Inflation is a political problem, especially in China, where it can mean regime change.

Inflation itself is not so much an economic problem- it doesn’t hurt growth and employment.
But fighting inflation can very much hurt growth and employment.

The first thing the monetarists do is hike rates, which actually more likely makes inflation worse through the cost and interest income channels.

But inflation also generally causes fiscal tightening as nominal incomes, spending, and therefore taxes of all kinds
tend to increase faster than govt spending. (In the US, for example, this led to Carter’s small surplus in 1979.)

And the budget deficit falling as a % of GDP works against domestic demand.
As does the various types of credit controls govts sometimes resort to.

The currency depreciates but trade probably doesn’t go anywhere as costs go up pretty much lock step.

So in the case of China, growth probably slows with the relative fiscal tightening and state lending curbs.

The currency could ‘naturally’ fall and if it does, China will be accused of using it as tool to support exports, so it may intervene some and spend some if its reserves to support it at times.

Not a major problem for the US, but very problematic for the euro zone even if China just stops buying euro debt, never mind sell some to support its own currency.

And, China may be an important factor in commodity prices…

All looking good for the dollar, which is still probably way oversold due to unwarranted QE fears.

Looking ok for bonds as well, not so good for stocks.

(Yes, this post is a bit forced and preliminary.
Haven’t been able to quite see it all through yet.
More later as things develop.)

66 Responses

  1. “The first thing the monetarists do is hike rates, which actually more likely makes inflation worse through the cost and interest income channels.”

    Is there evidence for that? Is there evidence the interest income is spent not saved? Is there evidence the interest cost is passed on and there is no margin squeeze? Is there evidence that bank lending remains high and doesn’t collapse under the high interest rate thereby increasing net private savings and thus the deficit?

    I only ask, because this is where you’re at odds with Rodger Mitchell’s solution – which is to raise interest rates. And I can’t work out which of you has the evidence on your side 🙂

    1. The fed says the propensities to spend are about the same.

      Bank net interest margins went up as rates were cut. savers lost and borrowers didn’t gain much if at all

      I think I have the evidence on my side- 0 rates in japan forever and no inflation and a very strong currency.

      rate cuts in the US didn’t help in 2000 or 2008, the economy turned after the deficit got large enough countercyclically both times, and every time before that.

      100% rates in Turkey didn’t slow down inflation. or high rates in brazil, or anywhere else?

  2. There’s no one answer. It boils down to how fast policy changes ripple through to productive, systemic adaptations.

    How long to enact fiscal spending changes? …………. How long to actually see equitable effects in Kansas?
    How long to enact tax changes?………………………….. How long to actually see equitable effects in Wyoming?
    How long to enact inter-bank interest rate change? . How long to see that “passed through” equitably?

    They’re all possible in theory. They’re all possible in practice. Only practice will determine which permutation of all of them our different electorates in different years can become best at.

    Real point is that we should always practice exploring more options, faster, so we can select faster.

    1. Cue William Vickrey:

      Indeed, if we are to control three major macroeconomic dimensions of the economy, namely the inflation rate, the unemployment rate, and the growth rate, a third control is needed that will be reasonably non-collinear in its effects to those of a fiscal policy operating through disposable income generation on the one hand, and monetary policy operating through interest rates on the other….

      Trying to control an economy in three major macroeconomic dimensions with only two instruments is like trying to fly an airplane with elevator and rudder but no ailerons; in calm weather and with sufficient dihedral one can manage if turns are made very gingerly, but trying to land in a cross-wind is likely to produce a crash.

      One possible third control measure would be a system of marketable rights to value added, (or “gross markups”) issued to firms enjoying limited liability, proportioned to the prime factors employed, such as labor and capital, with an aggregate face value corresponding to the overall market value of the output at a programmed overall price level. Firms encountering a specially favorable market could realize a higher than normal level of markups only by purchasing rights from firms less favorably situated. The market value of the rights would vary automatically so as to apply the correct downward pressure on markups to produce the desired overall price level… (Fallacy 6)

      1. Thanks Beowulf, that’s an excellent link. Professor Vickrey’s “third control measure,” sounds an awful like the Market Anti-inflation Plan (MAP) put forward by David Colander and Abba Lerner. Do you know if Professor Vickery also had a hand in developing MAP? I’ve been asking around Professor Mitchell’s website for the official MMT position on MAP, but haven’t gotten much of a response. Your the first person on a MMT website I’ve seen to bring up a similar solution to the problem of inflation control.

      2. Its not coincidental, Vickrey was Colander’s grad school adviser and was a big fan of his and Lerner’s MAP proposal.

        Of the three, Colander is the only one still with us, he teachesat Middlebury College in Vermont. He’s a prolific write and has PDFs of all his articles online. I’d recommend reading “William Vickrey’s Contribution to Economics” and “A Real Theory of Inflation and Incentive Anti-Inflation Plans”

      3. Oh, I see you already a direct link to the Real Theory of Inflation paper, cool. What’s interesting is that Abba Lerner updated his rules of Functional Finance with Colander, adding a fourth rule…

        1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
        2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
        3. If either of the first two rules conflicts with the principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2…

        To these three original rules, Lerner and Colander added:

        4. The government must establish policies which stabilize the price level and coordinate both the money supply rule and the aggregate total spending rule with this stable price level at the unemployment level it prefers.,%20New%20Classical%20Economics%20and%20Great%20Great%20Grandsons.pdf

      4. post keynesianism died with its various proposals for controlling mark up pricing.

        the question they were addressing was that the problem in the 70’s was deemed to be that corps had pricing power and therefore didn’t resist unions.

      5. What is the thinking of MMT’ers on Eisner’s understanding of monetary operations and monetary economics. He also wrote How Real Is the Federal Deficit? (1986), as well as The Total Incomes System of Accounts (1989).

      6. unfortunately his lack of understanding monetary operations weakened his out of paradigm arguments to the point he was actually part of the problem, like today’s doves.

        he’d argue in the wsj the deficit wasn’t a problem because we owed it to our selves, it’s only x% of gdp when calculated correctly, etc. etc.
        the difference was as soon as we first talked he immediately wanted to know more and get it right. He was entirely intellectually honest and an outstanding individual. Then he died.

      7. Beowolf, in the quote below of rule 1, exactly how was “inflation” defined?

        If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

        I saw credit card companies give free money to shopping machine princesses that everyone knew would/could never be paid back. I saw bank loan officers give out free money that also never had a chance of being paid back, both contributing to inflation.

        Warren, that is very scary all the famous money gods who died shortly after your memes entered thier head, it reminds me of Anthony Perkins talking about CIA Jackals committing murder. Like beowolf, I feel sorry for those guys coming to see you in st. croix.

      8. Bill didn’t realize the currency was a public monopoly when he wrote all that.

        He seemed to get it after I met him and discussed it, but unfortunately he died shortly after that.

        Same with Bob Eisner. He died shortly after I started discussing monetary operations with him.

        And Minsky died a week or so before I was supposed to meet with him.

        And Wynne died before getting it into his next book, had he written one.

      9. Wynne’s ideas about money was more credit/international than any “public monopoly”, but in case you haven’t read his Maastricht and All That, London Review Of Books 1992…

        But there is much more to it all. It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues. As Mr Tim Congdon has argued very cogently, the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis – a bit more education here, a bit less infrastructure there.

        And Macroeconomics, 1983

        “. . . But the central bank is in a very strong position in the bond market since it can sell or buy back bonds without limit. This gives it the power, if it chooses, to fix bond prices and yields unilaterally at any level and thereby (as we shall soon see) determine the general level of interest rates in the commercial banking system”

      10. He seemed to get it after I met him and discussed it, but unfortunately he died shortly after that…

        He died shortly after I started discussing monetary operations with him.

        And Minsky died a week or so before I was supposed to meet with him.

        And Wynne died before getting it into his next book…

        Can I buy an insurance policy on whoever won that trip down to St. Croix? :o)

        I get where you’re coming from Warren and in economic terms, I can’t disagree with anything you’re saying. My interest in a MAP is the same reason I’m an import certificate fan, politically its something that improves the prospects of MMT-based legislation without (IMHO) deforming the message too badly.

        If the goal is to keep interest rates near zero permanently (and unemployment too for that matter), its something shiny and new to offer to congressmen when they ask, “then how will we control inflation?”. Maybe it will never be necessary to implement, but even if its a tool given to Tsy on a standby basis, its something that the politicians would appreciate (they’re all suckers for a “free market” solution to anything) if it were a component of a broader reform package. But then I have no scruples, I was the one who suggested you take Blumenthal fishing. :o)

      11. Our current ‘full employment deficit’ is in fact probably a surplus, and, therefore, the current tax structure is way to aggressive for full employment to be sustainable.

        The payroll tax suspension may get us to a sustainable full employment fiscal balance of maybe a 3-5% deficit which means it can be permanent.

        And, of course, even that may be to aggressive, and further tax cuts necessary.

        (Our tax advantaged savings incentives currently function like a massive tax, allowing the rest of the taxes to be that much lower.)

  3. I would like to hear your explanation of how a country that produces more than is consumes suffers from inflation. This could not happen in a closed economy.

    1. Net Exports!

      People are really interested in the technical operations here, so I will describe this in detail, to the best of my understanding.

      1. Local official kicks 1000 peasants off their farms and builds a factory.
      2. Factory owner hires 500 of the peasants to produce 10,000 goods.
      3. The other 500 people seek work in other factories.
      4. Wise Chinese Leaders see that they need produce 20,000 more goods each year in order to prevent unemployment from rising.
      5. Local officials do not pay workers enough to buy the 20,000 goods, but only to buy 10,000 goods.
      6. There are 10,000 extra goods that no one can afford to buy.
      7. These are loaded onto a shipping container.
      8. The shipping container is loaded onto a pallet.
      9. The pallet is lifted high in the air with a crane
      10. The pallet is tilted by 30 degrees
      11. The shipping container slides into the ocean, along with 500 U.S. jobs.
      12. The pallet is made horizontal again and $100,000 U.S.D. appear
      13. The PBoC prints 600,000 RMB and buys the $100,000 USD from the exporter.
      14. The PBoC buys $100,000 USD of bonds.
      15. The Local Official gets 600,000 RMB
      16. The Local Official goes shopping, spending half the money on his mistress, and the other half on a downpayment for a small condo in BJ for his wife.
      17. Inflation ensues in China, even though they have high unemployment.
      18. Disinflation ensues in the U.S., and we have high unemployment.
      19. Wise Chinese Leaders decide that the solution is to clamp down on unions, since the high prices must be due to wage pressures. Real wages need to fall.
      20. Wise U.S. Leaders decide that the current account deficit are due to U.S. workers not being competitive enough, so their real wages need to fall, too.

      I think there is an IMF manual describing the above in greater detail.

    2. It is my understanding that the fundamental driver for inflation is energy costs, so I don’t think it’s a coincidence that we’re seeing Chinese inflation pick up during the same year that China became for the first time a net importer of its main energy source: coal.

  4. Neil, Warren and I fight about this all the time. There isn’t much data on this mainly because we have had only one period of real inflation since 1971 PGS(Post Gold Standard)> However, the data for that period seem to indicate interest rates cured the inflation or certainly didn’t cause it. See: Interest vs. CPI

    The fed successfully has prevented and cured inflations by, yep, you guessed it, raising interest rates at the slightest hint of inflation. (That’s why the graph has so many parallel periods between interest and CPI).

    The problem with Warren’s, and indeed all of the MMTers’ solution (increase taxes), is that taxes are too political, too slow, too unfair and too uncertain. For instance if the Fed thought inflation were about to rise by 1%, they probably would raise interest rates tomorrow by about .5% to start, and keep ratcheting up from there. Quick and easy.

    But what would anyone do about taxes? Raise whose taxes? By how much? How long would that take? It simply is impossible.

    Also tax increases hurt the economy while, contrary to popular myth, interest rate increases do not.

    Rodger Malcolm Mitchell

    1. Any thoughts on MAP as a policy tool for inflation control? Or the Vickery solution (which sounds an awful lot like MAP to me) mentioned by Beowulf above?

    2. Assuming a world where Ben Bernanke and Greenspan read this web site every day making them bonafide MMT’ers, why not make federal tax policy, or a component thereof, fall under the umbrella of the Fed?

      1. Ha ha, if the Tea Party wasn’t riled up enough as it is.

        It makes more sense to put the Fed in the executive branch (after all, the Constitution puts all executive authority in the hands of the President) than it does to outsource even more of the executive branch to the Fed. But its a moot point, tax policy has always been a legislative power.

        Congress could set a formula (as I’ve suggested before, say, every percentage point of unemployment, reduce tax collections by 10%), but there’s no way this Congress or any other other would grant discretion to set tax policy to the President, Tsy or the Fed.

      2. There appears to be a strange US (and UK) aversion to anybody who isn’t elected fiddling with tax rates. But they have less problem with somebody unelected fiddling with interest rates – even though that probably affects more people and has a larger ‘blast area’.

        Logically there is no reason the central bank couldn’t be given the power to move, say, a land value tax up or down by x% to control inflation.

      3. Such as Robert Rubin when he advised Clinton in 1993 that the bond markets would not tolerate a middle-class tax cut.

    3. Rodger –

      Would that quell a growing bubble? It seems like bubbles are the main cause of recent boom cycles. How about focusing on sectors that are growing rapidly? How would you stop the dot-com bust? Would raising interest rates have stopped the S&L crisis? Weren’t those folks working on other ways around such limitations?

      It seem like loose lending policies and questionable instruments have been at cause more times than not. Even in the dot-com bust, margin accounts must have a great contributor to the overpricing of stocks and ipo’s.

      1. Earlier on, margin requirements used to be changed in response to market moves. Not so much now.

        “It’s the leverage, stupid.”

      2. Unforgiven-

        Raising interest rates does not quell a growing market bubble. The expectations of investors during a market bubble are usually for a return on capital of 20%-40%. Given those expectations raising the interest rate by a few percent would not do much except hurting those sectors that are already hurting from the capital outflows that finance the bubble. It will probably exacerbate the market bubble by reinforcing the rotation of capital out of those sectors where expectations of return are much lower. The best way to quell a bubble is in my opinion to introduce taxes on the use of leverage. This tax is directed towards the source of market bubbles and grows exponentially as more leverage is used. In an ideal world such a tax would be written so as to also allow for tax credits on the use of leverage during deflationary periods. Taking on leverage would then be punished during inflationary times but rewarded during deflationary.

      3. like in the early 80’s when the hunts were running up the price of silver to over $50 and the comex officials first got short in their own accounts, and then raised margin requirements high enough to force the hunts to sell and the price quickly broke to maybe $20. All done legally at the time.

      4. you may or may not figure out how to stop any one financial bubble.

        but it’s easy enough not to let a bursting bubble cause unemployment and the loss of real output to go up.

    4. and i say the dereg of nat gas in 1978 created the supply shock as utilities shifted from oil to nat gas that drowned opec in its own output.

      but even as oil fell inflation remained high as volcker kept rates high which prolonged the inflation.

      (that’s my story and i’m sticking to it, roger… 🙂 )

  5. I think one problem may be that the FED is loath to use interest rates as anything BUT an inflation/deflation fighting tool first and formost.

    A lot of folks seem to think that Greenspan and Bernanke were oblivious to the dot com and housing bubbles, or possibly even encouraged such bubbles with their rate polices.

    But I can almost see them saying something like, “CPI is 2%, why would we want to raise rates now?”

    1. Yeah but interest rates aren’t the Feds only tool. It could have kept interest rates low and simply increased margin requirements for buying securities or for that matter, houses. For example,
      in China, the Central Bank requires a 30% down payment for home loans.

      Somewhere between our 0% down and China’s 30% down, the Fed could have popped the housing bubble without increasing interest rates.

      1. That a bank requires a 30% downpayment does not mean that the buyer pays 30% down. He just gets a second loan for the 30%. That’s what is happening in China, and that’s what happened in the U.S. as well.

      2. I could see lenders howling like stuck pigs if buyers weren’t allowed to have a 2nd mortgage. That 2nd is usually for a fat interest rate. That WOULD tend to pop a bubble though. One might get a “commercial loan” from a hard money guy to get around the problem. It seems like the industry generates lots of these workarounds to get past regulations, as they did with the S&L crisis.

      3. except regulators and supervisors officially require that for loans banks keep on their books, none of the down payment is borrowed.
        and i recall the housing agencies have the same rule.

        (not that people don’t cheat, of course)

  6. Have any of you seebn Taylor Conant’s attempt at rebutting MMT and, particularly, Warren’s 7 deadly innocent frauds over at It is truly humorous when someone with very little understanding of macroeconomics and the monetary system tries to pick apart Warren’s arguments.

    If you have a moment and want to add your $.02 to the conversation please stop by at


    The Banker

      1. Can you summarize how palin made the leap from alaska housewife and mother to john mccains running partner, even during the election silly season I could never understand what “halls of power” connections she had to get to where she did.

      2. Palin was heavily promoted by folks on the right, especially Bill Kristol, who went out on a limb for her publicly. McCain realized that he had to throw some red meat the right to shore up his wavering base, and Palin was the means he picked based on what he was hearing from the people that represent that faction in the halls of power. It actually worked for him for a while. McCain got a big bump up from the right, and McCain/Palin might have won if it were not for the financial crisis intervening and McCain’s clumsy moves. Obama took the center and over-wildly enthusiastic progressives.

  7. Wow, Conant’s “arguments” are pathetic. How can he be so ignorant after reading such a clearly defined reality as Warren’s “7 Deadly Frauds?”

      1. Tom take a brief look here:

        Realize they didn’t catch this guy hacking the federal reserve while he was in the cookie jar, it was only much later for another crime did they catch him. How pathetic is our cyberage security in our banking and federal reserve computers that this happened and they didn’t know about it until much later?

        Now Warren told me that when those chinese come to buy US oil or US rare earth, instead of having to invoke national security policy and maybe start trade wars, we can just change numbers in fed computers, but I am certain there are lots of hackers, probably russian and chinese, that are already changing numbers in fed computers, as the article above proves. So Warren is obviously VERY OVERCONFIDENT of USA control of the cyberworld/MATRIX/banking databases. He assumes the fed IT people are in control of the cyber banking world and only THEY can go in and make changes, that is wholly incorrect.

        I think that is a very foolish position for Mr. Mosler to have.

        Here at Macdill AFB in florida, they are scrambling to hire IT/Computer security folks to try and stop the awesome theft asian cyberwarriors are doing to USA IP(intellectual property)/research/top secret data. Colonel Arwood has tried to raise the issue with some of the generals (petreus being one) that we may have nukes and tanks and UAV airplanes, but we are totally unprepared for the cyberwar that is being waged against the USA and her citizens. That cause is not helped with people like Warren who prove they are very uninformed when it comes to issues like cybersecurity and assuming the US Fed boys have all the control over fed cyberspace stuff.

      2. Not quite sure I should feed the paranoia, but here goes.

        Does it really matter as long as you get the real stuff?

        That’s one of the fundamental undercurrents of MMT. Money is just a human process to get real stuff for real people.

        Banks make mistakes all the time, but like people faking notes (or debasing gold, or clipping coins) its not enough to be a problem. Law enforcement keeps the level below that which causes problems.

      3. That’s pretty scary, straw, and that was only one apparently lone guy. We can assume that this is a huge problem.

        Not to worry. DHS is on it. 🙂

    1. Truly bizarre, but alas, not surprising. I couldn’t resist to add my polemic 2c, I see Beowuld did too :-). It’s hard to remain calm and objective with those types.

      1. Banker@5:16pm

        I glanced briefly at Taylor Conant’s blog. ”Banker” you displayed remarkable patience and generosity. But who is Taylor Conant and why should anyone care what he writes?


        With respect to Sarah Palin, I find her generally to be quite convincing if you want simple answers to complex issues. That is one of the strengths of Tea Party arguments, they are simple to understand and intuitively appealing. I almost always disagree but I do see the appeal of their message.

      2. I have no idea who he is. I’ve done a web search and can find nothing about this guy or his background. I can tell you why we should care though; IMHO, one way that MMT can become more mainstream is through grassroots efforts to educate others. I’ve debated against classical econ opponents on several discussion forums and have typically received fairly positive receptions. I know many of you do the same as I see the same faces (profiles? Screen names?) on many other websites. Recently a member of a forum where we are having an MMT discussion MMT posted a link to Mr. Conant’s article as a refutation of MMT and Mosler in particular. I followed the link, read the article and began my response. I feel that if we allow this misinformation to go unchallenged (even on a relatively unknown blog) it makes our goal of promoting MMT more difficult.

      3. Will be interesting to see if Palin recognizes her model (in terms of resonating with her audience and in “counter-programming” against the rest of the GOP field) is George Wallace-style “Country & Western Marxism”.

        He called for removing the tax exemption from foundations and emitted a class-war cry—“the rednecks are coming”—that frightened the hell out of New York Times readers and William F. Buckley Jr., who called him a “country and western Marxist.” Read Wallace and tell me if this isn’t also the spirit of the New Left:

        The biggest domestic issue for 1968? I’ll tell you. It’s people—our fine American people, living their own lives, buying their own homes, educating their children, running their own farms, working the way they like to work, and not having the bureaucrats and intellectual morons trying to manage everything for them. It’s a matter of trusting the people to make their own decisions.

    1. Thanks for the link Tom. That Latvian tax system is scandalous (68% rate on wage income?!?). Along the lines that Hudson proposes, I just came came across an interesting paper on creating an unrealized capital gains tax (the equivalent of a wealth tax) that builds on the work of– who else would dare– William Vickrey. In a rational world, Congress would tack it onto the second capital gains tax regime it created this year, the “unearned income Medicare contribution”(which begins 2013) and whatever it collects recycle into payroll tax cuts.

      Generalized Cash-Flow Taxation
      Alan J. Auerbach
      David F. Bradford
      February 2002

      We show the unique form that must be taken by a tax system based entirely on realization accounting to implement a uniform capital income tax, or, equivalently, a uniform wealth tax… This deferral advantage could be offset, and the additional returns on current and alternative assets subjected to uniform treatment, by charging (deductible) interest on unpaid taxes as gains accrued, as first envisioned by Vickrey (1939), with the tax liability at realization…

      1. “That Latvian tax system is scandalous (68% rate on wage income?!?).”

        The UK system is 70% at the low end – 20% Income Tax, 11% National Insurance, 39% Tax Credit withdrawal – plus another 12.8% employer’s National insurance that the individual doesn’t see.

      2. right now we have a shortage of aggregate demand.

        so while cutting demand of people with capital gains has ethical merit, just remember that doing that necessitates adding that much more agg demand at least at the same time, if not sooner.

      3. Agreed. However, since we’re playing fantasy Congress right now (its hard to imagine real world Congress ever tackling unrealized capital gains, the supply side effects on campaign contributions would be too dramatic), I’d recycle every penny raised from new taxes or cut from wasteful spending into cutting other taxes.

        Of course the baseline problem is that Congress makes tax policy too hard for themselves (and the economy) by believing the budget has to be balanced “across the business cycle”. In fact, it only has to be balanced at full employment (and Bill Vickrey’s suggestion of 2% U3 rate is what they should be targeting, using a market anti-inflation plan to tackle inflation instead of interest rate adjustments).

        Congress could create a rule-based system that tied tax rates (or rather, reductions of the nominal tax rates) to the unemployment rate. The fiscal stance then could be adjusted monthly at the same time DOL adjusts the unemployment rate, allowing fiscal policy to fill in the output gap faster and more effectively than the FOMC ever could with monetary policy.

      4. “why does it have to be ‘balanced’ at full employment?”

        Politics. To quote Herbert Stein (who developed the concept of a “full employment budget” and later became Nixon’s CEA chair), “The Kennedy team recognized that there might be some people out there who cared about balancing the budget and for them they offered the comfort that the budget would be balanced at full employment.”

        The key question then becomes defining “full employment”, I suppose you could use “full” in the literal sense and peg it at 0%, certainly more practical than a 7% NAIRU or whatever economists use when they’re (to use Pat Moynihan’s wonderful phrase) defining deviancy down. But that’s politics.

        In terms of economics, unless we can get (for no practical reason) the current accounts balance in surplus or private savings in deficit, its a fool’s errands to ever balance the budget. The political solution is, of course, seigniorage. Instead of running, say, a $1 trillion deficit, Tsy mints $1 trillion in coins to sell to the Fed. Since coin seigniorage is booked as revenue and not debt, its a happy marriage of balanced budgets and activist fiscal policy (with that tramp “net interest” thrown into street). :o)

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