>   (email exchange)
>   On Sat, Aug 11, 2012 at 1:32 PM, Paul wrote:
>   In an op-ed ”Thirty Years Later, a Return to Stagflation” (Op-Ed, Feb. 14), Representative
>   Paul D. Ryan, Republican of Wisconsin, argued that the stimulus plan will bring the
>   combination of high inflation and high unemployment known as stagflation.
>   Here is a copy of my February 22, 2009 published letter to the Editor of the New York
>   Times evaluating Paul Ryan’s economics.

LETTERS; Can We Spend Our Way to Recovery?

February 22, 2009 (NYT)

To the Editor:

Paul D. Ryan repeats the tired idea that when the Federal Reserve prints money for the government to spend on economic recovery, the result will be inflation because ”it is a situation in which too few goods are being chased by too much money.” This is based on a false assumption that the output of the country will not increase when government lets contracts to businesses to produce more goods and services that will improve the productivity and health of our country.

If there is significant unemployment and idle capacity in the private sector (and who can deny that there is?), then this deficit spending will not cause inflation. Rather, the ”printed” money spent on a recovery plan creates profit opportunities that induce private enterprise to hire and produce more goods. Then there will be many more goods available for this money to chase and no inflation need occur.

Paul Davidson
Boynton Beach, Fla., Feb. 14, 2009

The writer is editor of The Journal of Post Keynesian Economics.

29 Responses

  1. They really ought to add the kicker to that last line.

    “Then there will be many more goods available for this money to chase and no inflation need occur. Moreover fixed costs are spread across a greater number of goods increasing economies of scale, likely making goods cheaper for everybody”.

  2. So does MMT really argue that stagflation cannot occur? Because it seems like it can, although perhaps the rising prices that we’ve experienced in a stagflationary environment is not really inflation?

    I don’t think Ryan was right in Feb 2009, but his op-ed is looking prescient. If the government stimulates the wrong sectors of the economy (e.g. ethanol production), then stimulus really can be bad.

    1. @ESM,

      “I don’t think Ryan was right in Feb 2009, but his op-ed is looking prescient. If the government stimulates the wrong sectors of the economy (e.g. ethanol production), then stimulus really can be bad.”

      Like war spending for example?

    2. right, those price increases come from something other than excess demand. Ultimately it’s the govt. paying more for the same thing, though most often indirectly.

      yes, I’ve been talking about the ethanol from day 1 as well.

      As they said about Goldwater, in your heart you know he’s right… (far right)

    3. @ESM,
      MMTers don’t claim that stagflation cannot occur. Obvious it did occur: around 1975. Nor do they claim that stagflation does not involve inflation.

      But that 1970s episode was unique, far as I know, and several factors contributed to it. First, the sharp rise in oil prices that preceded it is often cited as a contributory factor, and I think rightly so. Second, once inflation gets going, I fully accept as an MMTer that it takes a period of “Volker style” high unemployment (i.e. stagflation) to get rid of inflation and inflationary expectations.

      Third, my hunch is that 1970s episode was partially caused (at least in Britain) by historical or sociological factors. In particular, in the 50s and 60s most people had memories of the 1930s, plus they’d been thru WWII. They were grateful for a job. But come the 70s, the workforce became much more irresponsible: going on strike for large pay increases became the norm.

      1. @Ralph Musgrave,

        I think a lot of it is industrial policy. Propping up industries by throwing cash at them.

        If you have a Job Guarantee, then the industries are left to fail and shut down and the Job Guarantee catches those who lose their jobs.

        Assets from the failed industries then go on fire sale and you get a regeneration in a different format. Where a great oak falls many saplings sprout.

        The problem with the 70s is that government was frightened to let businesses go bust. Precisely the same problem that we have had over the last five years but in the financial sector. Businesses has made government dependent on the state of business confidence – precisely as Kalecki suggested it would.

      2. @Neil Wilson, Why should soros and peers be content with getting firesale assets on companies, when they can get firesale assets of entire nations? You got to start thinking bigger if you want to play ball with the big boyz dude!

        Neil, seth klarman of Baupost agrees with you, from thier Q2 hedge fund letter:

        “It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplishes virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic.”

        Lets expand on your OAK tree idea Neil, we have multi-national entities now that think we need to topple entire nations, USA, Argentina, England, Japan, Zimbabwe, etc so that a thousand shoots can rise up from the fallen tree (and they can get firesale assets of whole countries)

        Here is Pimco’s El-Errorian, he thinks this is happening by chance, instead of by design:


        The risk for the United States, as well as the global economy, is that a lack of vision and political courage ends up leading to even greater economic disappointment and financial instability, bringing with it the social unrest we’ve seen in so many other countries over the past 18 months. Occupy Wall Street and the Tea Party may have somewhat fizzled, but populist anger could return with a vengeance.

        The longer America’s interlocking economic and political challenges persist, the greater the number of companies and long-term investors that begin to worry — and, more importantly, act on those fears. They hire fewer people and invest less in factories and equipment. As they increasingly sit on the sidelines, the country’s fate will be left in the hands of tactical position players and short-term traders, further ramping up volatility and reducing future growth and job opportunities. And when day traders and company flippers start running a country’s economy, watch out.

        We are FREAKING DOOMED!

      3. @Neil Wilson,

        Go ponts Neil. When an economy gets too top-heavy with oligarchic firms, then fixed capital in aggregate begins toward obsolescence and return on new investment begins falling as existing firms size inhibits innovation from within and without. The result in an increasing focus on rent-seeking. This is largely what has happened in the US, where innovation is now in fields of low capital intensity such as Internet technology that depends mostly software innovation and banks of servers. As long as large firms are protected as TBTF or can induce scarcity through oligarchic practices, then innovation will lag.

        This is going to really hurt the US coming years as emerging countries come on line with state of the art technology, just as happened when Japan came on line and wiped out the US steel industry with technological advances that reduced price. The US companies just threw in the towel.

      4. @WARREN MOSLER, awesome abe lincoln quote on MMT below:

        Mosler, just read this about a new emergency g20 meeting for food inflation:


        and a comment for that article: The creation last year of the Rapid Response Forum “to promote early discussion among decision-makers about abnormal market conditions, with the aim of avoiding unilateral action” shows the instability of the commodities markets with millions of people’s lives in the balance. It also demonstrates that the present monetary, financial, economic and commercial systems do not work for they enrich the few, impoverish the many and imperil the planet. A way to tackle this unjust, unsustainable and, therefore, unstable world order is to pursue an integrated global governance system that is based upon an international monetary system that introduces a carbon standard. How that can be done is presented in a recent book entitled The Tierra Solution: Resolving the Climate Crisis through Monetary Transformation by sustainability sociologist Frans Verhagen. For more info, see http://www.timun.net

        I go to the link and there is people there maybe need to talk to MMT guy like you so thier ideas can be slightly tweeked, have you reached out to them?

        They seem to be on good path, from thier website:

        Money is the creature of law, and the creation of the original issue of money should be maintained as the exclusive monopoly of national government. Money possesses no value to the state other than that given to it by circulation…… The government should create issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power. Abraham Lincoln, Senate document 23, 1865.

        Who knew Abe Lincoln was MMT expert 200 years ago? We have went in reverse, by design.

      5. @WARREN MOSLER,

        I think you’re right (and Neil also), but you too often speak in generalities or riddles which are hard to understand. For example, it is often difficult to determine exactly how the government is setting prices.

        In this instance, I think inflation is happening due to government raising prices indirectly. Neil is right to call this industrial policy, although in the US at least it might be more accurate to call it electoral policy.

        I already alluded to the example of the US government raising the price of food by mandating ethanol purchases. The US has also raised (at least relative to what they would be otherwise) the wages of public school teachers and other state and local government workers by providing grants that must be spent for those purposes. Through the bailouts of Chrysler and GM, the US has also raised the wages of autoworkers (well, at least the unionized ones). Student loan subsidies raise the wages of university professors and administrators, and of course tuition generally.

        If you go through the US budget, you find that almost all discretionary spending goes to some form of industrial policy, and it is just growing exponentially.

        One quibble with Neil, however. Despite what you think of the financial sector, the bailout did not amount to an ongoing subsidy (or even a one-time subsidy). The financial sector is highly profitable on its own. Yes, yes, Warren would say that this is due to unnecessary institutional structure, but it has always been thus. Nothing new there in the last 5 years to raise prices despite high unemployment.

      6. @ESM,

        Just in case I wasn’t clear, I was referring to the lack of bankruptcies amongst the financial institutions that lent badly.

        They should have gone busts and their shareholders and management suffered the consequences. The resolution process used during the GFC was just wrong. There should never be any private company in the competitive sector that is too important systemically to fail and no operation, however ‘profitable’ should be allowed to neglect cash flow and capital concerns.

        Cash flow kills, and for good reason.

      7. @WARREN MOSLER,


        “They should have gone busts and their shareholders and management suffered the consequences.”

        Agreed, except that at least in the US, most shareholders and most management did suffer the consequences. The main people who were bailed out were the unsecured creditors of the banks (and of course Goldman Sachs!).

        “The resolution process used during the GFC was just wrong.”

        Well, I agree that it was poorly designed, and perhaps most important of all, the optics looked terrible to the hoi polloi. But the bailouts did have the virtue of keeping the lawyers at bay. The Lehman bankruptcy is still being litigated, and the lawyers “earned” over $1.6B in fees as of March 2012.

        In my experience, lawyers, courts, and litigation are to be avoided if at all possible.

  3. I would never have believed that anyone at Forbes would understand how the economy really works. The man understands the economy and MMT by whatever name he may call it.

    1. @GLH,

      John writes for Forbes but is a Post Keynesian whose speciality is trade. He is a friend of Randy Wray and knows all about MMT.

  4. Amazing quote, Save America.

    “If you have a Job Guarantee, then the industries are left to fail and shut down and the Job Guarantee catches those who lose their jobs.”

    I dunno, that sounds highly unrealistic to me, to be honest.

    What, so all the ex-miners are to be employed by the government, to play guitars and pick up trash, and this will cause no inflation whilst simultaneously preserving their skills/employability, so that they’re ready for the next industrial wave? Really?

    The fundamental problem with the JG is that the only jobs that can be offered, are those that the private sector (and the (non-JG) public sector) would never dream of doing.

    1. @y,

      “What, so all the ex-miners are to be employed by the government”

      Why do you say that. What is your underlying assumption there?

      They are *paid* by the government. Who or what engages them is a matter of system design.

      ” and this will cause no inflation whilst simultaneously preserving their skills/employability, so that they’re ready for the next industrial wave? Really?”

      If they lose all their income, then those they buy off lose some of theirs. That causes *deflation* and needless capital destruction of fundamentally sound businesses. We have to allow things that are failing to fail, but that doesn’t mean we have to put up with the collateral damage to sound capital. We can do better than that.

      It causes no inflation because it is a counter cyclical balancing system – an automatic stabiliser. A more powerful version of the ones that are currently propping up the world’s economies.

      And the one thing that this crisis has shown is that auto-stabilisers work. They just aren’t powerful enough to force a recovery.

      1. @Neil Wilson, Who or what engages them is a matter of system design

        We need a radical redesign of the “system” Erickson is there, so is hickey and a few others I think, but I still feel FAR TOO MANY here think proper reform can come under the broken system we have now. I am not even going to vote in this election, it is a total waste of my time and resources. I see no difference in the ultimate outcome.

        Warren’s blog here is PROOF that no matter how much logic, science, goodwill you bring to this CURRENT SYSTEM, it will NEVER be applied. We cannot get any traction on a national jobs gaurantee, deficit spending for large national infrastructure, nothing warren advocates can be implemented under this current system. Therefore the system must be reset and rebuilt. How many more years Neil must people suffer under this system and waste time posting MMT articles and charts back and forth, its getting nothing done concerning real change. Frankly I am astonished so many esteemed people here sell themselves and thier time this SHORT and are not going to the next level. How wasteful.

      2. well ok Neil, good points. However what you really need is investment that creates good jobs. Without that you could end up with stagnant regions full of people on the JG, i.e. areas that used to have large industries that have now gone.

      3. @y,

        Give people money to spend and the resulting increased demand will create the investment in jobs amongst private sector entrepreneurs – in the local area where people actually live.

        We had a rather good system called the ‘Enterprise Allowance Scheme’ back in the 80s which was a grant for people to start up their own business. Pretty much anything qualified as long as the individual was prepared to have a go and it worked rather well. I reckon something like that combined with the JG wage running on for a while could help the sapling to take root.

  5. Neil, regarding the oligarchs, here is a 30 minute neil barofsky interview released yesterday, he was the regulator in charge of Tarp, and he says that both treasury and the fed are totally compromised by the banking elite. http://www.youtube.com/watch?feature=player_embedded&v=WlAwaZ2T1Z4#!

    What are your thoughts on what he says in the interview? Warren says our money system is a servant of the people and the people are in charge through congress, but Neil Barofsky doesn’t seem to share his optimism.

      1. @WARREN MOSLER, Well then clarify for me, for years I have asked you about who is really in control, and you have responded that fed is not independent, but a servant of what congress orders them to do, and by proxy, the people are in control through congress.

        The larger issue is that you have the same problem as some of your readers here at this blog, that a body of 500 congress people can ever be “for the people” That it makes a hill of beans of difference who gets elected to presidency (barofsky in the interview says it will not maky any difference)

        With the trillions in play today, 500 people are too few to be corrupted, it is too easy. Democracy does not scale. You as the shepherd of your flock are not posting articles that I can see about truly radical reform and change, change that will bring about real results. Post another million charts showing proper MMT principles, it is not going to change anything. You still have a problem that the government no longer servees the people, by design. The founding fathers put their very lives at peril to challenge darkness and do god’s work and follow thier christian ideals. Are you willing to go that far? Barofsky was threatened by numerous people. Members of congress told him that if he were to do the “right thing” his career and monetary future would be ruined.

        A you willing to RUIN your monetary future warren mosler to do what is right? They came down hard on Spitzer, cost him his governership. What are you really willing to sacrifice?

        Your soul hangs in the balance, as does your flock, choose well.

  6. http://www.youtube.com/watch?v=LdJZwzhfvho Barofsky talking about how Richard Shelby told him to do the right thing, but it would cost him future employment, and how Herb Allison tried to threaten him.

    Warren says the people are in control of congress, warren the longer you go with this “theme” that the people are in control, the more foolish you make yourself look. When the tides of change come, you warren, will be swept away, instead of riding the tide in.

    http://en.wikipedia.org/wiki/Herbert_M._Allison Herb Allison worked for treasury, see how silly you look Warren? There is so much evidence everywhere showing how evil and corrupted our system is.

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