This post is to introduce a new paper I have written, an 8-page PDF stored at DropBox. The topic is "the debt ceiling and more."
Actually no, that's the title. The topic is "Prosperity awaits".
Anyway, the link: The Debt Ceiling and more - A letter to my Senator
Enjoy it. Share it.
Comments on the paper are more than welcome. If you refer to something I said, please quote it so I can find it in the PDF! Leave comments here, with this post
///// Afterthoughts
7:08 PM Sat, 29-Apr-2023
In the PDF I forgot to give a link to the Stephanie Kelton quote.
Robert Waldmann has it, here:
https://angrybearblog.com/2019/03/mmt-ii
Bloomberg has it here:
https://www.bloomberg.com/opinion/articles/2019-03-01/paul-krugman-s-four-questions-about-mmt
5 comments:
So I take it the MMT people have it right that private debt impedes prosperity, but are wrong about public debt being of no concern. They seem to believe in some kind of balloon sculpture theorem to the effect that you can't make deep cuts to public debt without ballooning private debt. If the converse of that is true, it looks like your agenda is out of options.
The graph near the end interested me. It seems periods of prosperity are associated with non-federal debt increasing with time, which seems reasonable as growth usually requires financing. Perhaps an inevitable breaking point is achieved, leading to the scenario you call rebalancing. That seems reasonable to me. No positive feedback loop can continue indefinitely. I can accept that the economy will always be cyclical and that there will never be a "last recession." What I cannot accept is that the fate of individuals and families has to be entrusted to the Invisible Hand and that state actors (among possible others) cannot attempt countercyclical measures, with the goal of making recessions, if not avoidable, less "deep." Your beef seems to be that we accept a growth rate that slows after time, after smoothing out the cyclical variability. My beef is that we can't have institutions, and to some extent policies, in place that are considered "standard operating procedure" and automatically go into effect under certain conditions. While the MMT fever dream of "guaranteed employment" might be a bad idea (I'm not taking sides on that here) can we at least have a "floater pool" within the civil service that hires and lays off people when private employers in the aggregate are laying off and hiring, respectively. If meaningful tasks can be found for them, that would be the icing on the cake. By acting as countercyclical ballast, they'd be of real service to their country, to humanity, really, since the economic cycle is truly global in scope. It seems political actors are more interested in postponing the next recession until someone else's watch than in enacting policies that assume there will be periodic recessions until the end of time, and that weathering these storms is a "we're in this together" thing.
A debt ceiling for non-federal debt sounds like the exact opposite of the thing they call quantitative easing, but you know much more about macro than I do so you tell me. I'm reminded of the "easy credit ripoffs" in the theme song to the old TV sitcom "Good Times." Quantitative easing is a literal ECR factory, and it seems that there is no easing up on that gas pedal, while there is the constant media drone about the looming debt ceiling. I'm especially impressed with your observation that "when debt-other-than-federal is low enough, prosperity resumes." The recession following the so-called "dot com bubble" is the one (AFAIK only) recession where Pr2Pu goes horizontal instead of going down. The period of uptick following that recession looks like about 2004-2007, or as I call it, the Ninja Loan Era, or ECR on steroids.
"That seems reasonable to me."
Thank you!
"What I cannot accept is that the fate of individuals and families has to be entrusted to the Invisible Hand and that state actors (among possible others) cannot attempt countercyclical measures, with the goal of making recessions, if not avoidable, less 'deep.'"
This is why I'm always calling for better growth. In Maynard's view we need to set up the economy so that it runs at "full employment" (which by his definition means "no involuntary unemployment"). That, by itself I think, would do much to ease your concern about "the fate of individuals and families". In my view, maybe I would add that we ought also to keep reducing inequality until no one has to live below a decent measure of the poverty line.
To see how much difference a good economy makes, read the Time magazine article from 1965: We Are All Keynesians Now at Brad DeLong's site. Read it for the mood of the writers, their confidence in policy, their sheer joy of life!
My, how things change.
"My beef is that we can't have institutions, and to some extent policies, in place that are considered "standard operating procedure" and automatically go into effect under certain conditions."
Before I retired I worked with a 40-ish guy who thought the death penalty was perfectly okay because it is less costly than keeping people in jail. Isn't that the worst reason possible?!
I think that imposing "supply side" economics on us caused a change in the way (younger) people think. I can't defend my view, but I'd offer that 40-ish guy as evidence of it.
"... can we at least have a "floater pool" within the civil service that hires and lays off people when private employers in the aggregate are laying off and hiring, respectively"
No matter what the solution is, acting on it costs money. Even if all the reasonable people go along with MMT in saying the federal debt doesn't matter, there is still the other half of the people to deal with -- and I cannot dismiss the possibility that those people could be right.
Surely if we could balance the budget and begin a sound plan of paying down the federal debt (or maybe just stabilizing it) there would be MUCH LESS opposition to a more costly proposal now and then. The mood of people, their lack of confidence these days makes them feel justified in opposing (because of cost concerns) everything that might actually improve conditions. Cost has become a principle on which decisions are made. I think the first thing is to fix the economy so that the federal government CAN balance its budget, not because I feel the need to balance it, but because those other people do. And anyway, I think that if we fix what's wrong (like excessive private debt) and the economy starts working better, then we will have less need for the social spending that (1) the Right complains about and (2) that draws more and more people to the Right.
The economy is usually described as three sectors: consumers, business, and government. But with three sectors, the real problem is hidden from view. If we go with four sectors, the economic problem becomes much easier to solve. The four sectors:
consumers
nonfinancial business
financial business
government
Some key concepts fron Dirk Bezemer and Michael Hudson, in Finance is Not the Economy,
https://michael-hudson.com/2016/08/finance-is-not-the-economy/
"Conflation of real capital with finance capital is at the heart of current misunderstandings of economic crisis and recession."
and
"The financial sector does not produce goods or even “real” wealth."
and
"To the extent that the FIRE sector [Finance, Insurance, and Real Estate] accounts for the increase in GDP, this must be paid out of other GDP components."
Finance preys on nonfinancial business just as it preys on consumers. Many businesses are not highly profitable, just as many consumers have declining living standards.
If we reduce the size of finance, we reduce financial cost for productive ("nonfinancial") business and for consumers. This is Obi-Wan Kenobi of our economy. This is our only hope.
Gross Value Added of Financial Corporate Business is now about 8% of GDP, up from 2% in 1947. If we reduce it from 8% to 4% (as it was in the mid-1970s) then we have 4% of GDP to play with. One can do a lot with 4% of GDP.
I have an old Components of Corporate Cost graph that shows employee compensation (as a percent of corporate deductions) falling by about 6%, while corporate interest costs were rising by more than 7% of corporate deductions. There's the problem, right there.
By reducing financial cost we can improve living standards and corporate profits both. With finance restrained, we move the Pr2Pu (thank you) ratio lower. As the economy moves toward prosperity, tax revenues increase and the budget moves toward balance.
(Every good economic plan has the happy ending.)
Hmmm, not sure whether you've read my blog post on theory of social classes. There I posited the existence of a "financier class," identifying it as the highest class in the social hierarchy.
It took a minute, but yes: I read that post before; I remember now. You say:
"I identify three distinct classes that are actively involved in production. I call these (from top to bottom) financiers, proprietors and wage-earners."
I quoted that and responded, but it must have been in one of those comments that didn't "take". My comment was that financiers are not "involved in production". That's my version of the Bezemer and Hudson statements that I quoted above.
(I'm pretty sure that my comment didn't "take" because I forgot to enter the "characters seen above".)
In Book 1, Chapter 6 of The Wealth of Nations -- "Of the Component Parts of the Price of Commodities" -- Smith identifies three of what are now called "factors of production": land, labor, and capital. He also identifies the payment to each, and points out how these payments differ. It is some of the most important economics I ever read.
I see that Michael O. Church writes:
"Regular workers are expected to Lose -- to generate surplus value for owners..."
but that is not part of Smith's overview.
In chapter six, Smith does say:
"The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue..."
The line about interest always being derived from one of the factor payments (rent, wages, profit) always seemed important to me. But it did not occur to me until today, while preparing to write this reply, that Smith's statement occurs specifically in the chapter where he considers what is and what isn't a "component part" of prices.
If we accept Bezemer and Hudson's analysis, or Adam Smith's, money is non-productive and the payment of interest creates economic imbalances. (It moves money into finance, and it creates cost-push pressures.)
If we do not accept that analysis, the additional cost of finance is still an additional cost. And growth of the financial sector (relative to GDP) increases financial cost as a share of GDP. So there is the added cost; but no more output is produced than would have been produced if the entrepreneur had invested her own money. Finance increases the cost of output, not the quantity produced. When the price for a given volume of output increases, that's inflation. It is caused, in this case, by the growth of finance. And the outcome gets worse (or far worse) if finance is partially (or largely) non-productive -- as it certainly is. [I find these arguments weak but they are the best I have at present.]
My conclusion remains unchanged: By reducing financial cost we can improve living standards and corporate profits both.
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