debt-subject-to-the-limit

Stop Using Obama for America Against the People!

Joseph M. Firestone — Sat, 24 Nov 2012 00:39:49 -0500

Obama for America, the campaign apparatus with the very large e-mailing list and great segmentation techniques that exploited Romney's weaknesses to help the President to eke out (yes, I know the electoral vote involved no “eking out,” but the popular vote was something else again) his re-election victory, is now trying to mobilize people who voted for the President to work against their own interests by supporting his deficit/debt cutting activities. So, I couldn't resist the following commentary on their mobilization e-mail.

From the graphic:

Right now, President Obama is working with leaders of both parties in Washington to reduce the deficit in a balanced way so we can lay the foundation for long-term middle-class job growth and prevent your taxes from going up.

This is just one sentence. But it has more errors in it than a whole book written by some economists. First, it assumes that we should “reduce the deficit.” But:

-- It's fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when, as now, both a trade deficit and an output gap between the economy's potential and its actual results exist. Such a plan is one that must remove more net financial assets, specifically reserves, from the private sector than would otherwise be the case, every year the plan is pursued. Banks can compensate for these reserves by creating new ones when they make loans. But, loans create both assets and liabilities in equal measure and no new net financial assets.

So eventually, if deficit reduction is pursued for long enough, a declining rate of addition to private net financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate. This will eventually dig the US's economic grave by reducing the productive capacity of the economy, and the Government's ability to sustain greater levels of deficit spending, producing outputs of real social value, without triggering inflation. Oh, well, President Obama, Timothy Geithner, Jack Lew, Erskine Bowles, Alan Simpson, Alice Rivlin, Pete Peterson, and the rest of us will be able to find consolation by reminding ourselves that our collective trip to the poorhouse was in the service of the neoliberal notion that fiscal responsibility is all about containing the rise of the debt-to-GDP ratio.

-- REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give, as the President is now doing with his drive towards a “Grand Bargain,” greater priority to that kind of abstraction, and to the opinions in the bond markets, than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Who would have predicted that this “pragmatic,” “realistic” president would have such a strong belief in “the confidence fairy”?

The President should put an end to the domination of Washington by that kind of malpractice. We, the members of Obama for America, need to call upon HIM to stop serving the bond markets, and put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector net financial assets and jobs, than would be the case if we either did nothing or increased the deficit, and created and maintained a full employment budget.

Second, what does it mean to reduce the deficit “in a balanced way”? We know what it means. It means that any “grand bargain” should be “fair” in that it takes something out of everyone's hide. “Shared sacrifice,” you know.

So, what's that about? Maybe a few points increase in marginal tax rates for the rich, the impact of which they will be able to substantially get around with tax loopholes and deductions anyway. Some reductions in spending on defense including cuts for defense contractors. And for the middle class and the poor the expiration of the payroll tax cuts, perhaps cuts for the long-term unemployed, certainly cuts for discretionary spending programs that benefit working and middle class people, and probably cuts in Medicare, Medicaid, and Social Security entitlements, since the President has so kindly put these on the table again and again over the past years.

But that doesn't begin to be fair. The 1% have fully recovered from the crash of 2008, largely because of the policies of the Obama Administration and the Federal Reserve in saving the big banks, and the system that allows them to make profits in the derivatives casino, which in turn have also helped the stock exchanges to erase the losses caused by the crash. In addition, the big banks have never been brought to account for their execrable and astonishingly numerous and blatant mortgage frauds that have made a hash of property rights for the middle class in the United States.

However, working people haven't shared in that recovery, as employment, housing, and inequality statistics amply indicate. The rich are getting richer, while everyone else is getting poorer, because of an economy and an associated financial system that has been politically rigged to benefit them and grievously harm everyone else.

So, even if deficit reduction was a REAL problem, which it is NOT, the President's call for balanced reduction is UNBALANCED and UNFAIR, because you can't forget about history and create balance. We've had 40 years of UNBALANCED economics, now fairness and justice demand REDRESS. We need UNBALANCE to create a NEW BALANCE.

Once again, we do not need, and should not have deficit reduction, but if the President must have “balance,” then let us have REAL balance. Let us quit mucking around, and go back to the marginal tax rates of the 1940s and 1950s, when the great American Middle Class was consolidated and full employment was often a result of economic policies that prioritized it higher than avoiding inflation. Let us have a social safety net that is not the least, but the most generous among modern nations.

Let us have no cuts for the middle class and the poor, and let us have policies that require sacrifice from those who have benefited so much from the rigged political system of the past decades. Doing things in “a balanced way” is a fine slogan. But real “balance” isn't a “Grand Bargain” that Wall Street-serving elites in both parties happen to arrive at. Real “balance” is justice and fairness and that kind of balance requires a settlement that gets sacrifice from those who have NEVER sacrificed anything, and gives benefits to those who have received little during the time of neoliberal economic distortion of our lives.

Third, the kind of bargain that will get sacrifices in the safety net and discretionary programs for Wall Street is not the kind that will create a foundation for long-term job growth. Only increased aggregate demand manifested in increased sales can do that, and only another credit bubble for the middle class, or INCREASED deficits from the Federal Government can supply that demand. Since the last thing most of us want is another credit bubble, the most preferable alternative is for the Government to use fiscal policy to end the human sacrifice of the middle class and the poor to the Gods of neoliberalism, and bring prosperity back to all Americans rather than only the economic elites.

And fourth, It is just WRONG to imply that if we don't have “balanced deficit reduction,” then we must have higher taxes. That is a false choice. We need neither deficit reduction nor higher taxes to ensure continued solvency. What we need is public deficits high enough to compensate for our capability to import more than we export, and our desire to save 6-7% of GDP per year. We are not getting deficits high enough for that now, and that is what Obama for America should be mobilizing people to support.

From the e-mail:

Your voice and action helped re-elect President Obama, and hundreds of thousands of you have already responded to our survey, which will help shape our next steps. Thanks to your feedback, we’re taking immediate action on one of your suggestions: keeping you informed about how the President is fighting for you so you can continue to talk to your friends, family, and neighbors. So here’s the deal:

President Obama, do the results of your survey show that a majority of OFA members 1) want long-term deficit reduction and are willing to cut the social safety net and discretionary Federal spending to get it, or 2) do they want you to leave these areas alone and just raise taxes on the wealthy, raise or eliminate the salary cap on FICA payments, and cut defense spending? I think you know the answer to this question as well as I.

OFA members favor deficit reduction, because they don't know that the deficit/debt isn't a problem for America. But they don't favor “balanced deficit reduction.” They favor 2) above instead. So, if you're really listening to their feedback, then why don't you stop “spinning” it, and just listen.

No “Grand Bargain.” No cuts to the safety net. No cuts to discretionary spending. If the Republicans don't like it, then just “go over the fiscal cliff!” And keep pushing in January to restore the middle class tax cuts and fixing other parts of the sequestration that damage the middle class and the poor. If the Republicans won't act reasonably in the new Congress, then they'll pay the price in 2014!

From the graphic:

Reducing the deficit in a balanced way. The President’s plan extends tax cuts for 98 percent of Americans Eliminates tax cuts for the wealthiest Americans Cuts spending by more than $3 trillion The Results

More than $4 Trillion in balanced deficit reduction that keeps your taxes low and preserves investments we need to grow the economy like Education and Infrastructure.

President Obama, you're asking OFA members to support $3 Trillion in spending cuts and only $1 Trillion in tax increases, or an average of $400 B in deficit spending cuts over the next 10 years. That $400 B is about the same size as the annual deficit spending on the American Re-investment and Recovery Act (the stimulus bill). But this annual anti-stimulus lasts for 10 years, whereas the stimulus lasted for about 2 years.

Now please explain to me why you think the stimulus bill was necessary and good for the economy and saved 3 million jobs, yet at the same time you think an anti-stimulus of the same order of magnitude lasting 5 times as long and made up mainly of high multiplier spending cuts will provide a foundation for long-term job growth, rather than simply cost the economy 15 million jobs? Do you think OFA members are dumb or something?

Why do you think OFA members will buy a pig in a poke? You haven't given any details about the spending cuts you are willing to accept, and which ones are off the table, yet you ask for our support? You say trust me, after you've put entitlement cuts on the table repeatedly in deficit negotiations and after you were the person primarily responsible for the creation of the notorious Catfood Commission; who has repeatedly made favorable comments about the Bowles-Simpson (B-S) report authored by these Captains of Catfood, when they were unable to get the approval of the Catfood Commission you created?

Sorry, Mr. President, but I doubt that OFA members are that gullible. If you really want their support and the support of OFA members generally, try telling people that deficit reduction isn't necessary but jobs programs are, and that you plan to go over the fiscal cliff and then fight hard for the Republican House to restore the tax cuts for the 98%, unemployment insurance for the long-term unemployed and a Federal Job Guarantee program that will create full employment at a living wage? That'll get all OFA members behind you quicker than you can say Green New Deal!

From the e-mail:

That’s the President’s plan, but he’s not wedded to every detail. He is determined to work with Congress to find compromise and common ground. His guiding principle throughout this debate will be what’s best for the middle class. He’ll be fighting for you.

Well, the President's $4 Trillion deficit reduction plan is bad enough, guaranteeing a stagnant economy for a decade. But, in addition, to be told that he's willing to make it even worse, to maybe agree to even greater cutbacks in spending that people need, and to even less in tax cuts for the rich that they don't need? No, OFA, I don't think members are going to support that kind of flexibility for a guy who seems determined to give away the crown jewels of the New Deal, in return for minor concessions from the knuckle-draggers. I'd rather see him resign his office first and leave it to Joe Biden, who may, at least be a REAL Democrat (though these days that's probably a vain hope)!

There’s a lot at stake. With your help we’ll continue to move this country forward.
Please forward this email and spread the word on Facebook and Twitter:

You bet I'll spread the word, I'll tell the world that support for this deficit reduction trope ('er so sorry, “plan”) is something we shouldn't give, and that, instead, we should shout very loudly for the President to begin acting like a Democrat, start trying to get full employment and extend the social safety net, and quit trying to play footsie with the Republicans and blue dogs.

There are plenty of things the President can do unilaterally to improve the economic situation. We voted for him to get started – not to cave to the Republicans and blue dogs again!

(Cross-posted from New Economic Perspectives.)

Trigger Mechanisms To Avoid the Fiscal Cliff? You're Kidding, Right?

Joseph M. Firestone — Sun, 18 Nov 2012 21:05:32 -0500

Robert Reich has been writing a series on “the Grand Bargain” and the “fiscal cliff.” In this post, I'll do a commentary on his “The President's Opening Bid on a Grand Bargain (II): Put a Trigger Mechanism in the Legislation”, because I think it's a good example of self-defeating progressivism or “loser liberalism. Take your choice of epithet.

Reich begins:

When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming "fiscal cliff," the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want - that's what it means to be rich.)

So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn't there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it's a problem? Let's go on and see if we get a hint of what the explanation for Reich's concern with “the deficit problem” comes from.

But before we do that, let's briefly note that Reich's easy comment that taxing the rich more won't harm the economy, isn't quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there's no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.

Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?

If we do too much deficit reduction too soon, we're in trouble. That's why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That's the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don't want to go there.

We certainly don't want to go where Europe has been going lately. They're a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there's no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That's not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it's now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we're still not out of the woods. So in the foreseeable future -- the next six months to a year, at least -- the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.

Of course, that's true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely to involve a good bit of those kinds of cuts, if there's any compromise at all with the deficit hawks on the budget.

But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.

Now we're getting an inkling of what Reich's problem is. He's afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that's true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there's nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody's is follish enough to downgrade US debt to below Japan's rating.

This is why any "grand bargain" to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I'd make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.

Triggers are a really bad idea, and I'd hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren't ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there's no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich's is a proposal for Obama's opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It's just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn't become a means of avoiding deficit reduction altogether, that trigger should be built right into any "grand bargain" legislation - irrevocable unless two-thirds of the House and Senate agree, and the President signs on.

Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can't take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how's that working for Congress and the rest of us? It's made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won't hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we've got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we're serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence - getting the economy back on track, and then getting the budget deficit under control. It's sensible and do-able. But will Congress and the President do it?

If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let's stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment's thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

(Cross-posted from New Economic Perspectives.)

The Fiscal “Cliff” and the Real Problem

Joseph M. Firestone — Fri, 16 Nov 2012 00:29:35 -0500

Like many others, I'm not worried about the so-called fiscal “cliff,” and the ravages to the economy that are likely to occur if Congress doesn't do something about it before the end of the year. That's because a lot of the impact can be cushioned in the short run by Executive Branch manipulations while negotiations continue to go on. But if measures aren't taken to reverse the contractionary effect of the sequestration-induced changes, we're looking at deficit cuts of $487 Billion over 9 months of the fiscal year.

By comparison, the American Recovery and Reinvestment (ARRA) of 2009 produced only $350 B in stimulus during its first year. And, if the full sequestration were allowed to proceed unmodified, then it would result in a “claw-back” of about 60% of the total ARRA stimulus.

Fortunately, if we do go over the "cliff" heavy pressure will then be on both parties to reintroduce the middle class tax cuts, and make them retroactive, and to restore some of the other cuts as well, so it may be possible to mitigate much, if not most, of the damage, if the Democrats are aggressive enough in pushing the negotiation advantages they appear to have now. So, the real danger of the manufactured “fiscal cliff” is more long-term.

That danger is the constant bleating from both deficit hawks and "progressives" that we have to do something long-term about the deficit/debt problem. So, they put up these long-term plans to delay deficit cutting for a year or two and then want to cut even more down the road to 'stabilize' the debt-to-GDP ratio. This is a non-existent problem, and any plan providing for deliberate polices to force deficit reduction by constraining Government spending to some arbitrary level is bound to damage the economy seriously when the prescribed spending cuts and increased taxes for lowering deficits take effect.

People have to come to accept reality, which is: if we want to import more than we export; and also want the private sector as a whole to save money (i.e. bank savings, pensions, other savings) then there is no alternative to having the Government deficit spend. Further, how much the deficit ought to be, without incurring the penalty of demand-pull inflation is dictated by how much we want the private sector to save, and how much of a trade deficit we want to continue to run. If we want to have a trade deficit at 4% of GDP, and we want to save 7% of GDP, then we must allow the Government to run a deficit of approximately 11% of GDP. And we must do that year after year after year, for as long as we want to save that much and import that much.

Do I need to point out that our deficits are not now anywhere near 11%? And that as a result we not only have high unemployment, an output gap of more than $3 Trillion annually in GDP, but also less in both savings (financial wealth being accumulated) and imports (real wealth being accumulated) then we otherwise would have? What will happen if even the “liberal” Center On Budget and Policy Priorities (CBPP) hits the economy with its proposed total of $3.7 Trillion (the $1.7 Trillion already agreed to last year and the additional $2 Trillion it is proposing) in deficit reduction? That is an average of $370 Billion per year in enforced deficit reduction which will come right out of savings and imports. That, in the absence of credit bubbles creating unsustainable demand, will condemn us to a stagnant economy as far as the eye can see.

We don't have to run those 11% of GDP deficits, and also have them drive 11% of GDP further debt accumulation. Deficits and debt accumulation are not the same things, and can be decoupled. We can have the deficits and use Proof Platinum Coin Seigniorage (PPCS) to underwrite the deficit spending; or we can change the rules preventing the Fed from monetizing deficit spending by just creating the necessary credits for spending Congressional deficit appropriations and placing them in the Treasury General Account (TGA) when needed. So having the increased debt along with the continuing deficits isn't necessary. And if we don't like the debt, then we can get rid of it.

But, again, if we want the imports and if we want the savings, then we must have the deficits, and we must never have deficit reduction unless we also have savings reduction and/or trade deficit reduction. So the bottom line here is: We need to have the “loser liberal” message we're hearing from Bernie Sanders, Robert Reich, The Center On Budget and Policy Priorities, and various "progressive" pundits and organizations, just stop!

Keynes's idea that a fiscally responsible nation incurs deficit/debt in bad times, and pays it back in good times with surpluses, is wrong in the context of fiat currency nations. The gold standard's been gone since 1971. Nations have much more fiscal space. Some nations want to run trade surpluses all the time, and accumulate nominal financial wealth, and others want to accommodate them and accumulate the real wealth of their imports instead.

So, this makes it impossible for those others to have both aggregate private sector savings and full employment, without Government deficits compensating for the demand leakages. The accommodating nations need to run permanent deficits to serve their own populations. And, if other nations, object to that, then they need simply to stop having export-led economies.

We have no national debt, or debt-to-GDP ratio problem, because we are a nation with a non-convertible fiat currency, a floating exchange rate, and debts in currencies not our own. This means we can always generate new currency to pay our obligations using the methods I just mentioned. And it also means that 1) our levels of debt and debt-to-GDP ratio have no impact on the fiscal sustainability of our fiscal policy; and 2) fiscal responsibility can't mean targeting fiscal policy at particular levels of the national debt, or the debt-to-GDP ratio.

Nor can the bond markets create rising interest rates on US public debt because "we," that is the Fed and the Treasury together, control those rates and can keep them as low as they want to even if every ratings agencies downgrades US paper to its lowest rating. Put simply, our creditors have zero power over our interest rates. Reich's talk about persuading our creditors that we’re serious about getting our fiscal house in order is just errant nonsense. What we really need to do about them is to use PPCS to fill the public purse, repay our debt instruments as they come due, and take their bond market in USD away from them entirely. It's only a source of "welfare" payments to rich people and foreign nations anyway. What do we need it for, anyway?

(Cross-posted from New Economic Perspectives.)

An MMT Fiscal Responsibility Narrative: Some Truths After A Second Crowd So

Joseph M. Firestone — Mon, 12 Nov 2012 21:22:30 -0500

Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn't think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.

So, here's my version, revised, a second time, after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org, a second time. Thanks to Tadit Anderson, Mitch Shapiro, Devin Smith, Dan Kervick, Nihat, James M., MRW, Marvin Sussman, joebhed, Clonal Antibody, Calgacus, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Charles Yaker, Lambert Strether, maltheopia, Ian S., Tyler Healy, PG, for contributing significantly to the critical evaluation of the earlier versions.

More comments, criticisms, recasting in more effective form, are all welcome. But this will be my last round of crowd-sourced revision. I hope all readers will feel free to use this version as they think is best to spread the MMT message about fiscal responsibility. To boil that message down: fiscal responsibility is about the impact of fiscal policy on people; it's not about the old time religion of its impact on a supposedly limited supply of gold standard-based money.

The Narrative

The first four points in the narrative offer some conclusions.

-- Austerity requiring budget surpluses cannot work in the United States economy, because surpluses, defined as tax revenue exceeding spending, destroy money in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss of financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t Ian S.)

-- It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more money from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, a declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government's ability to sustain greater levels of deficit spending producing outputs of real social value without triggering inflation.

-- REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let's put an end to the domination of Washington by that kind of malpractice. Let's put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector money and jobs than would be the case if we either did nothing or increased the deficit and created a full employment budget.

-- The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

-- More generally, there is no entitlement funding crisis in the United States, except a political crisis where US politicians are determined to ignore their constituents and cut back on an already inadequate safety net either because they believe in, or want others to believe in false ideas about fiscal responsibility and nature of the Government as a giant household.

And the rest of it provides the reasoning underlying them.

-- The US Government can't involuntarily run out of its own fiat money (USD), since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

-- Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that's why they can run out of Euros. The US is the issuer of Dollars; so it's supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that's why it can't become Greece, Ireland, or any other Eurozone nation.

-- In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector, and destroys it. When it creates money, it adds it to the private sector. A deficit is the net amount of money creation minus the amount of destruction due to taxation. A surplus is the net amount of money destruction minus the amount of creation due to Government spending. (h/t Golfer1john)

-- Since this is the case, it's clear that present proposals to reduce the deficit by an average of $400 Billion/year over the next 10 years are sure to remove money or Treasury securities (assuming deficit spending is accompanied by issuing debt) from the private sector that otherwise would have been created there in the absence of deficit reduction.

-- The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

-- The Treasury can keep accepting deposits (“borrowing money”) and issuing securities if we want it to. There's no limit on this Government “credit card,” just as there is no limit to the deposits a bank can accept, except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money, due to a failure to raise the debt ceiling between now and March 31, 2013, it will clearly be the fault of the Congress for refusing to grant further authority to the Treasury to elicit and accept further deposits, also known as refusing to raise the debt ceiling!

-- Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on them by buying securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in the interest-bearing “savings accounts” known as Treasury securities.

-- Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can't control the money supply. But it does control the price of it with its interest rate targeting.

-- The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won't, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.

-- The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt. One way to do this is through Proof Platinum Coin Seigniorage (PPCS). A second way is through subordinating the Fed to Treasury and then using the Fed's ability to create money out of thin air to pay back all debt instruments (“savings account balance”) when they fall due. The first way is legal now. The second is constitutional, but would require politically unlikely action by Congress to authorize it.

-- A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government's capacity to spend Congressional Appropriations at all. Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It's about its impact on people!

-- The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government's supply is a matter of its decisions alone.

-- However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.

Conclusion

Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation, and smack of a campaign to create hysteria among the public. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crises is one of a failing economy and growing economic inequality in which only the needs of the few are served, and also one of lack of political desire or will to solve these real problems. MMT policies can help to bring an end to the first economic crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to the political action we need to solve the political crisis and eventually toward fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

(Cross-posted from New Economic Perspectives.)

Tags: Fiscal Sustainability, Fiscal Responsibility, Modern Monetary Theory, MMT, national debt, deficit, debt-to-GDP ratio, debt-subject-to-the-limit, neoliberalism

An MMT Fiscal Responsibility Narrative: Some Truths After Crowd Sourcing Re

Joseph M. Firestone — Fri, 09 Nov 2012 19:31:27 -0500

So, here's my version, revised after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org. Thanks to Tadit Anderson, Mitch Shapiro, Nihat, James M., Marvin Sussman, joebhed, Clonal Antibody, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Lambert Strether, maltheopia, Ian S., for contributing significantly to the critical evaluation of the earlier version.

More comments, criticisms, recasting in more effective form, are all welcome.

The Narrative

-- The US Government can't involuntarily run out of fiat money, since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

-- In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector. When it creates money, over and above what it taxes or borrows, it adds it to the private sector. Since this is the case, it's clear that present proposals to reduce the deficit by an average of $400 Billion over the next ten years are sure to remove net financial assets from the private sector.

--The Treasury can keep borrowing money if we want it to. There's no limit on the Government credit card except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money due to a failure to raise the debt ceiling between now and March 31, 2013 it will clearly be the fault of the Congress for refusing to raise the debt ceiling!

-- Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in Treasury securities.

-- Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS's funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D. The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

-- However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.

-- Austerity requiring budget surpluses cannot work in the United States economy because surpluses, defined as tax revenue exceeding spending, destroy net financial assets in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss in net financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t Ian S.)

-- It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more net financial assets from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government's ability to sustain deficit spending producing outputs of real social value.

-- REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. REAL fiscal responsibility is Government fiscal policy creating greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It's political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let's put an end to the domination of Washington by that kind of malpractice.

Conclusion

Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crisis is a crisis of a failing economy and growing economic inequality in which only the needs of the few are served. MMT policies can help to bring an end to that crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

(Cross-posted from New Economic Perspectives.)

An MMT Fiscal Responsibility Narrative: Some Truths

Joseph M. Firestone — Mon, 05 Nov 2012 11:07:39 -0500

Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn't think of a brief positive MMT narrative containing primarily the truths, rather than the myths. So, here's my version. Comments, criticisms, recasting in more effective form, are all welcome.

-- The US Government can't involuntarily run out of fiat money because it has the constitutional authority to create it without limit. Congress constrains and regulates this ability; but its existence is still a stubborn fact!

-- In addition to taxing and borrowing money and, most importantly, the Government has an unlimited capacity to create it. When it taxes and borrows, it removes it from the private sector. When it creates it, over and above what it taxes or borrows, it adds it to the private sector.

--The Treasury can keep borrowing money if we want it to. There's no limit on the Government credit card except the one imposed arbitrarily by Congress.

-- The bond markets will most probably buy US debt for the foreseeable future; but if they don't, then the US won't be forced into insolvency; because the Government can always create the money needed to meet US obligations.

-- We're obligated to pay all US debts as they come due. Nevertheless, our national debt cannot be a burden for our grandchildren; since we have an unlimited credit card to incur new debt at interest rates of our choosing, or, alternatively can create all the money we need to pay off debt subject to the limit, without incurring any more debt; unless they wish to make it so by stupidly taxing more than they spend.

-- Since the US Government has no limits on its authority to create/spend money other than self-imposed ones, neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government's capacity to spend Congressional Appropriations at all. That's why a fiscal policy that measures its success, not by its policy impacts, but by its success or failure in reducing deficits isn't fiscally responsible, or likely to be sustainable.

-- Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. So, no solution to this “fiscal crisis,” bipartisan or partisan is needed. What is needed is a solution to the political problem of getting SS's funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D.

-- However large the Federal Debt becomes it cannot be a “crushing burden” on our Government, because federal spending is virtually costless to the Government, if it wants it to be.

-- Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that's why they can run out of Euros. The US is the issuer of Dollars; so it's supply of dollars is limited only by its desire to create them, and that's why it can't become Greece, Ireland, or any other Eurozone nation.

-- Austerity cannot work in the United States economy because budget surpluses, defined as tax revenue exceeding spending, destroy net financial assets in the private sector. Unless, these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss in net financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. For a Government and economy like the US, with both a trade deficit and a substantial output gap, evidenced by high unemployment and under-employment, a policy of deficit reduction aiming toward budget surpluses (austerity) is destructive and will only push the economy further into recession or depression.

-- REAL Fiscal Responsibility is a pattern of fiscal policy intended to achieve public purposes, while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

-- It is fiscally irresponsible to frame and follow a deficit reduction plan when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove net financial assets from the private sector every year the plan is pursued. Eventually, if pursued for long enough, declining financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy and the Government's ability to sustain productive deficit spending producing outputs of real social value.

So, current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation because they are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” and cuts to popular discretionary spending and entitlement programs. It is a phoney issue.

(Cross-posted from New Economic Perspectives.)

A Counter Narrative to Peterson's

Joseph M. Firestone — Tue, 30 Oct 2012 21:14:59 -0400

Stephanie Kelton writes:

The US is broke. Government deficits are de facto evidence of a government gone wild. We’re careening toward Greece. Entitlements are the root cause of our fiscal woes, and the Chinese are coming for our grandchildren. How many Americans believe this garbage? My guess? Most of them.

Pete Peterson has won and the American people have lost. There is no effective counter narrative, not even from the left. Nearly all “progressives” have accepted the fundamental premise that the federal government is like a great big household. That it faces the same kinds of constraints that you and I face. That it should spend only what it takes in and that deficits are morally and/or fiscally irresponsible. President Obama told the nation, “We’re out of money.” . . .

Stephanie knows that there is a counter-narrative out there to Peter Peterson's take on fiscal responsibility, because she's one of the people who best expresses it. But she thinks it can't be called “effective,” because we've been unsuccessful so far in getting the fiscal responsibility counter-narrative developed by Modern Money Theory (MMT) economists communicated broadly enough to create a break in the Washington/New York political consensus, which insists that now our most urgent need is for austerity to bring the deficits and the public debt under control. I agree with Stephanie, of course. We've not been successful in persuading enough people yet.

So, in this Post, I'll make yet another effort to counter the neoliberal austerian fiscal responsibility ideology by juxtaposing the primary claims underlying the narrative, with my construction of the MMT answers to them. The austerian claims below all link to MMT-based posts that critique them. And they are all juxtaposed against an MMT-based claim that refute them. The paragraphs following each pair of claims, summarize my version of MMT answers, and together provide a counter-narrative.

The Government is running out of money

MMT answer: The Government cannot involuntarily run out of money

The US Government has the Constitutional Authority to create an unlimited amount of money provided Congress appropriates the spending, and places no constraints on spending, such as a need to issue debt instruments when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary in the sense that they are due to Congressional mandates that Congress can repeal at any time, and not to financial limits inherent in the Government's authority.

Having said that, the constraints mentioned are now in place, and, so, it's important to emphasize that even with them, and without legislative changes, the Executive can always create enough money to pay for whatever spending Congress has appropriated and also repay debt, so that even with a Congress willfully maneuvering for default, or brandishing the threat of it, the Executive can still ensure that the Government doesn't run out of money even without more taxing and borrowing, because the Executive can use the option of Proof Platinum Coin Seigniorage (PPCS) as one method of getting around the debt ceiling. Originally suggested by Beowulf some time ago, there are any number of PPCS options the President can use to generate coin seigniorage profits to use for a variety of purposes. I've outlined some of them here. Some PPCS options stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging to $60 Trillion and up.

For getting around the debt ceiling, coins with face-values up to $5 Trillion will certainly remove the need to issue further debt subject to the limit and break the debt ceiling. However, minting a platinum coin with a face-value of say, $60 Trillion is also a political game-changer, because it results in filling the Treasury General Account with enough in credits to make it obvious to the most concrete thinker that the Government has the capacity to pay all the debt subject to the limit, issue no more such debt if it so chooses, and also spend whatever Congress chooses to appropriate in the way of new programs to solve current problems.

So, issuing a $60T coin, removes the issue (excuse) of whether the Government of the United States can afford to pay for employment programs, educational programs, infrastructure, new energy foundations, a Medicare for All program, new R & D programs, or expansion of the social safety net from the political table. Issuing that coin can and would create a new political climate moving American politics much further to the left within the space of a few months. In short, it would dramatically illustrate the MMT counter to the austerian deficit hawks, namely that the US Government is not running out of money and cannot do so as long as it has the intention to use its authority to create more of it.

The Government can only raise money by taxing or borrowing

MMT answer: The Government can create money; so it can never involuntarily run out

The austerian claim is false. First, the Federal Reserve, a Government agency can create unlimited money “out of thin air,” as the saying goes, though not for purposes of deficit spending, or directly liquidating Treasury debt. But second, I've just pointed out that PPCS can be used in the present legal framework to create money other than by taxing or borrowing. And third, if Congress doesn't want to use PPCS, it can authorize the Treasury to spend appropriations without issuing debt instruments any time it wants to take an afternoon off to get that done. So, plainly the Government can “raise money” without taxing or borrowing it by just creating the necessary money while spending.

We can't keep adding debt to the national credit card.

MMT answer: We can if we want to. There's no limit on the credit card except the one imposed arbitrarily by Congress.

Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends, by prohibiting the Fed from lending the Treasury money. So, it's only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.

And even if current constraints on debt ceiling constraints remained in place, Treasury can still issue debt without breaching the debt ceiling. Beowulf, the blogger/commenter, who first proposed using high face-value PPCS to get by the debt ceiling, recently came up with a new option to avoid breaking the debt ceiling. That option follows:

Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren't counted. ("The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government").

If there's no maturity date, then there's no promise to repay principal and thus there's nothing to add to the public debt total. Tsy could issue an unlimited amount of consols without tripping over the debt ceiling."

Beowulf has more on consols here. But the possibility of consols is enough to show that the Treasury has an unlimited credit card under current legal arrangements, and can use it without breaching the debt ceiling, though of course, it can't spend more than Congress has appropriated, and is also required to repay debt and interest that is coming due.

If the Government borrows more money, the bond markets will raise our interest rates

MMT answer: The bond markets don’t control US interest rates.

The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt subject to the limit when it deficit spends (using PPCS or consols, or by Congress moving the Fed into Treasury where it belongs) in which case the bond market interest rates would become entirely irrelevant to the United States.

If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity

MMT answer: They'll most probably buy it for the foreseeable future; but if they don't we won't be forced into solvency because we can always create the money we need to meet our obligations

Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers’ business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money, however little it may be at current interest rates. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short, they have little choice other than to buy our debt, unless they want to gradually adjust trade balances with us over time.

Even more importantly, as I keep repeating, we don’t need to raise money by borrowing USD from them or anyone else. We can simply spend/create it ourselves if Congress repeals its constraints prohibiting the Fed from “monetizing” the debt, or if the President decides to use PPCS or consols. The result of no more debt issuance, along with use of these other methods, would be paying off the national debt over time, without austerity. So, if we care so much about the high debt levels, then why don't we do that? Could it be that the austerians want austerity for political rather than economic reasons, and that the fiscal sustainability/responsibility justifications they give are just part of a complex fairy story they tell to avoid being candid about why they want austerity?

Our grandchildren must have the heavy burden of repaying our national debt

MMT answer: We're obligated to pay all US debts as they come due. But since we have an unlimited credit card to incur new debt at interest rates of our choosing, or, alternatively can create all the money we need to pay off debt subject to the limit, without incurring any more debt, our national debt cannot be a burden for our grandchildren unless they wish to make it make it so by stupidly taxing more than they spend. So, let's educate them well in MMT-based economics, so that they never make that mistake

No US generation except one has ever repaid the national debt by running budget surpluses. After the debt was paid off in 1835, that generation was rewarded with the depression of 1837. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession, most recently the recession of 2001, following Clinton's four years of running a surplus. It’s a bad idea to repay the national debt by running surpluses, because taxing more than a Government spends destroys net financial assets in the private sector, unless one also exports more than one imports.

So, provided we continue to run a trade deficit, our grandchildren won't run surpluses. They may not issue debt subject to the limit while “deficit” spending. But that’s possible, only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its PPCS power. In both cases the national debt can then be repaid without requiring that tax revenues match or exceed Government spending.

In any event, our grandchildren will not have the burden of repaying the national debt, if they are wise enough not to run surpluses. But if we are silly enough to attempt to pay it down, or pay it off, by running surpluses and practicing austerity, then they will have the burden of growing up in poor families, attending very poor schools, living in mal-integrated communities where they'll be subject to crime and violence, and living in a class-ridden nation run by a kleptocratic elite that monopolizes both the artificially constricted supply of financial wealth, and the increasingly scarce real wealth produced by a stagnant, broken economy. That's not what any of us want; but that's what the austerian/deficit hawk policies are producing.

I can't emphasize this last point enough. Austerity isn't moral. It's immoral! It kills, and it eventually impoverishes most people including our grandchildren, both those who are now living and growing up in difficult economic circumstances, and those yet unborn, who will be born and will grow up in a stagnant economy crippled by attempts to reduce the national debt, at the expense of full employment, and lost output for years on end.

There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.

MMT answer: All together now, there is no such problem. Since the US Government has no limits other than self-imposed ones on spending or borrowing, the level of the national debt, or the debt-to-GDP ratio don't affect the Government's capacity to spend Congressional Appropriations at all.

These numbers aren't related to fiscal sustainability or responsibility in nations like the US with a non-convertible fiat currency, a floating exchange rate, and no debts denominated in a currency it doesn't issue. Such nations can't become involuntarily insolvent because they always create more currency to pay debts denominated in that currency.

If the debt-to-GDP ratio were 300% and there were no other changes in current policy, the US would still have the same ability to deficit spend it has now. Conversely, if the debt-to-GDP ratio were 10%, the same would apply. To put this simply, the size of the public debt subject to the limit, and the size of the debt-to-GDP ratio have no impact at all on our capability to deficit spend, because we can always make the money we need, if need be, through PPCS. So there is no need for a long-term deficit reduction plan to lower the debt-to-GDP ratio. There is also no need to run surpluses to decrease the size of the debt, since we can always use profits from PPCS to do that without either borrowing more or raising taxes.

Even though neither the level of the national debt, nor the level of the debt-to-GDP ratio creates a sustainability problem for the US, depending on conditions, the deficit itself can be “too high.” But the question of when a deficit is too high isn't an issue of fiscal sustainability in the sense that we can run out of money, but instead is an issue of the negative consequences of an excessively high deficit. The most important of these consequences is demand-pull inflation, and when that is observed, Federal spending should be reduced to control or eliminate it. However, there are two questions arising here. First, which spending, if cut, will produce the most overall benefit. And second, what's the impact of cutting spending vs. the impact of doing nothing, vs. the impact of raising taxes.

The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.

MMT answer: No, the Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes.

Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending. So, the Federal Government doesn't have to sacrifice to live within its means, since its “means” to create new currency is limited only by its own decisions and not by any factors external to it. Put simply, Federal spending including deficit spending doesn't cost anything in the doing. The only relevant question is its real effects on the economy.

We should also find a bipartisan solution to strengthen Social Security for future generations

MMT answer: Social Security has no fiscal problems. The SS crisis is a phoney one. So, no solution to this nonexistent fiscal crisis, bipartisan or partisan is needed. What is needed is a solution to the political problem of getting SS's funding guaranteed in perpetuity

Again, this austerian claim assumes that Social Security funding is a fiscal problem and that the program needs to be strengthened by making the program “fiscally sustainable.” But that claim is at issue. Apart from the fact, that it isn't obvious that a bi-partisan solution to a fiscal problem would produce a real solution, it's also true that this is a fake fiscal problem.

Social Security should be strengthened alright. But the way to strengthen it is to guarantee its funding in perpetuity, and to greatly increase benefits for many seniors whose current benefits leave them scraping the poverty line. Try doubling SS benefits while providing full payroll tax cuts. That will strengthen SS and the economy as well.

We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead

MMT answer: This is total nonsense, because federal spending is costless to the Government

If the debt subject to the limit bothers the neoliberal austerians so much, they ought to be supporting full payoff of the debt using PPCS profits. Doing that won't harm the economy, and it won't cause inflation either, since the bonds retired are more inflationary then the money paid to redeem them.

The United States is in danger of becoming the next Greece or Ireland

MMT answer: Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that's why they can run out of Euros. The US is the issuer of Dollars; so it's supply of dollars is limited only by its desire to create them, and that's why it can't become Greece, Ireland, or any other Eurozone nation.

This one is a real laugher. Greece and Ireland can run out of Euros. California can run out of dollars. But the United States can't run out of Dollars. Japan can't run out of Yen. The UK can't run out of Pounds, and Canada and Australia can't run out of Canadian or Australian Dollars. So, governments like California, Michigan, Wisconsin, etc. can become the next Greece or Ireland if the Federal Government allows that to happen by refusing to bailout States if they need it, but the US can't become the next Greece or Ireland, because it can always bail itself out if it chooses to do so.

The real danger for the US is in becoming the next Japan and losing a decade of economic progress by following neoliberal deficit reduction doctrines. The US is now four years into the decade we are losing. Why are we losing it? Because, as Warren Mosler is fond of saying: “. . . we fear becoming the next Greece, we continue to turn ourselves into the next Japan.” That is, we're making ourselves a stagnant economy by imposing fiscal austerity, rather than creating/spending the money we need to solve our increasingly serious national problems.

Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus.

MMT answer: No! REAL Fiscal Responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

So, the REAL Government fiscal responsibility problem is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it. Instead, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans.

This means that the REAL solution to the REAL fiscal responsibility problem is for our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of smarts, morals, will, and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.

Federal Government austerity will create jobs

MMT answer: Right! Show us one case where austerity is working

Well, let's see. We've got austerity now in Ireland, Spain, Portugal, Italy, the Baltics, and, of course, Greece, among nations in the Eurozone, and also in the UK. Is it creating jobs anywhere? Is there even one case, in which the “austerity will create jobs” theory isn't being refuted by events? Some may think that Latvia is beginning to recover because it's unemployment rate has now fallen to 15%; but that's because 200,000 Latvians (10% of the population) have chosen to emigrate, a particularly effective way of both leaving the labor force, and lowering the rate of unemployment. Bet we could lower unemployment here too, if we first ran the economy down by 30%, drove U-3 up to the 20% level, and then had 31,000,000 people leave the United States for parts unknown. Oh austerity, will thy wonders never cease?

Conclusion: Saying No to Neoliberal Austerity

So, the importance of continuing to counter austerian propaganda coming out of the Peterson Foundation and the organizations it allies with, and funds, remains. We must continue to try to break through the screen of the Petersonian closed system, the Washington/New York consensus. One of the popular slogans for the austerians this year is “Debate the Debt.” There's a petition web site urging politicians to debate the debt. There was even a proposal demanding that the presidential candidates devote a whole presidential debate to the debt and deficit issues.

But, what is it the austerians want us to debate? They want us to debate how we should reduce deficits over the medium and long-term by spending less and taxing more. But they most emphatically don't want to debate whether the debt, deficit, and debt-to-GDP ratio, represent real problems relating to fiscal sustainability or fiscal responsibility. Put simply, they don't want us to debate whether their deficit/debt “problem” is really a problem either for our capacity to spend in the future, or for government solvency, or for our grandchildren.

They say there's a government solvency problem and that all of us must and should suffer to solve it. MMT says that there is no solvency problem and there's no reason for people to suffer any more than they have already due to the crash of 2008. That's the debate about the debt we badly need right now, When they say debate the debt, they mean debate how we should all suffer to get rid of it. When I say “debate the debt,” I mean debate whether the public debt subject to the limit is a real problem, or a just a massive distraction from coming to grips with our real problems. I think that my debate question is clearly prior to the austerians' because it doesn't assume what it should prove, namely that there is a problem and that focusing on it isn't a distraction.

But, I think it is a massive distraction; and the President can prove it! Just mint that $60 T platinum coin and the debt problem will go away. Then the Peterson Foundation and other agents of the emerging plutocratic elite, will need to invent a new fairy tale to distract us with; or maybe they'll do all of us a favor and just go out of business, so we can re-build our country without having to deal with their insolvency fantasy first!

(Cross-posted from New Economic Perspectives.)