The right level of deficit spending, long term or otherwise, is the one that coincides with full employment.

Any nation with a non convertible currency and floating exchange rate policy is necessarily not in any case operationally revenue constrained.

A statement from Professors Paul Davidson, James Galbraith and Lord Skidelsky.

We three were each asked to sign the letter organized by Sir Harold
Evans and now co-signed by many of our friends, including Joseph
Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and
Richard Parker. We support the central objective of the letter — a
full employment policy now, based on sharply expanded public effort.
Yet we each, separately, declined to sign it.

Our reservations centered on one sentence, namely, “We recognize the
necessity of a program to cut the mid-and long-term federal deficit..”
Since we do not agree with this statement, we could not sign the

Why do we disagree with this statement? The answer is that apart from
the effects of unemployment itself the United States does not in fact
face a serious deficit problem over the next generation, and for this
reason there is no “necessity [for] a program to cut the mid-and long-
term deficit.”

On the contrary: If unemployment can be cured, the deficits we
presently face will necessarily shrink This is the universal
experience of rapid economic growth: tax revenues rise, public welfare
spending falls, and the budget moves toward balance. There is indeed
no other experience in modern peacetime American history, most
recently in the late 1990s when the budget went into surplus as full
employment was reached.

We agree that health care costs are an important issue. But health
care is a burden faced by both the public and private sectors, and
cost control is a job for health policy, not budget policy. Cutting
the public element in health care – Medicare, especially – in response
to the health care cost problem is just a way of invidiously targeting
the elderly who are covered by that program. We oppose this.

The long-term deficit scare story plays into the hands of those who
will argue, very soon, for cuts in Social Security as though these
were necessary for economic reasons. In fact, Social Security is a
highly successful program which (along with Medicare) maintains our
entire elderly population out of poverty and helps to stabilize the
macroeconomy. It is a transfer program and indefinitely sustainable as
it is.

We call on fellow economists to reconsider their casual willingness to
concede to an unfounded hysteria over supposed long-term deficits, and
to concentrate instead on solving the vast problems we presently
face. It would be tragic if the Evans letter and similar efforts –
whose basic purpose we strongly support – led to acquiescence in
Social Security and Medicare cuts that impoverish America’s elderly
just a few years from now.

Paul Davidson James K. Galbraith Lord
Robert Skidelsky

Paul Davidson is the Editor of the Journal of Post Keynesian Economics
and author of “The Keynes Solution.”

James K. Galbraith is a Professor at The University of Texas at Austin
and author of “The Predator State.”

Lord Robert Skidelsky is the author, most recently, of “Keynes: The
Return of the Master.”

40 Responses

  1. Agree Anon. I found it very interesting to learn that after budget surpluses, the economy has performed very poorly.

  2. It appears the message that govts are not financially constrained is sinking in. The next big hurdle will be the fact that govt deficits equal private sector savings and the desire of the private sector to net save is what drives the deficit. The statement in the Evans letter “we recognize the necessity of a program to cut the mid to long term deficit” translates to “we need to reduce the private sector savings some time in the future”. If they (those that signed the Evans letter) understood this they would realize they make no sense.

  3. Clearly, a fundamental message of MMT is the reliable performance of the automatic stabilizers in an employment led expansion. Another is the dismal economic performance that inevitably follows in the wake serial budget surpluses, as demonstrated by history.

    These messages should be brought more to the top of the list in explaining MMT to the broader audience.

  4. Anybody hear of this guy, Dean Baker? He seems to be closing in on it as well't-have-a-debt-problem!-ask-the-market.-523272.html?tickers=tlt,TBT,tip,udn,uup,%5Edji,%5Egspc&sec=topStories&pos=9&asset=&ccode=

    I particularly like the quote, “Baker says that not all debt has to be sold to the public. The U.S. could use Japan’s model with the Treasury selling debt to the Federal Reserve Board.”

    Geewhiz those Japanese are smart! Why didn’t we think of that!

    1. Dean Baker is a good guy. He and another solid economist, James K. Galbraith (who wrote the foreword to Warren’s book) were up on the Hill during the TARP debate in the fall of 2008, urging congressmen to vote against the bank bailout.

      Issa said that the credit is actually due to former FDIC Chairman William Isaac, who has been on Capitol Hill briefing lawmakers as to what other options and financial tools are available to the treasury. Isaac spoke to a group of skeptical Democrats yesterday and set up camp outside the Democratic Caucus meeting Sunday. Along with liberal economist Dean Baker and another economist, James K. Galbraith, the trio would engage Democrats coming in and out of the meeting.

  5. The right level of deficit spending, long term or otherwise, is the one that coincides with full employment.

    but that does not mean that Government should continually expand rather it should cut taxes else you eventually get into inflation which would the require higher taxes which will push transactions into the black market. Higher taxes also encourage wives of high earners to drop out of taxed work and work at home.

    A FICA tax cut would would be great but both political parties, each for their own reasons, do not want to do that. So perhaps the Federal Government could pay the states to reduce their sales taxes.

  6. couldnt resist this one from Bernanke today:

    Even with interest rates effectively at zero, Bernanke argued there is more the central bank can do if needed to spur growth.

    One possibility would be to lower the rate it pays banks to park excess reserves at the Fed, currently 0.25 percent. Asked by a legislator why the Fed continues to pay banks to keep their money idle despite weak lending conditions, Bernanke said cutting the rate carries risks.

    “If rates go to zero there will be no incentive for buying and selling federal funds, overnight money in the banking system and if that market shuts down … it’ll be more difficult to manage short-term interest rates,” Bernanke said.

    What Bernanke is telling them is that even though he is at 0.25%, he is really at zero (going on TWO YEARS). If he goes any lower he risks losing his FF market liquidity and that is too risky for him. He’s done.

    Ignoring the disclosure that Bernanke thinks the world exists to support a FF market, at what point do these MORONS in Congress think to now change the line of questioning towards fiscal policy? They are not even good lawyers as by now, you would think that after hearing the same responses for two years from their “expert” witness with no results, they would start to question the witness credibility.

    1. Morons. Why doesn’t someone ask Bernanke why the US needs to issue debt at all, when it is the monopoly issuer of a nonconvertible floating rate currency, and the apparently unnecessary interest payments constitute a subsidy for bond holders. Of course, he would answer that it would undermine the confidence of the bond market. And the obvious retort is, What bond market if the US no longer issues bonds?

      1. I am actually having a problem with this:
        1. inflation happens
        2. household tend to save
        3. saving on macro level means either cash or gov. bonds
        4. without bonds and interest saving is punished

        does no bonds policy imply that saving is bad? will such policy also counteract any negative outcome that saving is supposed to?

        Why does everybody thinks only about bond markets? I want to save!

      2. Sergei,
        I see plenty of opportunities into which you could deploy your savings. Start with bank deposit accounts with unlimited insurance, also, Tom has delineated between ‘finance’ and ‘productive’ capitalism, ‘productive’ capitalism has legitimate financing needs and would issue bonds that you could get into via diversified funds, etc. I believe in Europe you have things called Covered Bonds that we could do here in US. there are probably others I cannot think of.

        The issuance of govt bonds (risk free bonds that pay a positive interest rate) distorts the credit markets for legitimate Productive capitalism, and establishes the foundations of a ‘playground’ for Finance Capitalism and all their speculation. It hurts people in legitimate businesses.

        WRT propensity to save, the JG component of MMT would be influential here. I think people here in US save “for a rainy day”, and for retirement. With a JG, you almost eliminate the chance of a real “rainy day”, as if you lost your employment, you would know that you could just report to the JG program and support your household income. As far as retirement, Senior Citizens could also report to the JG if they wanted to work to earn extra money and MMT proves there is no possibilty of our US Social Security public retirement income going ‘bankrupt’ so folks would start to view that differently wrt savings desires, etc.


      3. Matt, I do not agree. Saving should be a concept understandable to any grandma. It should say: this amount, this term, this interest rate. That is all you can expect a saver knows and he/she wants to save. You can not expect everybody to know the difference between covered bonds and bonds, diversified funds and measure of diversification, productive capitalism and venture capital and so on. And while JG does address some adverse risk but it implies that this person is of working age which leads me back to the grandma issue again.

        However, I do not see a single reason why a responsible government should deny its citizenry a risk-free simple saving instrument.

      4. Sergei: “Saving should be a concept understandable to any grandma. . . .

        “I do not see a single reason why a responsible government should deny its citizenry a risk-free simple saving instrument.”

        I agree. 🙂 In the U. S. you can buy savings bonds directly. You do not have to go through a broker in the bond market.

      5. State governments will always need to borrow, the US could, after appropriate due diligence guarantee new State bonds and sell them on the Treasury Market. Full faith and credit of the United States is a bigger seal of approval than a AAA rating. The US Government would step in to help a state that fell into insolvency anyway, so its no additional burden (and guarantees add nothing to the statutory debt limit).

        Right now, state bonds pay higher interest and underwriting fees than do Treasuries, and in some cases are scrambling for investors.
        Federally guaranteed state bonds would provide more affordable financing for state governments and a steady supply of gilt-edged bonds for investors.

      6. No brainer. Why aren’t we doing this instead of tanking the economy and bleeding jobs?

      7. Grandma has a basic human right to a secure saving account (i.e. one that is government run or government backed). She does NOT have any automatic right to interest or bonds. If there happens to be a surplus of borrowers and shortage of savers then interest rates will rise and Grandma may get some interest. But to say she has an AUTOMATIC right to interest especially when interest rates are around zero is to say that taxpayers should subsidise Grandma’s unnecessary hoarding. I don’t agree with that taxpayer subsidy.

      8. Grandma has a basic human right to get interest at least at the rate of inflation. It is not a subsidy. It is a basic human right to the same extent as grandma’s pension is indexed. It does not depend on surplus or deficit of borrowers/savers. That is all I argued about. And there is no need to put financial sector in between.

      9. yes, but I have an answer. I guess many governments (well, at least here in Austria) allow retail people to buy gov. bonds directly. Maturities of between 1m and 10y are allowed. Do not know how interest rate is defined but it is defined somehow.

        So issue bonds! But sell them to retail only and directly!

      10. The US financed WWII with retail bonds. They were called “War Bonds.”

        One can still buy them retail in small denominations, although they are not longer called war bonds but savings bonds.

        I have no problem with this. It’s advancing public purpose to encourage retail savings.

        But the banks would rather not have it, since it compete with them, so it’s not featured and not many people use it in the US now. Usually, CD’s (certificates of deposit) and savings accounts are used retail.

      11. Right, ESM. I’m even OK with the large denomination Tsy bills and bonds sold “at retail” instead of as an offset that mimics borrowing. As long as it is clear that government securities are issues only as a savings vehicle, in competition with other savings vehicles, it does not reinforce the government-finance-is-like-household-finance analogy.

        If we are going to go this route, they I would want to see the denominations and venue made very retail-friendly, so that the public could buy government securities as savings as easily and conveniently as dealing with their bank, if they preferred to do so.

        Then two issues immediately arise. First, should government be subsidizing savers with interest as a matter of public purpose. Although I like no bonds, I think an argument can be made for this and I might be convinced by it.

        Secondly, should government be competing in this way with the private sector. Of course, banks won’t like this much.

        There are, of course, other issues top consider, too. But if it is clear that government “debt” issuance constitutes national savings then we could have the debate on the facts and real issues instead of myths and bogus issues.

      12. “If we are going to go this route, they I would want to see the denominations and venue made very retail-friendly, so that the public could buy government securities as savings as easily and conveniently as dealing with their bank”

        What you’re talking about is the government operating a chain of retail stores in every community. That’s a lot of infrastructure and labor costs. I bet you’ll want the government employees to drop off the monthly interest checks personally, geez Tom! :o)

        From July 1, 1911, to July 1, 1935, Postal Savings System deposits could be exchanged in amounts of $20 or more for postal savings bonds, which yielded 2.5 percent interest. After July 1, 1935, customers could purchase U.S. savings bonds in lieu of postal savings bonds.
        Beginning in 1940, postal savings stamps were also issued in 25-cent, 50-cent, and 1-dollar denominations. In 1941, a 5-dollar denomination was added, and while still redeemable for certificates of deposit, the stamps were meant to be pasted into booklets which were redeemable for United States
        Treasury Defense savings bonds.

      13. Beowulf, I have said previously that I don’t think that retail banking is presently working in consumers interest and I don’t know that the present system can be repaired. I’ve suggested separating consumer banking from commercial banking, and isolating finance (including investment banking) from the banking system. I am not alone in this and there are some proposals out there already. I am not presently supporting any of them since I haven’t looked into this in detail, and I am not knowledgeable enough in the field to propose anything very explicit myself.

        I see the government’s role in this as one of both protecting and facilitating, without impinging on the private sector where the private sector is able and willing. However, I do not see the private sector willing in many respects unless extraction is involved.

      14. I was actually agreeing with you, the Postal Service could probably use the work.

      15. Funny, I was thinking that maybe it’s time to privatize the USPS. Too many subsidies and the cream has been raked off by UPS, FedEx and DHL. 🙂

      16. I probably see Bernanke’s points, though I am not so sure.

        If things are changed the number 0.25%, interest on required reserves, interest on excess etc.

        Assume for the moment, that for some reason, banks stop lending each other because something was lowered. This would lead to a heavy usage of the discount window and banks will price the loans assuming higher cost of funds.

        The beauty of the Mosler proposal is that everything is self-consistent. You cannot modify it. For example, banks have unlimited overdraft at the central bank in the proposal. Right now its not the case.

      17. Tom: Your “Morons. Why doesn’t someone ask Bernanke” point is spot on. That point is Abba Lerner in a nutshell. It’s modern monetary theory or “functional finance” in a nutshell.

  7. Tom Hickey: “Then two issues immediately arise. First, should government be subsidizing savers with interest as a matter of public purpose. Although I like no bonds, I think an argument can be made for this and I might be convinced by it.”

    Under the current circumstances, where we have a consumer based economy run on consumer debt, we should encourage consumer savings. Yes, we have FDIC, but the symbolism of gov’t bonds should not be looked down upon. In addition, the rates on gov’t bonds could be used for policy purposes. Also, if we are going to have the gov’t issue bonds, why should the beneficiaries be the bond vigilantes?

    Tom: “Secondly, should government be competing in this way with the private sector. Of course, banks won’t like this much.”

    Private banks have too much control over the money supply as it is. The public utility aspect of banking has been greatly reduced. Right now private banks are reluctant to lend, the risk is too great, because of economic conditions. But a gov’t bank could lend, and improve economic conditions in the process. Then it could pull back as private banks began lending. Such a bank would not be simply competing with private banks. OTOH, it would and, IMO, should compete with credit card companies. It may be preferable to eliminate consumer debt, but that is not about to happen. However, offering single digit consumer credit would help get our economy away from its reliance on debt. During our current crisis interest rates for the banks have plummeted, but credit card rates have risen. Does that not indicate a market failure? Shouldn’t the gov’t get involved?

    Getting back to savings bonds, is issuing them more competitive with banks than issuing other gov’t bonds is already?

    1. During our current crisis interest rates for the banks have plummeted, but credit card rates have risen. Does that not indicate a market failure? Shouldn’t the gov’t get involved?

      As to the public purpose of banking, who was the congressman that just drilled Bernanke that either through the fed or the treasury, the government bought a bunch of garbage loans that it is going to take a huge loss on? What is your interpretation of this new legislation?

      This new bill from frank and dodd seems to be enabling a new payday loan system that is going to bypass the banks. unsecured payday loans for ben bernanke. I would be interested in what they plan to use for collateral.

  8. instead of a govt bank lending when private banks won’t, presumably because it can take more risk as losses aren’t consequential, why not a tax cut or other fiscal measures instead?

    or at least recognize that govt lending without private sector skin in the game is functionally fiscal policy?

    loans that will knowingly go bad are very much akin to fiscal transfers in any case.

    lending by china’s state owned banks are an example.

  9. Warren, what are student loans like in China compared to the Usa? Are they expecting many defaults like their real estate loans?

    This chart shows how much inflation there has been in the price of college. I know at several of my local colleges many kids do not have the ability to repay their 300K or so in student loans and have went into default. Tom Hickey, didn’t you get a masters degree? Did you pay for it all yourself or was it subsidized with loans or grants? I was reading an article in the local college newspaper where a student and professor were given 300K to go to nigeria and try to solve some unsolved murder cases. I look at starving veterans only a few blocks away and am confused about this allocation of resources.

    I know MIT and others have free online courses you can take now, why isn’t education moving to this cheaper and more efficient allocation of resources in teaching? Do chinese colleges require students to show up physically like in the USA?

    1. Straw, I got an MA and PhD on the Viet Nam GI bill. This subsidy met most of my expenses. The rest were easily provided for by teaching part-time after my second year in grad school, when I had finished by course work and was preparing for the comprehensive exam and then writing my dissertation. This took several years to complete. I graduated with zero debt.

      1. Very interesting Tom, thanks, looking here

        and here

        I am wondering if the grants/subsidies have kept up with college inflation. The first site says you get 50K and a max of 10 years in which to take the benefit. That seems wholly inadequate and underfunded to go to a top tier school. I know Gen. Shinseki recently started a new VA program with USF that he claims will usher in a new era of productivity like the first GI bill did in the 40’s. Let me ask you Tom, if you give service to your country, and are honorably discharged, why cap the amount of money or time you need to finish college – why doesn’t our society subsidize this more? I know warren said he doesn’t make CNBC as much because he only got a lesser degree (no PHD) and einstein said anything beyond a bachelors was a waste, but I wonder how many vets we can turn into masters and PHD degree holders with current subsidies, seems insufficient to me and I think we can all agree that education and educated citizens is the real path to a better future.

      2. My view is that daycare and kindergarten through PhD should be available free to who are willing to do the work. As Bill Mitchell has observed, education is the best investment a country can make because human resources are the most valuable. This is much more doable now with technological advances that facilitate distance learning. With holographic imaging it is now possible to have a teacher in many places at once, with students interacting this way, too.

        There isn’t the personal interaction with faculty that there used to be anymore anyway. It seems to me that the way to go is to make most of learning distance learning and have faculty travel to different location for seminars and workshops to provide personal interaction in the cases that this seems to be appropriate. Tuition is needlessly high now, and the only way it works is to put students deeply in debt. That is just crazy in addition to being wrong. There is a better way.

        Do not I think that government should subsidize education for some and not for all. Subsidies introduce too much inefficiency. For example, they tend to increase costs and can shut out many of those that don’t qualify for the subsidy.

      3. Strawberry Producer (will look better on your resume),

        The original GI Bill was passed in the middle of World War II, ed benefits were very good,, the education benefits would cover tuition anywhere at any level (I believe even foreign universities). It slipped in value over time, until a few year ago, it’d maybe cover community college. When Jim Webb was elected to the Senate, his big issue was upgrading the GI Bill. It now covers the in-state tuition of any state university (which is a big deal for someone from say, NJ where Rutgers costs $12,000 a year. It will also pays a monthly stipend to help cover food and housing.,15240,165937,00.html

        Of course, the smart play is to get your bachelors while in the service, and use your GI Bill for grad school. There’s a website where a sailor explains how he tested out of an associates and bachelor degrees in a matter of months (the whois address is NAS Jacksonville, so he’s legit, though he’d be crazy not to be taking ad money from the exam review companies).
        My main purpose of building this website is to show other persons seeking a higher education that it is possible to earn a regionally accredited, legitimate associate and bachelor’s degree while on active duty, WITHOUT STEPPING A FOOT INSIDE OF A CLASSROOM

      4. SP, one other thing, $300k in education debt is crazy, even half that is nuts. The Bankruptcy Code sticks you with two debt that cannot be discharged…1. child support and 2. student loans. So student loans aren’t a favor for most kids (majority of college students end up dropping out). And the ones who stay in often go for the most unemployable degrees. You just shake your head when a kid tells you about their plans to move to New York so they can use their, say, Art History degree.
        expected income – student loan payments–> default.

        The moral of the story… bring back the draft. As rites of passage go, its a better deal than college. You get paid (OK, and ordered) to move out of the house and see the world. And on the back end, Uncle Sam owes you the cost of college instead of vice versa. :o)

      5. “You just shake your head when a kid tells you about their plans to move to New York so they can use their, say, Art History degree.”

        LOL! Either you and I travel in the same very small circles or this is a far more common problem because that is EXACTLY what several of the kids near me tried! It is always New York or Miami to make millions with thier interior design degree doing furniture and apartment remodels for people with last names like Gucci and Armani, then when they get to new york they can’t find a job except as a flower shop employee doing floral arrangement designs and can’t repay the loans. I am just wondering if china is also making bad student loans like this for their kids to go to shanghai and be art history or interior design dropouts 🙁

  10. Peter Dorman at Econospeak on the implications of the secotoral balance identity.

    Ver Simple Debt Dynamics

    What does this mean for intelligent policy? First, Keynes was right: if the private sector has stopped borrowing, the public sector must leap in and take its place, and this must continue as long as the private sector remains skittish. If that imperative leads countries into the maw of adjustment—well, we need international institutions that spread adjustment across surplus and deficit countries alike, so that the contractionary impact on the latter is offset by the stimulative impact of the former.

    Second, if lots of bad debts have been incurred, and if the amount of time it will take to wind them down and return to healthier levels of consumption and investment is too long, it is better that there be an orderly writeoff of a large chunk of the debt overhang. Alas, this was not central to the bailouts of the last two years as it should have been, even though the financial system had accumulated trillions of dollars in bad debt. Either we do this in a rational, civilized way, or the economy will sputter until default breaks out chaotically.

    Unfortunately, the creditors are in command across the world economy and can think only of squeezing out every last cent of their assets.

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