 98 percent of export earnings and as much as 50 percent of gross domestic product (GDP).
Falling production. Oil output has declined for decades, reaching a new low in 2018.
Spiraling economy. In 2018, GDP shrunk by double digits for a third consecutive year.
https://www.cfr.org/backgrounder/venezuela-crisis
The last fact is the most telling since prices are inversely proportional to the value of production.
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JOHN ELLIS Mar 10, 2019
No they didn't but money printing was seen as a way out their problems. And there are many other countries whose main export is energy who didn't fall into the same trap. The Bolivar was not purely a coupon for the price of oil. MMT is a facile framework a bit like your analysis really.
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LEN CHARLAP Mar 10, 2019
On second thought, Norway and SA are irrelevant as the question is whether the excess printing of money which could cause hyperinflation has ever done so at least since WWI. Whether the actual cause of inflation in country A would cause it in country B is not germane to this question.
I agree that when inflation has started in a country for a reason other that the excess printing of money, the excess printing of money can severely exacerbate the problem, but it seems difficult to start hyperinflation by it.
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OEUFS BRUNS Mar 10, 2019
As with every alleged critique of MMT, we must start with misrepresentation (in this case a gross misrepresentation) of what MMT actually is because it merely describes how a monetarily sovereign economy actually functions, not how it used to function or we wish it would function but how it actually functions. This is terribly disconcerting to those with lucrative academic careers based on the used to and wish it would models. But I must ask, how does Mr. Magic Spreadsheet get taken even remotely seriously any more? Telling the Masters of the Universe what they want to hear might pay well but shouldn't be a path to academic legitimacy.
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DOUGLAS UNGREDDA Mar 10, 2019
Not so., USA has responsibility not just upon its citizens but also to the world as anything it does carries spillover effects to the world markets and also to global financial stability. So they are not immune to the consequences of folly as their actions backfire. Too strong a dollar hurts the American economy. So does a weak one
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JOHN ELLIS Mar 10, 2019
One problem with your little bit of nonsense is that the MMT is as a practical matter constantly advanced as a means of funding unlimited government spending as in the particular case Rogoff is addressing. But thanks for the bit of grand philosophizing.
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LEN CHARLAP Mar 10, 2019
If you would learn even a small bit about MMT you see that the statement "MMT is as a practical matter constantly advanced as a means of funding unlimited government spending," is just a statement that politicians do not understand MMT either.
Perhaps the most important part of MMT is the effect government spending (more precisely money creation) has on prices.
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ANDY FREW Mar 10, 2019
But if the Green New Deal involves paying wages to middle class earners who actually pay their taxes and whose expenditures are taxed, and saves imported energy or promotes gas exports, the effects on the US fiscal position and teetering US balance of payments are both positive and badly needed. And with so much of the US economy now in services, likely to be reflationary.
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B WILDS Mar 9, 2019
It is only massive and unsustainable deficit spending that continues driving our economy forward. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit.
Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.
This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. The article below argues government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future.
https://brucewilds.blogspot.com/2019/02/deficit-spending-main-driver-of.html
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EGMONT KAKAROT-HANDTKE Mar 6, 2019
Too much ado about deficit spending
Comment on Kenneth Rogoff on ‘Modern Monetary Nonsense’
For some time now, MMTers are shouting from the rooftops that deficit-spending/money-creation is the solution to almost all economic/social/environmental problems or, in the words of Kenneth Rogoff, to use “the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.”
This is indeed stupid for several reasons:
• The government, needless to emphasize, is well aware of the advantages of deficit-spending/money-creation but plans to exploit them for other purposes. What naive MMTers do not know is that the free fiscal space is not free at all but has already been allocated “to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar.”
• “The US is lucky that it can issue debt in dollars, …” There is no use to awaken foreign suckers to the fact that they are taken for a ride. “If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either.”
• Don’t rock the Fake-America-Great-Again boat: “For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates. How to exploit this increased US borrowing capacity is ultimately a political decision.” Not waiting for MMT-twits, this decision has already been taken for the benefit of the one-percenters.
• In addition: “The right approach … is for the government to extend the maturity structure of its debt, borrowing long-term instead of short-term.” Because the longer the maturity, the higher the interest rate for the bondholders, i.e. the one-percenters.
• In addition: “And if things get really difficult, it is far easier to inflate down the value of captive long-term debt … than it is to inflate away short-term debt, …” No need for MMTers to shout around that it is NOT the government that goes broke and that public debt will never be repaid.#1
• Finally: “Misguided ideas may yet drag the issue of US central-bank independence to center stage, …” Even naive MMTers must understand that the last thing anyone wants is a discussion about who runs and should run the central bank.
So, MMTers get it, although your ideas “have a grain of truth” it is “just nuts” to make so much fuss about it.#2 A public debt of $22 trillion should tell you that FED/TREASURY know already for a long time how to max out the no-limit public credit card without domestic/foreign bondholders and the general public getting too nervous.#3 After all, because of Public Deficit = Private Profit, the so-called free market economy hangs on the life-support of the State, i.e. on a smoothly growing public debt.
MMTers stand for aggressive deficit-spending, Rogoff stands for moderate deficit-spending. In the final analysis, all are in the same camp. And it is NOT the camp of WeThePeople.
Egmont Kakarot-Handtke
#1 Some nasty MMT surprises behind the time horizon
https://axecorg.blogspot.com/2019/02/some-nasty-mmt-surprises-behind-time.html
#2 MMT: The art of shooting oneself in the head
https://axecorg.blogspot.com/2019/01/mmt-art-of-shooting-oneself-in-head.html
#3 MMT, money printing, stealth taxation, and redistribution
http://axecorg.blogspot.com/2017/11/mmt-money-printing-stealth-taxation-and.html
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LEN CHARLAP Mar 10, 2019
While I disagree with practically everything you say, I have written below of historical examples which suggest MMT is correct. I would here just like to complain about your use of the figure of $22 trillion for the "public debt". I agree that the term "public debt" is sometimes used for what I prefer to call the gross debt which includes the money owed to the FED, the SSA, etc., i.e. other parts of the federal government. I prefer to use "public debt" for the debt owed to the public, i.e. outside the federal government.
But even more importantly, when one quotes the size of the debt presumably to impress us with its size as compared with other times and countries, it is entirely the wrong statistic. The debt in dollars is important especially as it changes, but for comparison the debt ratio (debt/GDP) is more appropriate.
The public (outside the government) debt ratio is today about 77%. It was 109% in 1946 which was followed by 27 years of Great Prosperity. It was 16% in October of 1929 which was followed by some of the worst economy the country has ever seen.
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GALEN LINDER Mar 6, 2019
On the one hand MMT argues that a sovereign can create and spend money into circulation. This is true, although the US has not done this since it ended issuance of United States Notes in 1971. https://en.wikipedia.org/wiki/United_States_Note
On the other hand, MMT argues that deficits don't matter. Deficits, however are created by borrowing, so government created money should create no deficit.
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LEN CHARLAP Mar 10, 2019
Yes, there is confusion about the term deficit. If it means how much we borrow, then you second paragraph follows from your first since borrowing would be unnecessary. But if it means the difference between federal spending which would equal the amount of money created and taxes which would be the amount of money destroyed, then MMT says that figure is practically the whole ball game since that is what figures in the determination of prices.
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ALAN LUCHETTI Mar 5, 2019
Mr Rogoff misrepresents MMT. Cartoonishly. But worse, he misrepresents bond volume as debt.
Debt is what is borrowed. Borrowing is exchange of a financial liability for a financial asset. But bond issuance is not borrowing. It is the exchange of a financial liability for a financial liability.
Bond issuance is not borrowing and bond volume is not debt. For too long these misnomers have been colouring the thinking of too many people. “Budget” balance should be between inflation and slack, not between currency issuance and currency destruction as if the destruction funded the issuance.
It is ironic in the extreme that when MMT says that inflation concern, not budget balance, should inform the fiscal stance, we read all this commentary about MMT’s lack of concern for budget balance, and how it will be inflationary. No wonder central banks are barely been hitting the lower bound of their desired inflation ranges and labor underutilisation had been chronic.
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PAUL FRIESEN Mar 6, 2019
How on earth do you figure that bond issuance is not borrowing? If the government issues bonds, it gets money now that it has to repay later. What definition of "borrowing" does that not fit?
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MARTIN SCREETON Mar 5, 2019
What's had 'serious consequences' is 'supply-side economics' being practiced for 40 years now in this country... that has given away the treasury to mostly the rich while impoverishing roughly 60-70% of our population... and they continue to decline, to this day, in this dying society. What was the 6 trillion dollars given to the banking sector? what was the Two trillion dollars given to the rich by mr. trump in 2017? We sorely need to change back to a "Consumer-Centered Economics" which does a hell of a lot more to get the masses educated and contributing to our society. That means not only free college, but paying people to go to college (via monthly stipend), immediate debt relief to the millions upon millions that have been ripped off by For-Profit-everything mentalities...this will crash on it's own, but it's better to offer at least bankruptcy again. We need only to look at the past to know what to do... after WW2... they had all this plus housing, union jobs, stiff labor laws and more... What we have now is the Roman Empire in its final days.
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PAUL FRIESEN Mar 5, 2019
There are times and places where deficit spending is fully justified. That is when there is a shortage of demand and extra government spending is needed to return to full employment. But deficit spending under other circumstances is just a way for governments to spend more without raising taxes. Good for short-term popularity, bad for the long term.
Ideally, we should do for fiscal policy what most rich countries have already done for monetary policy - get it out of the hands of the politicians. Just as we have independent central banks with managements structured to avoid pressure from politicians to lower the interest rate ahead of an election, so we should have an independent body to determine the appropriate level of fiscal stimulus. Such a body could control a key tax rate, for example a sales tax. Politicians would control other taxes, but if they failed to set an appropriate tax rate for their level of spending and the economic circumstances, the independent authority would just raise the rate it controls.
This would also have the advantage that the independent authority would be able to act quickly in a recession.
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WMC MANTIS Mar 5, 2019
I'm not an economist, but I have been following the MMT dispute for at least a decade. The main premise of MMT seems to be that fiscal policy should be predicated almost exclusively on its expected impact inflation. If MMTers are profoundly wrong on this point, it should be very easy to prove in a short, 2000-word essay, devoid of esoteric concepts and devoid of ad hominem attacks. Why hasn't the economics "establishment" been able to provide us with such an essay?
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LEN CHARLAP Mar 10, 2019
I agree. You notice that the critics of MMT rarely invoke historical examples to prove their point or have anything to say about the economic history that supports MMT. Here are some examples:
Keynes famously wrote, “The boom, not the slump, is the right time for austerity at the Treasury.” This is usually taken to mean that we should run federal deficits & thus increase the debt when times are bad, but when times are good we should run federal surpluses & pay the debt down.
But during the Great Prosperity of 1946 to 1973, not only did we not pay down the debt, but we increased it 75%. (f you want to raise "The Europe was Rubble" myth, look at ttp://piketty.pse.ens.fr/files/capital21c/en/pdf/F1.1.pdf which shows that the out of Europe was about the same as the output of the US during the Great Prosperity.
Then there is the even more compelling fact that when we did follow Keynes' advice, the economy fell off a cliff:
The federal government has balanced the budget, eliminated deficits for more than three years, and paid down the debt more than 10% in just six periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30. The debt was paid down 29%. 100%, 59%, 27%, 57%, and 38% respectively. A depression began in 1819, 1837, 1857, 1873, 1893 and 1929.
We can see how this fits into MMT claim that the flow of money between the three sectors, private, federal, and foreign, is an important economic factor by looking at the what happened in 2008. With the exception of a brief period in 2003, from about 1996 to 2008, more money flowed out of the private sector than in. This was because the federal deficit was less than the current account deficit. As in the previous 6 examples in which a federal surplus sucked money out of the private sector, private debt exploded. By 2007 the big banks had 27 or 28 times the amount in outstanding loans as they had in reserves. We would have had a real depression as in the previous 6 cases but for the FED which could now create as much money as it needed and poured TRILLIONS into the banks to use for reserves.
I ask those deficit hawks like Prof Rogoff to point out a period in US economic during which a too high federal debt has ever negatively affected the US economy. Just remember that the federal debt ratio was 16% in October of 1929.
Furthermore if one looks at the cases of excessive inflation since WWI at least one see that as MMT maintains these were all by a decrease in production or a constrained economy. Here are some examples:
In 1972, the anchovy harvest off the coast of Peru failed. Since anchovies form one of the principal component of livestock feed, ranchers had to buy other food like corn & wheat to feed their valuable stock. This shortage raised the price of food worldwide. Then we had the oil embargo which not only raised the price of all products made from oil, but more generally of all products that had to be transported.
During and right after WWI over 1,000,000 Germans died from starvation. Germany simply did not have enough arable land to feed its people and the allied sea blockade prevented it buying it elsewhere. Food prices went through the roof. Then there were reparations in kind which required Germany to send steel and cattle to France. But these were the only things that Germany was producing in any quantity. When Germany failed to send the steel, in 1923, France invaded the Ruhr and seized the steel mills. They forced the workers to work without pay and took the steel back to France. The economy was drastically constrained. But people were starving. So the Weimar government began to print money. Of course, this raised prices further and we got 1,000,000,000 mark stamps. But it is important to note that inflation caused the printing of money. Then the printing of money caused more inflation.
In Venezuela, oil was practically their only product. When the price of oil fell 60%, they got instant hyperinflation which they exacerbated by printing more money.
In Zimbabwe, the farms were taken from those who knew how to run them and given to those who didn't. Production fell, and printing more money could not increase it.
Someone from Boston who uses the nym max once wrote the following pithy comment in the NT Times:
"So much of our economic issues could be solved if people understood that the US cannot run out of money, and how hard it is to cause hyper-inflation from government spending alone."
Len Charlap
Princeton, NJ
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RALPH MUSGRAVE Mar 5, 2019
Given that Kenneth Rogoff was pushing for a limit to stimulus in the middle of the recent recession, I am not clearly on why anyone needs to attach much importance to his views. His campaign to limit stimulus will have resulted in very large numbers of people remaining unemployed for much longer than they need have.
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RALPH MUSGRAVE Mar 5, 2019
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IAN GRIBBIN Mar 5, 2019
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PETEY BEE Mar 5, 2019
Tax breaks for asset-holders, bank bailouts, and death-star levels of military expenditure get funded with deficit spending. While there is token protest in congress on behalf of future taxpayers, most legislators are willing bump up the dollar amounts each time around.
But heaven help anyone who might suggest doing the same for social services, or to avert climate change.
This isn't really a question of economics.
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HANS RIJSDIJK Mar 5, 2019
It is a pity that this sort of discussions usually focus on one side of an argument in stead of looking at all the aspects.
First a general comment. Most Americans have not the faintest idea what social democracy is, let alone socialism. Socialism is forever equated with communism, suppression of free enterprise, etc. This is plain nonsense of course.
The author focuses only on the ability of the central bank to issue money. And indeed just issuing money to start projects without consideration of where the money should/could come from creates huge budget deficits. Just look at the US today.
If you want to have a just society where the most vulnerable are protected by the state (crude capitalism doesn't do this) you need to raise enough revenue to pay for this. This is done by raising tax. There is nothing wrong with raising tax and the better off should pay more tax than the rest. If you want to raise the general health and well-being of your population you must spread your wealth and establish basic health systems and other social programs.
When you don't do this you get countries like the US today where huge proportions of its people are below the poverty line and the average life span is slowly declining. General education is quite poor. (I saw once in Vienna a shop that sold t-shirts that said: "There are no kangaroos in Austria". After asking why they sold these the answer was: for the benefit of Americans, many of them who have no idea of the difference between Austria and Australia). America today is a country for the rich and the myopic, while it could be really great again by spreading its wealth a little better.
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THEODORE SCHRADER Mar 5, 2019
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ROBERT BOSTICK Mar 5, 2019
It's not surprising that Rogoff omits a critical part of the Fed Chair's remarks, namely, "Powell conceded that he has not read up on the theory but said he has heard some “pretty extreme claims” about how it might be implemented. (https://goo.gl/vv2Hb4)
Like the ancient voodoo priests, Rogoff and Powell know their words will be received as wisdom and their congregants will act accordingly. Even when neither really understands MMT. Powell knows he will not tolerate a competing and more democratic theology. So he and Rogoff, out of ignorance, demean the new knowledge for fear they'll lose congregants. They're not concerned with credibility.
Neither of these dissemblers displays an understanding of fiat currency systems, the result of Nixon abandoning the gold standard in 1971. Thus, ushering in monetary sovereignty for the U.S. and eventually, most nations that had not already abandoned the gold standard to issue their own fiat currency.
Rogoff fails to understand the differences between monetarily sovereign and non-monetarily sovereign regimes. Of the people who spread disinformation in the face of contrary fact, some do it out of ignorance and some are paid to do it.
I do not know in which camp either of these men resides.
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ARUN MOTIANEY Mar 5, 2019
Well said!
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KARL MICHAEL ROM Mar 5, 2019
Robert Bostick, I wanna thank you for your oh so needed and 100% TRUE comment, I'd sign immediately .... "Learning from History" is not wanted since "Jekyll Island Club" and in circles of Volcker/Greenspan/Bernanke/Yellen/Powell it's simply irrelevant. Mr. Rogoff waiting for D.J.Trump's call to "lead" the FED ?
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SIDNEY WOLFE Mar 4, 2019
I hope Ken isn't shorting Japanese bonds. It would be so sad to see him sleeping on the streets. Then again maybe the MMT crowd would buy him a coffee.
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ELIZABETH PULA Mar 4, 2019
You may want to look at the significant DROP in labor participation rate to get a clear picture of the employment picture- like the significant increase in unemployed 25-54
of age males in the US, etc. etc.
And, is there any kind of "real infrastructure IMPROVEMENTS" during this present administration anywhere in the US? It's nice to see the developments in Belarus, quoted in US dollars even.....
https://www.ebrd.com/news/2019/ebrd-supports-modus-group-expansion-in-belarus.html
Sure, things are exciting anywhere, and everywhere, BUT the US.
Take a good look at the following link to get away from NONSENSE, and that includes some of the context of this article on PS.
https://ycharts.com/indicators/sources/bea
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MARC LAVENTURIER Mar 4, 2019
Gee, I always thought of Ken as the Simon Legree of financial repression; here it seems that he and Brad are the Abbot and Costello of auto-inflatio, where the baseball diamond and its' rules are the ideal of a market and it doesn't matter who's on first, including Laffer, MMT, whatever. The US will default on its' debt - that's showbiz, the game is fixed, and the name of the game is money for its' own sake.
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VIVEK IYER Mar 4, 2019
To be fair, Ocasio-Cortez isn't an MMT nutjob and is merely speaking of deficit financing which, given low real interest rates, won't crowd out private sector investment. Still, this may be quite a shrewd move- like Trump coming out as a 'birther'- because it sends a subliminal message which a lot of people want to hear more particularly in the context of Pelosi's commitment to the 'pay-go' budgeting rule.
Why not have a proper 'tax & spend' Democrat in the White House? How else are younger people going to get onto the sort of economic escalator most baby boomers took for granted?
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OEUFS BRUNS Mar 10, 2019
Please define "MMT nutjob." Is that anyone refusing to be bound by gold standard, neoclassical economic thinking? In other words a heretic who might expose the religion and their priests' feet of clay?
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