After my brief recap is my response to a very good and typical inquiry I thought I’d pass along.

Meanwhile, the tax cuts were extended, and perhaps a bit of restriction removed, eliminating that source of risk of a sharp contraction that could have happened otherwise.

With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts, there was some consideration of declaring victory and moving on, but I’m feeling more the opposite.

First, it’s tiny and at the macro level the propensity to spend of the recipients is trivial.

And it probably doesn’t even offset the drag from prices for imported crude and products.

And it may just be an interim step in letting the next Congress ‘pay for it’ with Social Security cuts.

The large increase in ‘spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.

And a President who seems to think that’s all a good idea as well.

And my nagging feeling that a 0 interest rate policy is highly deflationary, meaning that for a given size govt we need even lower taxes than otherwise, remains.

Lastly, for this post, China has been a first half/second half story, with much of their economic year front loaded into the first half, and they have apparently capped state sponsored lending, which could mean a relatively weak first half, or worse.

The euro zone is forecasting lower growth for next year as austerity bites and the ECB’s job becomes more problematic, as slower growth will slow the ‘fiscal improvement.’

And the recent extreme absurdity of the ECB raising more capital serves to highlight the risk of having incompetents in control.

Reader’s Questions:

I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.

– Should the federal deficit and associated payments be taken completely out of the budget discussion?

Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.

That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).

Right. And potential consumption is always what goods and services we are physically capable of producing.

I understand that, but does value (rather than money) get added to the economic system when the transfers are made?

Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.

Does it have any impact on inflation or taxation?

Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.

For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.

But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.

The first example is spending on a ‘price rule’ that says $8 max

The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.

I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?

The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.

Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?

There is the risk that China might do that.

But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.

Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.

I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.

It allows available savings to be added to the economy.

For a given size of govt, there is a level of taxes which keeps the real economy in balance.

Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.

My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along

Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.

and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.

Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.

12 Responses

  1. Warren,

    Do you think politically we could present MMT as a ‘balanced budget’ option as a way of leveraging that particular desire.

    Obviously MMT fiscal proposal are indeed a balanced budget. They balance the spending decisions of the non-government sector with the required amount of government spending/withdrawal to maintain the economy in balance at full output and stable prices.

    How about a proposal for a ‘balanced economy’ rather than merely a ‘balanced budget’?

    1. Neil, I think that this is an excellent idea. It is often the way I put it when explaining why a balanced budget amendment would not work that way it is expected to, using the simple algebraic equations regarding sectoral balances that Bill Mitchell reiterates as the basis of MMT macro. The beauty of this approach is that it graphically dispatches the false analogy between government and non-government finance by showing that government and non-government stand in an inverse relationship, with government counter-balancing non-government.

      1. Sectoral balances in terms of national accounting identities determine budget balanced based on shifting propensity to save and trade balance.

      2. Government is the currency issuer and non-government is a currency issuer.

      3 . Fiat money creation is not operationally constrained, so taxation and borrowing are operationally unnecessary for government funding.

      4. Manage the economy using principles of functional finance in order to achieve optimal capacity and full employment, along with price stability.

  2. Hi Warren,

    You said, “With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts . . .”

    You probably are right, but I just wanted to call your attention to page 149 of my book FREE MONEY, where I said:

    “Which tax cuts are most politically acceptable? And, which tax cuts would help boost the economy fastest? I believe the answer to both issues is the same. Eliminate Social Security and Medicare taxes. These two taxes effectively are regressive, placing a much greater proportionate burden on low earners than on high earners.”

    FREE MONEY was published in 1998. Hey, sometimes the government is a bit slow to catch on.

    Rodger Malcolm Mitchell

  3. The large increase in ’spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.

    And a President who seems to think that’s all a good idea as well.

    The President would be held in more (any?) esteem if he’d start waiting till at least the second round before throwing the fight. It looks like the cake is already baked here, the Bowles-Simpson commission report is being readied to be rammed through during the spring debt limit “fight” (be in your seat early or you’ll miss it).

    Thinking about it, I’d surmise the only reason they didn’t force a vote on it now is that when the White House planned this out last winter, they forgot to build in time to convert the report into legislative language. There wasn’t enough time to get it done during the lame duck session, so they’ve kicked the cramdown vote till March or April to give legislative counsel time to get all their ducks in a row. Its unclear how much of the GOP is on board, there are so many ways to doublecross the President on this, I can’t imagine that they won’t.

    No wonder Galbraith sound so bummed out.
    It’s a measure of where we are, I think, that at a meeting of Americans for Democratic Action, you find me comparing President Obama unfavorably to President George W. Bush.

  4. Re “My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along”

    An analogy I’ve been using is that the effects of deficit spending are essentially the same as the effects of gold mines digging new monetary gold into existence in the 19th century. The mines ran perpetual deficits of gold, and if they hadn’t, the deflation that tended to occur under the classical gold standard would have been even worse. A balanced budget amendment today would be as absurd as an amendment forcing US mints to rebury all the gold they received under a gold standard.

    Neil, clever idea.

    Kucinich bill, on a related note:

    1. You must be new here, reference:

      “The U. S. is headed toward a period of business depression, probably beginning within the next two years, which may exceed that which preceded the War. . . . The only thing that will save us is a new gold policy or the discovery of a new process or additional gold fields. If the fall [of gold production] is not prevented by design or accident we shall throttle business, wringing out all profits and experiencing all the evils of deflation.”

      – Irving Fisher, Time Magazine, Jan. 20, 1930

    2. Wow, Kucinich slays me… still reading is monetary reform bill(its kind of long) but my favorite part so far–

      the Secretary of the Treasury shall cause plates and dies to engraved in the best manner to guard against counterfeits fraudulent, alterations, and shall have printed there-from [therefore? b.]and numbered such quantities of such notes of the 14 denominations of $1, $2, $5, $10, $20, $50, $100, $500, $1,000, $5,000, $10,000 as may be required

      Oh yes a $10,000 note, its about time Congress remembered that a duffel bag full of ransom doesn’t go as far as it used to.

      1. Yeah, its a mess with a lot of moving parts– a Monetary Authority, a Bureau of Federal Reserve and something called “the Emergency Board”, I have no idea what they do: but they do appear to have bit of a separation of powers issue.

        (b) EMERGENCY BOARD.—There is established for
        purposes of this section the Emergency Board which shall consist of the following members:
        (1) The President. (2) The Secretary of Commerce. (3) The Secretary of Labor. (4) The Secretary of the Treasury. (5) The Speaker of the House of Representatives. (6) The minority leader of the House of Representatives. (7) The majority leader of the Senate. (8) The minority leader of the Senate. (9) The chairpersons and ranking members of
        the Committee on Financial Services and the Committee on Oversight and Government Reform of the House of Representatives. (10) The chairpersons and ranking members of the Committee on Banking, Housing, and Urban Affairs and the Committee on Homeland Security and Governmental Affairs of the Senate.

  5. If the politicians pass an “austerity,” bill, the economy will tank. No question, there. The real question is what an investor should do about it.

    My take is to load up on CD’s (from different banks, of course), even though they pay next to nothing. Any thoughts?

    Rodger Malcolm Mitchell

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