Monday, April 6, 2020

The failure of the conventional economics point of view

(c) by Mark Dempsey

Appearing in the LAprogressive.com blog, as he mulls over the coronavirus crisis, Mr. Krypios appears to have only the most rudimentary understanding of Modern Money Theory (MMT), saying things like “The problem of course with Modern Monetary Theory or Quantitative Easing Infinity is that it has never been tried before and no one knows what the effects will be.”

On the contrary. I quote Dick Cheney: “Reagan proved deficits don’t matter.” … and the Republicans have repeatedly exercised “military Keynesianism” to make enormous deficits with their spending in excess of tax receipts, while complaining loudly about unbalanced budgets whenever they are out of power. Reagan’s deficit exceeded the sum of all previous administrations’…and he got an average business cycle recovery after all that (mostly military) spending.

Of course Reagan tried to cut social safety nets, and reduced HUD’s affordable housing budget by 75% (gosh, I wonder why we have a housing crisis!), but the deficit grew without taking care of the poor.

We also have historical examples of the opposite–austerity. There were seven or eight significant reductions of National ‘debt’ since 1776–and the results follow exactly the MMT predictions.

The last of these was the Clinton surplus. There was a significant reduction in 1929–the last time a Republican administration balanced a budget. Andrew Jackson even paid off national debt entirely in 1835. What correlates with these ‘debt’ pay downs 100% of the time? A gigantic economic downturn. (100% of the time!)

So the cat is out of the bag. MMT accurately describes the position of monetary sovereigns, despite the propaganda emanating from economists. I’ll remind you that the “point of economics as a discipline,” Matt Stoller writes in his anti-monopoly newsletter Big, “is to create a language and methodology for governing that hides political assumptions from the public.” It’s no wonder economics as a discipline is “incoherent” (British economist Wynn Godley’s adjective).

What’s really going on? As mentioned, the propaganda is pervasive. “Tax and spend” is practically a mantra in the press, yet (obviously) the government must spend before it gets tax revenue, otherwise taxpayers wouldn’t have any dollars with which to pay those taxes.

With fiat money, we don’t have to wait for gold miners to find more gold, so the only limit to the amount the monetary sovereign can issue is inflation–and typically inflation is “cost push” (a shortage of goods) not “demand pull” (an excess of money). The oil shortages of the ’70s is a good example, but the Cato Institute’s study of 56 hyperinflationary episodes throughout history discloses that literally none of them originated with central banks run amok, printing too much currency. Zimbabwe had to deal with a food shortage when the Rhodesian farmers left. Weimar Germany had to deal with France invading the Ruhr, shutting down their heavy industry. The money printing came later.

Does money printing alone cause inflation? We have a recent example: The Federal Reserve extended $16 – $29 trillion in credit to the financial sector in 2007-8. No measurement, public or private, shows a surge of inflation then. The figures, incidentally, are from the Fed’s own audit.

So it’s not “tax and spend.” It can’t be. It must be “spend first, then retrieve some of those spent dollars in taxes.” Taxes make the money good-for-something (i.e. valuable), they do not, and cannot provision federal programs.

What do we call the dollars left out in the economy? Answer #1: the dollar financial assets of the population–i.e. their savings. Answer #2: National ‘debt’…. Just as we call your bank account your asset, but the bank’s liability. Both answers describe *exactly* the same thing.

Advocating a reduction of National ‘debt’ is roughly like marching down to the bank, demanding that the manager reduce the bank’s debt. “You understand this will make your accounts smaller,” says the manager. “We don’t care,” say the proponents of austerity “we just hate the word ‘debt'”…

So…not very sensible, if you ask me. Incidentally, MMT observes that there are circumstances that warrant ‘debt’ reductions–things like an overheated economy. It’s safe to say that’s not our current situation.

The conventional (neoclassical, neoliberal) economists who get press attention typically wag their fingers at anyone opposing the prescription for austerity, sternly warning that the ‘debt’ can get too big, and will impair the economy if it does…and [gasp!] we can’t predict what will happen because spending like that is unprecedented!….except for the New Deal and that big public works project we call World War II.

Why government spending (or borrowing) will “crowd out” the private sector! There’s even a paper from economists Reinhart and Rogoff attempting to pinpoint the threshold of ‘debt’ to GDP when the bad economy starts to kick in.

And there is plenty of precedent for not spending–i.e. austerity. I just cited it. (see here for more https://www.huffpost.com/entry/the-federal-budget-is-not_b_457404), And we have seen its results. Not pretty!

Meanwhile, Reinhart and Rogoff’s paper has been debunked. Apparently they cherry-picked their examples. A graduate student even found a mistake in the spreadsheet where they did their calculations. So these are not exactly resounding endorsements of their credibility.

But the biggest indication of how disingenuous all the handwringing about ‘debt’ is comes from economic reality at present. The neoclassical/neoliberal economists predict the debt will become unpayable, and the bond markets will charge an arm and a leg before the nation can sell its debt. Why just look at Greece (paying ~10% on its bonds)!

Except Greece is no longer a monetary sovereign. They can’t monetize that debt, so bond markets are accurately building credit risk into their calculations. “Credit risk” is that the Greeks won’t be able to pay their debt back, and the bond markets charge a premium for that credit risk.

But what about monetary sovereigns? The neoclassical/neoliberal economists make no distinction, and say the debt will become unpayable even there. Maybe it’s not at 90% of GDP as Reinhart and Rogoff suggest, but at some point, that sovereign ‘debt’ will impair the economy, and make the bond markets charge through the nose to sell it, conventional economists sternly warn.

The only thing conventional economists have to explain, then, is the current Japanese national ‘debt.’ Japan is a monetary sovereign. It makes the yen (Greece does not make drachmas or euros), so it can monetize (print money to pay) any yen-denominated ‘debt.’

The Japanese debt-to-GDP ratio is ~240%, and the interest they have to pay is near zero (some is negative!).

So MMT accurately describes what we have been practicing when “deficits don’t matter,” and predicts economic downturns when we practice austerity–an economic strategy Democrats since Edmund Muskie have advocated.

So…could we address the climate crisis by putting money behind programs to de-carbonize the world? Economists have calculated the Green New Deal would only take 5% of the U.S. economy. World War II saw the government taking over 50% of the economy. Obviously, financing is not a limitation!

We have the means. We have the money. And no, government spending will not “crowd out” private sector demands for resources (or financing) if the economy is not operating at 100% of capacity. The latest figures I’ve seen say the U.S. economy is working at 77.5% of capacity.

The irony here is that the conventional narrative says Democrats are “tax and spend” profligates, but they are often the ones advocating austerity. From the Clinton surplus, to Nancy Pelosi’s “pay-go” pledge (i.e. we must raise taxes to pay for any new programs) they have been advocating cutting the only fiscally unconstrained player (government) out of the economy.

Unless the corporate Democrats wake up and “smell the coffee” reality will demonstrate that we can weather very large deficits without driving up interest rates or impairing the rest of the economy.

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