Bill Mitchell wants the big change

Bill Mitchell:

I argue that we have to abandon our notion that the role of government in meeting the climate challenge is to make capitalism work better via price incentives. Rather, we have to accept and promote the imperative that governments take a central role in infrastructure provision, rules-based regulation (telling carbon producers to cease operation) and introducing new technologies.

Mitchell wants big changes. That's how I know his thinking is wrong.

//

Time Magazine, December 31, 1965:

Far from being a socialist left-winger, Keynes (pronounced canes) was a high-caste Establishment leader who disdained what he called "the boorish proletariat" and said: "For better or worse, I am a bourgeois economist." Keynes was suspicious of the power of unions, inveighed against the perils of inflation, praised the virtue of profits. "The engine which drives Enterprise," he wrote, "is not Thrift but Profit." He condemned the Marxists as being "illogical and so dull" and saw himself as a doctor of capitalism, which he was convinced could lead mankind to universal plenty within a century. Communists, Marxists and the British Labor Party's radical fringe damned Keynes because he sought to strengthen a system that they wanted to overthrow.

Keynes -- pronounced canes -- wanted to keep the economy he knew, and fix it. He didn't want to abandon capitalism. He didn't want the big change.

//

When you go for big change, the story often goes something like this, as told by William E. Leuchtenburg in Franklin D. Roosevelt and the New Deal:

It was frequently remarked in later years that Roosevelt saved the country from revolution. Yet the mood of the country during the winter of 1932-33 was not revolutionary. There was less an active demand for change than a disillusionment with parliamentary politics, so often the prelude to totalitarianism in Europe...

Many argued that the country could get out of the morass of indecision only by finding a leader and vesting in him dictatorial powers. Some favored an economic supercouncil which would ignore Congress and issue edicts; Henry Hazlitt proposed abandoning Congress for a directorate of twelve men. Others wished to confer on the new president the same arbitrary war powers Woodrow Wilson had been granted. Even businessmen favored granting Roosevelt dictatorial powers when he took office. Distressed by the chaotic competition in industries such as oil and textiles, alarmed by the outbursts of violence, convinced of the need for drastic budget slashing, they despaired of any leadership from Congress. "Of course we all realize that dictatorships and even semi-dictatorships in peace time are quite contrary to the spirit of American institutions and all that," remarked Barron's. "And yet -- well, a genial and lighthearted dictator might be a relief from the pompous futility of such a Congress as we have recently had... So we return repeatedly to the thought that a mild species of dictatorship will help us over the roughest spots in the road ahead."

Big change is dangerous.

What, Blanchard and Ubide again?

The next paragraph, after that opening:

Our contention has been that lower interest rates decrease the fiscal and the economic costs of public debt. In addition, lower interest rates and the effective lower bound on nominal interest rates limit policymakers’ ability to use monetary policy, requiring them to rely more on fiscal policy to sustain demand and activity. We have made a careful case for the use of primary deficits to sustain demand where needed, and for the use of these deficits to finance growth-friendly measures, such as the fight against global warming, or the financing of transition costs of reforms, or other types of public investment. We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.

So the main thrust of their argument is that low interest rates make public debt a good deal. A secondary issue, offered "in addition" to the main thrust, is that low rates make monetary policy ineffective. Third, they have made "a careful case" that deficit spending would be a great way to expand "the fight against global warming".

To pick up where I left off yesterday, it's all bullshit.

It's certainly not economics. Economics wouldn't focus on getting you a bargain price on the fight against global warming. I think Blanchard and Ubide only bring up global warming because it has a pre-existing fan base which they hope to use to expand their readership. What else could it be? That they don't know the difference between macro-economics and bargain-hunting? Give me a break.

Where is the part where Blanchard and Ubide ponder the need "to sustain demand" and how that need arose and whether their recommended solution even works?

And how the hell did the failure of monetary policy get to be just an afterthought? What's wrong with these people?

The one sentence that impresses me:

We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.

That's economics. That's where they should be all the time. But you can't just give it one sentence and think you're done. If you want to increase investment, you need to know why investment is insufficient and you might want to know the cause of the cause, and the cause of the cause of the cause.

If you work backwards like that, eventually you'll find that the ultimate cause of most any economic problem is policy. Policy that's just wrong, or policy that was right but then the economy changed. Add a little irony to that and make it that the economy changed because of policy (as it should), and you've got the Lucas critique.

Now that's funny.

What, demographics again?

From Why Critics of a More Relaxed Attitude on Public Debt Are Wrong by Olivier Blanchard and Ángel Ubide, July 15, 2019:

The decrease in real interest rates is not something that started with the financial crisis and that will go away when its effects fully dissipate. The decrease started much earlier, in the mid-1980s, and has taken place steadily since then, driven in large part by structural factors, such as demographics.

Okay, but not long ago, "structural factors, such as demographics" were used to make a different argument. This argument:

The decrease of Labor Force Participation was not something that started with the financial crisis and that would go away when the effects of the financial crisis fully dissipate. The decline began much earlier, in the year 2000, and had taken place steadily since then, driven in large part by structural factors such as demographics. 

But the decline in Labor Force Participation stopped dead in its tracks in October of 2013. And it wasn't because demographics returned to what it had been before the year 2000. Far as I'm concerned, this means the demographics argument was total nonsense. It was nonsense then. It is nonsense now.

Economists should do economics, and leave fertility issues to druids.

No disrespect intended, to druids.


Blanchard and Ubide, the next two sentences:

For a while, there was a belief that, after the financial crisis, interest rates would return to their historical levels. They have not.

Some people thought that, after the financial crisis, interest rates would return to their pre-crisis levels. But interest rates have not returned to those levels. The statement implies that the effects of the financial crisis have fully dissipated.

That is certainly wrong.


Many economists seem to think their task is to explain the economy to the rest of us. That's not it. The task is to understand the economy. If you don't understand it, all your explanations are bullshit.

My recent comment at JW Mason's

My response to Mason's A Baker’s Dozen of Reasons Not to Worry about Government Debt:

The last part, all underlined, is a link to mine of 19 June.

"the ability of a central bank to stabilise inflation using its short-term nominal interest rate tool" makes the world go round, you think?

This has been stuck in my craw for a while now, from JW Mason:

I don’t think a “quantity of money” has been an important part of orthodox macoreconomics or any major heterodox school for many, many years.

Enter Cecchetti, Mohanty and Zampolli (2011), page 2:

As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. With few exceptions, the focus was on a real economic system in which nominal variables – prices or wages, and sometimes both – were costly to adjust. The result, brought together brilliantly by Michael Woodford in his 2003 book, is a logical framework where economic welfare depends on the ability of a central bank to stabilise inflation using its short-term nominal interest rate tool. Money, both in the form of the monetary base controlled by the central bank and as the liabilities of the banking system, is a passive by-product.

Money is a passive by-product, they say. Passive in 2003, perhaps. But money was no longer passive just a few years later, when interest rates hit the zero bound and the demand for safe assets skyrocketed.

"Land, labor, and capital" -- and also finance

From Grundrisse 17:

Monied capitalists and industrial capitalists can form two particular classes only because profit is capable of separating off into two branches of revenue. The two kinds of capitalists only express this fact; but the split has to be there, the separation of profit into two particular forms of revenue, for two particular classes of capitalists to be able to grow up on it.

Again: Monied capitalists and industrial capitalists exist as two separate classes because profit includes two types of revenue. Therefore, the existence of the two classes of capitalists is evidence that profit includes the two types of revenue.

I can live with that.


From Chapter 23:

I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together, namely, the rate of interest and the marginal efficiency of capital. For it now seems clear that the disquisitions of the schoolmen were directed towards the elucidation of a formula which should allow the schedule of the marginal efficiency of capital to be high, whilst using rule and custom and the moral law to keep down the rate of interest.

Finance is not a factor of production. Finance is a factor of facilitation: it facilitates production. But finance has a cost, just as land and labor and capital do, and must be included on any list of cost categories.

In our world also

"The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds."

Debt service and RGDP growth

I went to FRED for data on debt service and RGDP growth. Brought the data into Excel and showed each series along with a smoothed version using Hodrick-Prescott:

Graph #1

Debt Service (FRED's TDSP) is shown as the blue line. The thinner line, darker blue, is the smoothed version. The data frequency is quarterly, and the Hodrick-Prescott smoothing factor is 1600, standard for quarterly values.

The jiggy, dull red line shows Real GDP growth (FRED's GDPC1 as Percent Change from Year Ago). The thinner, bright red line is the smoothed version. Again, quarterly data and a smoothing factor of 1600.

My objective here is to compare the general trends of RGDP Growth and Debt Service, so on the next graph I'm keeping the smoothed lines and omitting FRED's data series. To facilitate the comparison I'm using a data manipulation technique that I picked up from Lars Christensen.

I figured the series average for the smoothed Debt Service series, and subtracted the average from each value in that series. This centers the blue line at the zero level. I did the same for the smoothed RGDP series, so both series are centered at the zero level.

Next, I figured the standard deviation for each smoothed series. I divided the relocated RGDP values by the standard deviation of the RGDP, and multiplied them by the standard deviation of the Debt Service series. This makes the amplitude of the smoothed RGDP series similar to that of the smoothed Debt Service series.

Here is the result:

Graph #2

Real GDP growth (red) shows increase when debt service is low, and decrease when debt service is high. Look for it on Graph #1 above, and you'll see it there, too. When less money is going to finance, more is left to spend on other things.

Graph #3: Household Debt Service Payments as a Percent of GDP

Adam Smith and John Locke: Money produces nothing

Mary Sennholz in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises:

Look into any sure thing long enough, and questions are bound to arise. Here is footnote 11:

The "confusion between capital and money which was so common before Mill's time"? I'll have to look into that.

Aristotle: Money produces nothing

From Aristotle and Economics by Richard M. Ebeling in Capitalism Magazine:

Aristotle condemned the earning on interest on money that was lent to others. Since money is only a medium of exchange, the facilitation of trading one commodity for another, all that a lender of money could “justly” ask for was a return of the sum – the “principle” – that had been lent.

In itself money was not productive, and as such, it should not be allowed to “breed” (obtain an amount in excess of the original amount lent), because, in his mind, this would be getting something for nothing. That which was “barren” (money) could not bare “offspring” (interest on a loan).

Campbell McConnell: Money produces nothing

Campbell McConnell, Economics, sixth edition (1975), page 24:

We should note especially that the term "capital" as here defined does not refer to money. True, businessmen and economists often talk of "money capital," meaning money which is available for use in the purchase of machinery, equipment, and other productive facilities. But money, as such, produces nothing; hence, it is not to be considered as an economic resource. Real capital -- tools, machinery, and other productive equipment -- is an economic resource; money or financial capital is not.

The original sources of revenue

Adam Smith:

Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

The creation of output is the "original source" of income.

//

Bezemer and Hudson:

To the extent that the FIRE sector accounts for the increase in GDP, this must be paid out of other GDP components.

The financial sector is not an "original source" of income.

Price, value, Adam Smith, and the exorcism of significance

Came across some notes on The Wealth of Nations, attributed in the HTML (and in the URL) to Michael A Tate. I went right away to Tate's notes on my favorite part of Adam Smith's book -- Book I, Chapter VI -- where Tate says only

Smith argues that the price of any product reflects wages, rent of land and "profit of stock," which compensates the capitalist for risking his resources.

I'd say much more: Smith comes up with the concept we now call the factors of production: not a detailed list of inputs, as it is sometimes given, but broad categories of cost -- land, labor, and capital. The costs are natural resource costs, wages, and profit. These, according to the title of Smith's chapter, are the component parts of the price of commodities. This is one of the most useful concepts I've ever come across.

In Smith's time the three classes associated with these cost categories were, as I have it, the aristocracy (land), the commoners (labor), and those who accumulate stock (capital). Smith simply looked at the world around him and described what he saw.

Things are similar today except that we've not had an aristocracy for a good long time. And "land" now seems to be counted as a financial asset rather than a natural resource. So instead of an aristocracy, it seems we have those who accumulate financial wealth, and its cost (finance). We still have cost categories, but the list of categories is a little different.

Anyway, looking thru Tate's notes, I found this quote from Smith's Chapter Five:

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.

Tate's immediate response:

This is known as the labour theory of value, a defining feature of classical political economy.

I've heard of the labor theory of value but I never knew what it was, so I followed the link. Wikipedia says:

The labor theory of value (LTV) is a heterodox theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it, rather than by the use or pleasure its owner gets from it (demand) and its scarcity (supply).

and

Mainstream neoclassical economics tends to reject the need for a LTV, concentrating instead on a theory of price determined by supply and demand.

Okay. So they reject the need for a theory of value, in favor of a theory of price. Yes, I've seen it: They say that prices determine the value of things. The value of a thing is equal to what we are willing to pay to buy it. Or to what we can sell it for. They say.

I have some trouble with that. When I guess the price of a thing, the going price is often three times my guess, or more. And even my low-side estimate is, in my view, usually higher than what I think the thing is really worth.

Nay, I don't even think in terms of what a thing is worth, but only in terms of how much I'd have to pay to buy it.

Value is what a thing is worth. Price is what you have to pay to get it. These days, there seems to be little connection between value and price.


I like Smith's idea that the value of the labor that goes into making something is the measure of the "exchangeable value" of the thing. It's an important concept because it ties monetary value to real output. I don't see "supply and demand" doing that. Not any more.

Supply and demand is just an arrangement. It's the way things happen to be, these days. When you can buy a hardened washer for your lawn tractor for $2 or $3 in one place and $12 or $14 in another, price no longer signifies something meaningful. It's just what we have to pay to get a thing. And please don't explain to me that the $14 "includes shipping". That's just another example of the exorcism of meaning from the concept of price. (Anyway, they tell you shipping is free!)

On top of that, we've got everyone from Universal Basic Income supporters to Helicopter Drop theorists saying it might be a good idea to throw money at people as a way to make the economy work better. I have to say (number one) that throwing money at people has nothing to do with the way the economy works.

I have to say (number two) that if we're throwing money at people so people can buy things, then we've got consumers with income that has no relation to what they've given up in exchange for that income.

So we've got consumers with income that is doesn't match up with work done, buying from producers setting prices that don't match up with the costs of production.

The economy exists in the exchange of value. When things are exchanged at prices that have no significance, the price system no longer conveys useful information.

The "whatever it takes" methodology

Not so very long ago I mumbled on about Stephanie Kelton's "whatever". Twice.

I quoted Kelton:

"Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …"

I quoted Kelton again:

"MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result."

And I said:

Kelton's plan is to "accept" the deficits, the growing deficits, "whatever" they are. However much they turn out to be.

Please don't go there. I know you want to fix the economy but that's not the way.

As an aside, painfully off topic, two sentences on Lerner again:

"Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy."

Maybe you noticed this before. Took me till now to figure it out. I'm always saying we should fight inflation less by changing interest rates, and more by encouraging the repayment of debt. Specifically, by putting tax policy in place to encourage the repayment of debt.

Tax policy is fiscal policy. My idea is a damn good match to Lerner's.


Back to "whatever". We have Robert Barro reminiscing:

In the early- and mid-1970s, Presidents Richard Nixon and Gerald Ford tried to curb inflation with a misguided combination of price controls and exhortation, along with moderate monetary restraint. But then came President Jimmy Carter, who, after initially maintaining this approach, appointed Paul Volcker to chair the US Federal Reserve in August 1979. Under Volcker, the Fed soon began to raise short-term nominal interest rates to whatever level it would take to bring down inflation.

Raising interest rates to whatever level it would take to bring down inflation.

Yeah, and that's what Volcker did, too. He raised interest rates until they took the life right out of our economy. Then rates started coming down. Death throes, it was: Rates came down for 30 years before hitting bottom. And now, for 10 years, the Fed has been trying to bring inflation up, of all things. Trying to bring our economy back from the dead.


I pointed this out before:

In an old post (but one that fascinates me more than ever) Marcus Nunes writes

On becoming chairman of the Fed, Volker challenged the Keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970´s demonstrated that inflation arose from cost-push and supply shocks – a situation dubbed “stagflation”.

... To Volker, the policy adopted by the FOMC “rests on a simple premise, documented by centuries of experience, that the inflation process is ultimately related to excessive growth in money and credit”.

This view, an overhaul of Fed doctrine, implicitly accepts that rising inflation is caused by “demand-pull” or excess aggregate demand or nominal spending.

Essentially, Paul Volcker said there's no such thing as cost-push inflation. And that was all there was to that.

Volcker assumed there's no such thing as cost push inflation, and he proceeded to raise interest rates until he brought down inflation -- whatever level of interest rates it took.

Gone was any thought of looking into the problem to consider what might be wrong.


Back in 1977 I wrote:

If we have "more" money to spend, we'll probably spend it; if we have "less" money, we must spend less.

Two years later (a coincidence, certainly) Paul Volcker started making sure we'd spend less by pushing interest rates up to record levels. Oh, and it worked, because if we have less money, we must spend less. But that doesn't mean Volcker solved the problem. He didn't. He just started us on the trend of spending less. The death throes.

Volcker didn't even correctly define the problem. In 1977 I wrote:

The solution to inflation is "less money". The solution to unemployment is "more money". This is a magnificent answer for an either/or problem. But when the problem is "both", the logical solution is to increase and decrease, at the same time, the country's money supply.

And again:

Our economy is facing a both problem. The solution to that problem is to do two contradicting things to the money supply.

Volcker thought the problem was inflation. It wasn't. The problem was that we had high inflation and high unemployment at the same time.

The problem has since taken a different form, but remains unresolved to this day.


On my old econ blog I wrote this:

The problem in those years was not that we couldn't get good growth. And the problem was not that we couldn't keep inflation at bay. The problem was that we could not do both at the same time.

And this:

Like Solomon, then, policymakers split the stagflation problem in two. They took a "both" problem and dealt with it as two separate problems. They would fight inflation with monetary policy; and they would invent new tales of government and regulation to deal with unemployment and growth.

As with Solomon, splitting this baby was not the answer.

The right answer is not to use extreme measures and do "whatever it takes". The right answer is to figure out what the problem really is, and the source of that problem.

"... and thus in need of further monetary expansion."

J. Bradford DeLong:

As for lessons that were forgotten, one is that persistent ultra-low interest rates means the economy is still short of safe, liquid stores of value, and thus in need of further monetary expansion.

DeLong begins with the fact of "persistent ultra-low interest rates". In order then, he offers an observation about that fact, and draws a conclusion.

But "persistent ultra-low interest rates" was not the first thing that happened when the shit hit the fan ten years ago. Therefore, DeLong's sentence is not necessarily correct. It is very likely incorrect.

//

I looked around for problem-solving. George Polya turned up. And this:

Even if we accept DeLong's definition of the problem -- "persistent ultra-low interest rates" -- he has to work backwards from there to "determine the root cause(s)". I don't see that happening.

"Debt accrues according to the decisions we make" ??

Following up on something I read, I looked into Cory Booker's "baby bonds" idea. Well, he had a couple tweets on it that I read, and got a bunch of tweeted replies. That's not really "looking into" it, but it's as far as I got. I got to one from DMZ Vet:

"Free" money is an illusion foisted into the weak by the predatory as a form of manipulation. We live in a capitalist society in which debt accrues according to the decisions we make. This is the "cost" of being able to make truly free decisions. I think ur looking for communism

— DMZ Vet (@logicaverita) May 31, 2019

In particular, consider DMZ Vet's thought on why we have so much debt: "We live in a capitalist society in which debt accrues according to the decisions we make. This is the "cost" of being able to make truly free decisions."

I dunno. Take just household debt as an example. Is this a measure of our freedom?

Graph #1: Household Debt

Or maybe better, household debt per person. Is this a measure of our freedom?

Graph #2: Household Debt per Capita

Almost fifty thousand dollars apiece, these days. Approaching $200,000 for a family of four. It's more a measure of our bondage than our freedom.

We have this debt because of the decisions we make, DMZ Vet says. Sure, that's part of the story. But if the car breaks down and you have to fix it, and you can't afford to fix it and you put it on the credit card, is that really your decision? Or is it, in part, simply the way life is these days. The way the world is.

It's the way the economy is these days, I'd say. But the way the economy is, is partly due to the economic policies we have in place. Largely due, I'd say. Policies that encourage saving, for those of us who save. Policies that encourage credit use, for those of us who spend. Policies that increase supply and demand in the financial sector. Policies that increase the size of the financial sector. Policies that embiggen the part of our economy that facilitates everything, but produces nothing. Facilitates everything these days, because these days everything is on credit.

Economic policy made the world this way.

google economic inequality:

Was that useful? No. It is confused. It darts from economic to social, to economic, and back to social again.

Economic inequality is the yadda yadda between different groups in society.

What kind of groups are they? Must be economic groups (in society), what with some of them being "trapped in poverty" and all.

Little chance to climb the social ladder and get out of poverty? It's all a confused mess.

When people get together for their various reasons, that's "social". When they negotiate or exchange or accumulate things of value, that's "economic". It's easy.

Money may be fungible, but cost is not

That old post from Scott Sumner comes up, again. This time, mawillits in comments on Sumner's post, and Cullen Roche at mawillits's link. Mawillits links to Cullen Roche's The True Role Of Debt In Boom And Bust Cycles. Here's the part of Roche's statement I find most useful:

Since bank money (what MR would call "inside money") is the primary form of money in our fiat monetary system it's perfectly normal for loans to increase as economic activity increases.

That thought again, at the end of the post:

The bottom line to me is, you can't even begin to understand the current economic machine without understanding this basic fact - we live in a fiat monetary system in which bank issued "inside money" is the primary form of money. Access to credit can exacerbate the boom as we just saw during the recent period of lax lending and unusual optimism. And the more credit the more potential for a boom (and a bust).

The posts are from 2012, Sumner's and Roche's and mawillits's. If the focus on credit booms and lax lending standards seems a little odd, it's because the posts are old. And yet, if you can't even begin to understand the current economic machine without understanding that bank issued "inside money" is the primary form of money, then it is necessary to to say so at every opportunity.


How does this apply to our world? Jim points out that if a saver "had a lick of sense he would figure out that he has no savings at all. All he has is IOUs from destitute people who can never pay and the process is making them even more destitute."

Most of the money in our economy was created by people borrowing and spending it. If somebody saves that money, the saver earns interest on money that the borrower is still paying interest on. And the money the borrower put into circulation is no longer in circulation. So the situation has not improved.

If the borrower needed to borrow before, he's going to need to borrow again. That means debt is going to increase. And savers are going to save more of it, again. And borrowers will be putting money into circulation that doesn't stay in circulation. The borrowers bear the cost of keeping that money in circulation, without getting the benefit. It's insanity. You can't run an economy that way.

We tried.

Not political will, but economic understanding

"The problem is to have the political will to take the necessary measures."

- Milton Friedman

There are two kinds of people: Those who see this graph and think I'm complaining about the Federal debt. And those who haven't seen the graph yet.

Figure 1: Showing the Growth of the Federal Debt above and beyond its pre-1975 Trend

I'm not complaining about the Federal debt. I'm looking at a change in the trend of that debt: when the change occurred, and how big a change it was. I didn't say it was a bad thing. I didn't say it was a good thing. That's on you.

I'm just trying to understand the graph. I want to know what happened, how it happened, and why. But what's to understand? Everybody else on the planet already knows that the Federal debt exists because the government spends more money that it brings in.

Hey, I can do the math. It's elementary-school arithmetic. When they spend more than they bring in, they get deeper in debt. You don't have to know anything about Federal spending and revenue. Once you know that the Federal debt is growing, you already know they're spending more than they bring in.

But why? The standard story seems to be that they don't have the political will to stop spending so much. It's a story of political will. And maybe it makes sense, far as it goes. But I need to hear a tale of the interaction of economic forces.


Political will? At Governing, Mark Funkhouser writes:

When you hear a public official or pundit say that the reason this or that desirable thing cannot be done is because of a lack of political will, what you are actually hearing is that person blaming other people’s moral failings.

Hey. People obviously disagree with each other. It happens. Political will is the power to see differences of opinion as the moral failings of other people. This doesn't seem to me to be a good thing. Political will can turn any little disagreement into a problem that cannot be solved.

Stranger yet is Funkhouser's conclusion:

Rather than expressing dismay or scorn or outrage over the way the political system works, people who actually want to effect change need to learn how to use that system. As LBJ understood so well, they need to learn to create political will.

This conclusion is echoed in the article's title and the line just below it:

What People Get Wrong About ‘Political Will’
It’s not some innate quality -- good leaders must create it.

We need more of it?  Political will -- "born of a lack of insight and analysis," Funkhouser says -- is just an easy way to criticize the other guy. You don't need to know anything except who you want to disagree with.

This all leads me to think that maybe we should dump the "political will" explanation. It's not doing us any good. It reduces arguments to finger-pointing, and it makes differences irreconcilable. I don't see the benefit in creating more political will.

Where does this leave us? It seems we need a different story. And since our focus is on debt and the problems debt creates, the story ought to be about economic forces.

"An important first step toward a balanced budget"

What follows is something I wrote up two years ago but never finished.
I decided to keep the first half (the finished half) and throw the rest away.
I'm using this post as an intro to mine of 2 July.


Summarizing the Annual Budget Message to the Congress, Fiscal Year 1965:

The resulting administrative budget deficit of $4.9 billion for 1965 is $5.1 billion below the deficit now estimated for the current year and marks an important first step toward a balanced budget.

- Lyndon B. Johnson, January 21, 1964

From Fire, fury and the national debt limit:

Well, the day of reckoning has arrived. The Treasury has announced that by the end of September, it will face a shortfall. Without the authority to issue additional debt, the government will not be able to pay all of its bills—including the interest on the outstanding debt. In response, President Trump has threatened the Congress: either fund the wall along the Mexican border, or he will shut down the government...

Instead of counterproductive threats and bluster, we should be looking for institutional changes that prevent even the possibility of any future self-inflicted debt crisis. The goal, in our view, should be a set of fiscal arrangements that impose long-term budget discipline, while allowing short-term flexibility.

- Cecchetti & Schoenholtz, August 28, 2017

Long-term budget discipline and short-term flexibility, they say. It sounds like they think we could get the Federal debt under control by getting Federal spending under control. You know: that all-important first step. But I have to point out that we've been going for the "long-term budget discipline" thing since LBJ was president, and it hasn't worked. It hasn't worked. And, for what it's worth, that failure is the original source of the counterproductive threats and bluster that fail to impress Cecchetti & Schoenholtz.


Back in 2010 Paul Krugman said that "the sensible thing" would be to "run deficits while the economy is depressed, then turn to budget-balancing once recovery is well in place". Same thing Cecchetti & Schoenholtz said: Long-term budget discipline with short-term flexibility.

Same thing Keynes said, actually.

Did Keynes have it wrong? No. But something is different now.