We should let the Bush tax cuts expire, but only if it is not used to reduce the deficit

[Kurt_and_Hunter]

Should we let the bush tax cuts expire?

Yes.

But ONLY if the increased revenue is pumped into the economy 100% and is not used to reduce the deficit in any way.


Government spending stimulates the economy. No responsible educated person thinks otherwise. The contrary view is the sole province of crack-pots and con-artists.

Tax cuts stimulate the economy. No responsible educated person thinks otherwise. The contrary view is the sole province of crack-pots and con-artists.

Implicit in those two statements is the real truth of the thing. The deficit itself stimulates the economy. (The deficit can pose problems, but in a depressd economy the down-sides of deficits are truly trivial. We have no inflation. Mortgage rates are at record lows. The government can borrow money at very low rates.)

Tepid deficit neutral stimulus is conceptually possible if the reallocation of money is super smart, but the great power of government stimulus lies in spending money you don't have. Deficit spending. (The contrary view is the sole province of crack-pots and con-artists, which offers an idea how many crack-pots and con-artists are afoot.)

The big stimulus question is "how much are we going to borrow?" We can borrow to cut taxes or borrow to spend more. Government spending is, in practice, somewhat more stimulative than tax cuts, dollar for dollar.

Tax cuts for the wealthy offer the lowest stimulative bang for the buck. Taking in $1 less in federal revenue from Bill Gates is low yield. Giving a dollar to an unemployed person is quite stimulative because she will spend it. Spending a dollar on infrastructure is good for the economy long term and stimulative short term, though somewhat less stimulative short term than giving an unemployed person the dollar.

The one thing that is absolutely drop-fucking-dead not stimulative is reducing the deficit. It is pure disaster. (Anyone who has ever expressed concern about the deficit during the last two years is an idiot and whatever else they have to say about the economy can be discarded... they are in barking mad, flat-earth territory.)

So we have options, regarding the Bush tax cuts. In order of worth:

1) Let them expire and spend out ever penny of the increased revenue and then some. This is the right answer.

2) Leave them in place. This is sub-optimal economic policy. The Bush tax cuts are stimulative, but not very effective stimulus dollar-for-dollar.

3) Let them expire and use some or all of the increased revenue to reduce the deficit. This is bat-shit crazy... it is actually much worse than leaving the cuts in place. It would hurt the economy and most likely lead to the deficit being HIGHER in ten years. The only thing that is really going to reduce the deficit is economic growth. (When a policy is dumber than the Bush tax cuts it is really, really dumb.)

[Oregone]

1. Great summary

:)

Option 1 is clearly the most intelligent choice. Wait for it to get mucked up and complicated by people only wanting to repeal certain cuts, and let others go, and use only some of the money for stimulus, etc. Sausage.

[sandnsea]

2. Reduce Deficit = Reduce Interest Spending

and then that money can go into the budget. Or, it can put us in a better position to borrow money to pay back social security benefits in 10 years because FICA is not going to cover the boomers.

[Kurt_and_Hunter]

3. Taking a dollar out of the economy to save 3 or 4 cents cannot be correct in a bad economy

We are paying very low prices for borrowed money these days. If we spend a dollar less in stimulus to save 4 cents of interest on borrowing that dollar the net effect on the economy is 96 cents taken away.

Until we have something like full employment we have to consider ourselves in economic crisis (morally) and thus cannot spend a dollar less now to save interest money in the future.

IMO.

[sandnsea]

4. The money isn't going into the economy

Do you even stop to think for two seconds about what you printed two days ago? The money is being hoarded. Don't you remember those articles? It was literally just a couple of days ago. If the idiots refuse to invest the money, then take it from them and do something with it that will put the country in a better economic situation. Paying debt is always a good idea. ALWAYS. If someone gives me $10,000 and says I have to pay debt with it, woohoo. That just improves my credit rating so I can maybe borrow some money to invest in business or buy a house.

[Oregone]

5. "The money is being hoarded"

So...you fight deficient demand by paying down debt?

Can you explain how paying down that debt creates incentive for the hoarders to stop hoarding. Im sure Keynes covered this in The General Theory of Employment, Interest and Money

And if it does not, why not instead take that money and spend in ways that actually directly fights deficient demand, thereby creating incentives for private investment?

[sandnsea]

6. The issue you're addressing is

Let them keep their money if we use tax cut money to pay down debt. That is what the OP said. PERIOD.

That money is not in the economy.

Since it's not in the economy and is just being hoarded, then using it to pay down debt is a better use than sticking it in the closet.

I didn't say not to spend it. I said there was value in paying down debt if that's the only way we can get Congress to repeal the Bush tax cuts for the wealthy.

You seriously need to respond to what people actually say and learn to leave it at that. If you run off on some other wild goose chase, I won't be responding.

[Oregone]

7. Oh, I see. You are honing in on a false dichotomy by eliminating the optimal choice

"1) Let them expire and spend out ever penny of the increased revenue and then some. This is the right answer."

That is the option you ignored. That said, I still don't agree with you if its between choice 2 and 3.

I will refer to this:



It would seem that according to Mark Zandi's economic models, that money is in the economy to some extent (a pitiful one). For every dollar given out in Bush Tax Cuts, it has $.29 cents of stimulatory action upon the economy (Im assuming an extension has the same amount as the status quo, though not supported objectively by the data). That means the government is wasting money with stimulus, but stimulating none the less. To not extend them (and instead pay down debt, which has no bang for buck) would surely cause some negative stimulative economic impact.

While its absurd to support spending $1 dollar for $.29 cents of stimulus, in the midst of deflation and deficient demand, it may be more absurd to suggest not stimulating at all (IOW, paying down debt). Pick your poison. At this time, both those option suck.

On edit: Thats stale data, but even recent model have extending these cuts listed as positive bang-for-buck (so, it may be terribly inefficient and wasteful, but stimulative nonetheless)

[sandnsea]

8. No I am responding to the OP

If there's a false choice, it's HIS. So why don't you respond to him instead of me?

[Oregone]

10. "If there's a false choice, it's HIS"

Explain. I saw three general options. Ending the extensions and stimulating sounded best to me.

Ending the cuts and not stimulating, or continuing a terrible stimulus with the cuts both suck to varying degrees. In light of the state of the economy, the non-stimulative choice (paying down debt) may suck worse.

If you have more options you can think of regarding this, from the macro perspective, Im all ears.

[sandnsea]

16. Last time.

I was responding to his point that we shouldn't repeal the Bush tax cuts if they go to paying the deficit. That's it. That's all. You can't rant all day about Keynes and deficit spending if it will make you happy. I wasn't arguing that point.

[Kalun D]

13. Sure

""Can you explain how paying down that debt creates incentive for the hoarders to stop hoarding.""

Of course. It takes the money in taxes that they were going to hoard, and applies it to the debt so we pay less in interest.

It's a win in 2 directions.

History proves it more than once.

[Oregone]

14. How does that stimulate private investment in an environment of deficient demand?

I understand it pays off debt. But...its impact on the economy?

It won't stop hoarding anymore than the tax money it takes (which investors may offset by withdrawing more capital from the economy).

[Kalun D]

15. A LOT Of Money

"It won't stop hoarding anymore than the tax money it takes"

just 3 or 4 percent more is a lot of money, let's bring it back to 90% taxes on the uber-rich. That's a LOT of money.

use half of it to buy stuff and the other half to pay down the debt. Buying stuff is demand in itself and paying down the debt means less interest and even more money to buy stuff and drive up demand.

Ford had it right, you need to pay people enough so they can buy what they are producing. You drive down wages and increase the rich hoarding and you get where we are right now.

The rich are stupid, they do stuff that hurts themselves in the long run.

[Oregone]

27. So you are saying...

Whatever money you save in interest, reinvest in infrastructure?

Will that increase production IMMEDIATELY as much as the .30 cents on the dollar of stimulation caused by the idiotic tax cuts?

And why is that better than using 100% of the tax cut monies for stimulus IMMEDIATELY, thereby increasing production and government revenue to pay down debt at a later time?

[Kalun D]

45. You Make Some Good Points

It's hard to say without access to all the hard numbers. But I know one thing for sure, if we took just a fraction of the $Trillions we spend on oil wars and put it back into the economy we would probably break out of this depression overnight.

if we used just a fraction of the $Billions maybe $Trillions we gave away to the crooked bankers...

and what are the hard numbers on the interest of the national debt? how much are we flushing down that rat hole every year? It's like a maxed out credit card that you are just barely paying the interest on and never the principle.

[Kurt_and_Hunter]

18. Do you stop to read ANYTHING???

The interest referred to in the post I was replying to is on GOVERNMENT DEBT fer chrsisakes...

and yes, government spending is, in fact, going into the economy.

[moriah]

47. For the consumer, paying debt is a good thing.

Because yes, it turns into immediate spending power for the consumer since they will be able to charge more and put themselves back in more debt. If they paid their debt and then their credit card companies took away their spending power by lowering their limits down to current balances (it's happened to me, I paid off a card with a tax refund and they closed it the next month -- MFers! Had never been late or over limit either... *mutter*) then it would have been better to have spent that money on something else rather than pay the debt. It made the spending power go away for the consumer.

A lot of our debt is to foreign governments. Paying off that debt at the moment is not putting that money back into *our* economy. And even for the consumer, if they pay off debt and then go back and borrow that same amount later, they are not actually reducing deficit spending. Paying off credit cards and never borrowing again is reducing deficit spending.

So, what do you do when you are poor and we need to get more money spent in our economy? Do you send money out of our economy and plan to not ask it back in (which is what reducing deficit spending is), or do we leave it in our economy even if it is mostly stagnant?

Of course, the BEST choice is to not let it be stagnant, by repealing the tax cuts and using it for stimulus.

I do see a fourth option, though, that's better than putting it all to debt reduction or leaving the current tax cuts in place -- if people insist on paying off some debt and leaving it paid off (reducing the deficit spending) then we need to use the rest for direct, more effective stimulus like food stamps, UI extensions, etc -- and look at the balance of how much we use and how far the dollars will go to stimulate the economy to make the total effect better than the very tiny stimulative effect of the current tax cuts.

But yes, I agree with the OP that putting it *all* into deficit reduction right now is insanity.

[Kalun D]

12. Not

Not taking a dollar out of the economy. The rich hoard, that's why they're rich, they don't spend.

and compound the interest over several years, it's way more than 3 or 4 cents.

[girl gone mad]

22. The deficit represents private sector savings.

Most of the interest paid is going to Americans. Think Granny with her series H savings bonds.

For the past decade or so, the private sector has been a net saver. The truth is, that as long as businesses and households continue to save, the government must run a deficit, unless you want negative GDP and a severe recession.

[BzaDem]

31. We have only been at 0% interest rates for a few years. Not the past decade.

Saying that the deficit equals "net savings" is misleading. In reality, there isn't a constant amount of "savings" and a constant amount of demand for savings (investment). The amount of savings and the amount of investment depends on the interest rate. At a high interest rate, there is a different amount of savings and investment than at a low interest rate.

"Net savings" really only becomes significant when interest rates are at 0. At that point, savings exceeds demand for savings even when use of savings is free. It is at this point that the government needs to step in and invest the savings itself.

But when interest rates are positive, there is demand for savings that matches the savings offered (at the given interest rate).

[DesertFlower]

9. i haven't given much thought about what

to do with the money. i want those cuts to end. i'm tired of the rich getting richer.

[Kalun D]

11. Bogus Argument

""The deficit itself stimulates the economy""

only in the short term, and only as the deficit is made greater

In the long term it hurts the economy because your tax dollars that pay interest buy you nothing.

I think it's the main reason the filthy richers were mad at Clinton, he raised their taxes and paid down the deficit. So they paid more taxes and made less money off interest. Throughout this country's history the best times for the most people were had when the taxes on the filthy rich (1/10th of 1%) were the highest.

Your trying to say if you borrow more than your income your household will do well. Yeah for maybe the first year or so, then that $10,000 credit card is going to bite you in the a*s.

[sandnsea]

17. Depends on what you do with the borrowed money

I don't agree with the Keynes theory that any dollar into the economy is as good as the next. Same as a household budget. You can spend the money you make, or make the money make you money.

[Kurt_and_Hunter]

21. Keynes never said any dollar in the economy is as good as the rest.

He always said that spending on things like building a port facility or roadway is directly stimulative and also increases economic prospects.

He made a lot of famously absolutist statements to make the point that even if there was not use to the spending that spending would still help, like his story about how the government burying jars of money very deep in the ground would create full employment from mining companies digging up the jars.

But he never said that burying money was the best idea. The point is that if burying jars of money would work (which it would) then sensible, useful things would work even better.

Similarly, a lot of folks talk about how FDR had men tearing up roads in order to re-pave them. That probably is not true, but if it were true it would provide employment. (Though just paying the guys and sending them home would be more humane.)

Tearing up sound roads to repave them needlessly is, however, not nearly as useful in the big picture as repaving damaged roads or building new roads.

[sandnsea]

30. Good example

Spending money on a stupid project is not just as good as spending the money sensibly. However, Keynes did say spending the money stupidly would create full employment so it's an acceptable use of debt.

My point, here, is that it's not. It is make-work. Anybody collecting TANF and doing "make-work" knows what a stupid and wasteful idea it is.

It would be better to pay off debt than to pay your kids money to go move rocks around the yard with the thought that they'd spend the money and maybe buy you dinner. I mean it makes no sense.

Targeted spending, targeted tax cuts, and targeted paying of debt. That's the way you do it. Clinton showed the way and I am not a Clinton fan for the most part. He did get this right though.

[Kurt_and_Hunter]

34. Nobody wants make-work, or high interest payments, or a huge debt

It's all relative evils.

Make work is silly to me because I don't have a deep moral objection to sending someone a check. But if it were *required* that a government employment program beneficiary must do something for eight hours a day there are rare times when make-work is correct. (It would be better to give the person a check and send them home, of course.)

During the stimulus debate we had the whole "shovel-ready" debate that kind of missed the point. At that time providing employment on an emergency basis was more important than the actual infrastructure projects. No money should have been held back until it could be used "wisely" because the situation was eroding daily and irreparably prolonging the bad times to come. So in that case I would have paid people to count pebbles rather than waiting a year for a useful project to be ready to go.

But the useful project would be much better, all other things being equal. (They were not equal because our ability to administer work projects reduced the force of the stimulus.)

Regarding interest: We are currently borrowing money at rates that will (with any luck) be on par with inflation someday soon. The burden of interest is not a big deal for a nation with a major currency. Some even argue (I disagree somewhat, but it's an interesting argument) that since a US treasury bill is the safest investment and the lowest yield that money is really "worth" T-Bill rates by definition. If that were the case than all interest on the national debt is a break-even proposition. That is not literally true, but it's not too far off.

The value of a dollar changes every day. Old dollars are not the same as new dollars. Unless we are facing prolonged deflation the interest on the debt is not a big deal. Our grandchildren will not have to pay it off. It will never be paid off. And if we get the level of inflation we are supposed to the interest on the debt will fade further in importance.

(Never be in a hurry to pay off a debt when the interest rate being paid is below inflation.)

[BzaDem]

39. +1

The idea that money is "worth" T-Bill rates has more truth now than it does in normal times. In normal times, more money usually implies more immediate spending. Bonds cannot be used to immediately spend. But in deflationary times, people just uses money as a store of value (not to just immediately spend). Therefore, there is little difference between a dollar and a T-Bill. Both act as stores of value.

This is precisely why quantitative easing with short-term bonds doesn't do much good. When the Fed prints money and then uses the newly-printed money to buy short-term bonds from banks, it is just exchange one store of value (cash) with another store of value (a short-term bond). Nothing really happens. (And the banks, who don't like the tiny rate they get on excess reserves, will simply use the cash to buy government bonds again to get a higher rate.)

[sandnsea]

42. You keep rambling off of your own argument

Nobody is arguing about good stimulus spending. And I'm certainly not arguing about TANF or unemployment or any other kind of assistance people can use. You also appear to agree that TANF programs that require people to work are "make work", so we agree there.

The argument is about cutting the deficit being a wasteful use of tax cut money. It may not be the best use, but it's not wasteful, and certainly not as wasteful as make work projects.

I am going out now.

[BzaDem]

44. That's because he is correct and you are wrong.

Cutting the deficit is extremely wasteful right now, anywhere and everywhere. If you say otherwise, you are objectively wrong. This isn't a matter of opinion.

You keep citing Clinton as if the circumstances under Clinton even remotely resemble what today's circumstances are. They don't. Clintons policies were good during those times (no liquidity trap, no 0% interest rates), and would be horrible during our times (where there is a liquidity trap, 0% interest rates, and the Fed has no traction on the economy).

[Kurt_and_Hunter]

53. You are correct that it is wasteful

We are disagreeing about how negative wasteful is, as a concept, in the context of this economy.

"The argument is about cutting the deficit being a wasteful use of tax cut money. It may not be the best use, but it's not wasteful, and certainly not as wasteful as make work projects."

I agree that it is not as wasteful as make-work projects. But waste is the least of our worries at the moment.

When you have 10% unemployment and prices hovering on the brink of deflation the top priority is to get some traction in the economy.

A lot of effective stimulus is indeed wasteful, but wasteful stimulus is better than nothing.

If we can be equally stimulative without being wasteful that's great. If we cannot, stimulus is more important.

Hence the OP argument -- our handling of the Bush tax cuts should be about maximizing stimulus, not cutting the deficit.

My vote is to transfer money from the rich to the government, provided the government will spend it. (Which as you and I both acknowledge, the rich are not doing an optimal job of.)

[BzaDem]

19. It is your argument that is bogus.

In an environment like this, where we can borrow at trivial long term interest rates, as the OP says only a crackpot or a fool would say not to borrow. If we do not stimulate the economy now, we will continue to be in a deflationary liquidity trap (see Japan's lost decade). That will DRAMATICALLY increase the deficit (not to mention the moral issue of having huge unemployment for a decade).

"Your trying to say if you borrow more than your income your household will do well."

Your central flawed assumption is that the government is AT ALL like a household. It isn't. It is the OPPOSITE of a household. It needs to do exactly the OPPOSITE of what a household does. The government does not "pay back" its debt like a household. The government does not need to (and basically has never) had a long-term balanced budget (0-deficit, 0-debt) like a household. As long as the debt is held at a reasonable constant percentage of GDP over the long term, economic growth essentially takes care of it.

[girl gone mad]

23. Correct.

In my understanding, the issuer of sovereign fiat currency is not monetarily restrained the way that households and state or local governments are. Sovereign currency regimes must function primarily to keep balance in the economy. In times of deflation, this is accomplished by running large deficits. In times of inflation, the government must tax to preserve the strength of the currency. This is a simplification, I know.

[BzaDem]

28. Though in our system of government, it is the Fed that makes these decisions.

When the Fed has traction over the economy, they are the ones that raise/lower interest rates to maintain the right balance of employment and inflation. It is only when the Fed has no traction (interest rates are at 0) that the government is the only entity that can stimulate the economy.

While under MMT/chartalism, taxes and spending are how inflation/employment are always controlled, that does not reflect the government and laws of this country. Every dollar we spend must be taxed or borrowed (as required by law). Only the Fed can create money out of nowhere, and even then it can only exchange this money for an asset (such as a bond).

[girl gone mad]

32. The government doesn't have to borrow or tax to spend.

Per Galbraith:

In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.

As noted, the above argument is based on the common belief that the government must borrow in order to spend, and thus that the government faces “funding risks” in private markets. Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.

The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks—in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs.

The effect of government check-writing is to create a deposit in the banking system. This is a “free reserve.” Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk. (This is like moving a deposit from a checking to a savings account.) The Treasury can meet that demand, or not, at its option—it can permit, or not permit, the stock of US Treasury bonds in circulation to increase.

So long as U.S. banks are required to accept U.S. government checks—which is to say so long as the Republic exists—then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

[BzaDem]

33. Under current law, the government does need to borrow or tax to spend.

That law isn't going to change, ever.

Galbraith is basically saying that IF the law were SOMEHOW different, we could print without taxing or borrowing and not cause high inflation (in our current environment).

But he is NOT saying that the US Code allows the government to print without then borrowing at the next treasury auction.

Galbraith also has some pretty radical views about the idea that we don't have a long term deficit problem. Krugman shot him down pretty soundly in their recent exchange on Krugman's blog. Galbraith keeps saying we don't have a short term deficit problem (which is correct), AND that we don't have a long term deficit problem (which is not correct). He justifies the latter by citing how we are in a deflationary environment, but that of course only applies to the short term, not the long term.

[girl gone mad]

35. The government doesn't borrow to finance spending.

They borrow to maintain bank reserves and defend the overnight rate.

Galbraith is not talking about what the government could be like, he's explaining how monetary policy actually functions as opposed to how people believe it functions.


ETA: Krugman did not shoot Galbraith down. That's just silly talk. Krugman backed down after completely misstating Galbraith's opinions.

Galbraith is right and Krugman is wrong. Talking about hyperinflation in the face of double digit unemployment is an absolute joke. I'm pretty sure he realized that and changed his tune.

[BzaDem]

36. Krugman did not back down at all. Galbraith backed down.

Krugman simply noted that all of Galbraith's justifications for "no long term deficit problem" relied on assumptions that are only true in the short term. This is not new. Everything Galbraith ever writes about "no long term deficit problem" makes short-term assumptions that aren't valid in the long term. That's why practically every economist disagrees with him on that point (and many don't even think his arguments on that point are serious enough to be worth responding to).

When Krugman pointed out the obvious, Galbraith didn't even respond.

As for how our government operates, what you are saying is simply not an accurate description of reality. While we do credit people's accounts and that for a time "creates money", it is balanced by an equal amount of debt we issue. By law.

[girl gone mad]

40. Nonsense.

Krugman was arguing against a straw man and he got it completely wrong. Galbraith has never said "deficits never matter" and neither has any other MMTer.

Read Austrian economist Edward Harrison's analysis of Krugman's comprehension errors, http://seekingalpha.com/article/215021-misunderstanding-modern-monetary-theory">Misunderstanding Modern Monetary Theory:

Krugman goes on to use a model with strongly monetarist/neoclassical embedded assumptions to make his points. Jamie Galbraith responded in the comments and I am posting his comments here. But, first, a few words.

I agree that deficits matter. But I take a more Austrian/austerian view in general – so of course I would say that.

However, as I understand MMT, Krugman’s post mischaracterizes both MMT and Galbraith’s statement. There are two separate issues here that should be disaggregated and treated in isolation. The first issue is about money and government’s source of funding. A separate but related issue is deficits.

On the funding side of things, it sounds like Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world and that taxes don’t fund government spending, requiring government to issue bonds for a shortfall. Remember, a fiat currency is one that is created by government. Government can satisfy any commitment in that currency if it so chooses. It could theoretically credit accounts electronically to fulfill its commitment, laws permitting – no bonds necessary.

If you want to understand Post-Keynesian economics, why don't you actually read what they write instead of relying on a Keynesian's complete misinterpretation of what they write?

http://bilbo.economicoutlook.net/blog/?p=332">Deficit spending 101 – Part 1

http://bilbo.economicoutlook.net/blog/?p=352">Deficit spending 101 – Part 2

http://bilbo.economicoutlook.net/blog/?p=381">Deficit spending 101 – Part 3

[BzaDem]

43. Your article actually supports exactly what I'm saying.

Your article from seeking alpha doesn't even claim to refute anything you claim to be refuting.

"The first issue is about money and government’s source of funding. A separate but related issue is deficits."

Let's look at the second argument first. The REAL argument is the second argument: deficits. Galbraith is making an argument and he has a policy perscription to deal with it. His argument is that we do not have a long term deficit problem. His policy perscription is that we should not worry about long-term entitlement spending and our long term problem in general (and spend more, not less, in the long run).

This argument is obviously false, WHETHER OR NOT we borrow using bonds. In the long term, we will eventually default if we don't worry about our huge long term deficit problem. We will either default by not paying bonds, or we will default by devaluing our currency so that it isn't worth anything. Your article agrees with me, and Krugman, on this point:

"That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation."

Good. Your article, Krugman, and I all agree about the need to worry about deficits in the long term.

"But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can’t spend at will under MMT; eventually the output gap closes and inflation becomes a big problem."

This is also true -- deficits are not a problem in the short term. In fact, this isn't somehow unique to MMT. This is exactly what Keynes said. You should spend your way out of a huge output gap with high unemployment. This argument is not "modern." It is old, and correct. But deficits not being a problem in the short term does NOT imply that we don't have a long term deficit problem. We won't have 17% underemployment forever, we won't have an enormous output gap forever, and we won't have 0% interest rates forever.

So far, the article, I, and Krugman are still completely in agreement.

But then look what Galbraith says.

"The so-called long-term deficit is not a real problem."

Galbraith obviously disagrees with the article, because Galbraith says the long term deficit is not a real problem. The article obviously disagrees with this:

"That makes me worried about deficits."

If you want to back up Galbraith, you should probably at least try to find an article that doesn't refute Galbraith.

---

Back to the first argument: the first argument is not an argument. NO ONE DISAGREES that the government is technically capable of printing money without borrowing. It just turns on the printing press (or if you will, the account creditors). Krugman is not disagreeing with this, nor am I nor anyone else. Krugman is simply stating that under current law, we must issue debt to pay for spending. Even your article implicitly concedes this when it says

"It could theoretically credit accounts electronically to fulfil its commitment, laws permitting – no bonds necessary."

The word THEOETICALLY implies that it is not being done in practice today. This theoretical world assumes that laws do in fact permit such actions. But in the REAL WORD, they DON'T.

[girl gone mad]

46. The point of Harrison's article was that Krugman got it wrong.

Krugman doesn't understand what Modern Monetary Theory actually says about deficits, and I guess you don't, either.

As Harrison says: "If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation."

In other words, Galbraith understands that deficits can lead to inflation. Read that again. Get it now?

Galbraith has never said that deficits are never a problem. He isn't saying that in his response to Krugman, either. His point is very simply that for right now, the real crises facing us do not include the long term deficit, in and of itself. Until we reach full employment and full productive capacity, the deficit does not pose a serious danger. Once we do reach the stage where inflation risks are real, we have ample tools at our disposal to directly address these threats.

As Galbraith says in the paragraph preceding the one you quoted, "in the present state of the world economy, and for the foreseeable future — and except for the energy sector — surely a small rise in the inflation rate is a trivial risk. My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico."

Do you see now that Galbraith's statement is conditional? He is not saying that deficits can never lead to inflation or that inflation will never be a risk. He is saying that the current state of the world economy indicates inflation is not a real danger and that there are more immediate concerns which the government should be focusing its resources on.

I really don't even know what we're arguing about at this point. It seems like we are all on the same page. I never said deficits are never a problem, and no other MMTer, or Galbraith, has ever said that deficits are never a problem. This is why Harrison writes that Krugman's blog post is wrong. As Harrison says: "Krugman clearly misunderstands MMT because it sounds to me like he's saying the same thing [as Galbraith]."

To sum up my position in this thread so far: the government doesn't need to borrow or tax to finance spending (Harrison is the person who taught this to me). The government doesn't issue debt to fund spending. The deficit represents private sector savings. If the government reduces the deficit while the private sector is net saving, our economy will contract (standard double-entry accounting, this is not controversial). The long term deficit is not a cause for concern while unemployment is high and productive capacity is underutilized (this is what Galbraith and every other MMTer I've ever read believe). Once we reach full employment and run up against productive capacity constraints, inflation will be a risk and the government should address that risk through appropriate deficit reduction and taxation (also something that every MMTer I've read believes). Paul Krugman does not seem to understand MMT because 1. He argues against the straw man he created that "deficits never matter", something no MMTer has ever said (see the preceding sentence), and 2. He writes about hyperinflation as if it is a serious risk to our economy based solely on our current deficit levels.

Krugman's "deficit dove" approach is problematic because it enables the deficit terrorists by ceding too much undeserved ground to their household-budget analogy propaganda.

These issues have been addressed, time and time again, by MMTers such as Randall Wray and Bill Mitchell. You could post your questions to them on their respective blogs, or to reply to Harrison or any of the other Austrians who also believe MMT is the correct interpretation of modern monetary systems. I feel like we are just going in a circle here.

[BzaDem]

49. Galbraith is specifically saying that there is no long-term deficit problem.

He is not just saying "we don't need to worry about it now." He is saying it is not a real problem and it does not need to be dealt with now or later. While he does acknowledge that inflation can be a problem, he does NOT believe that the current long-term track of our spending and taxation will result in inflation now or in the long term future. He has made this point repeatedly. He is wrong, your article disagrees with that position, and you are attempting to change what Galbraith is actually saying (and what he says repeatedly).

But whatever. I don't particularly care about what Galbraith is actually saying (or the distinction between what the government CAN do economically and what it is permitted by law TO do), since it appears we agree on most of the substance.

[girl gone mad]

50. That's a common misconception. Mostly fostered by the right.

Galbraith doesn't say that deficits are never a problem.

He does say that a sovereign fiat currency regime can never default on its debt obligations (which is true), but he understands the risks of inflation and writes about them extensively.

Here's L. Randall Wray's response to the assertion you're making:

The strangest criticism of all is that we MMT-ers argue that “deficits do not matter”. In a recent exchange in the New York Times, Paul Krugman put it this way: “But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency.” In that piece he took Jamie Galbraith to task for arguing that “Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks” facing a sovereign government. I won’t go into the details, but Krugman produced a simple model in which ever-larger budget deficits generate ever-rising prices. You can see the rest of that back-and-forth http://krugman.blogs.nytimes.com/2010/07/17/more-on-deficit-limits/">here. But the strange thing is that Krugman never actually addressed Galbraith’s points that insolvency, bankruptcy, or higher interest rates are non-issues for a sovereign government. Nor did Krugman even try to justify his claim that MMT-ers “say that deficits are never a problem”.

In fact, MMT-ers NEVER have said any such thing. Our claim is that a sovereign government cannot be forced into involuntary default. We have never claimed that sovereign currencies are free from inflation. We have never claimed that currencies on a floating exchange rate regime are free from exchange rate fluctuations. Indeed, we have always said that if government tries to increase its spending beyond full employment, this can be inflationary; we have also discussed ways in which government can cause inflation even before full employment. We have always advocated floating exchange rates-in which exchange rates will, well, “float”. While we have rejected any simple relation between budget deficits and exchange rate depreciation, we have admitted that currency depreciation is a possible outcome of using government policy to stimulate the economy.

Read more: http://www.creditwritedowns.com/2010/07/wray-deficits-do-matter-but-not-the-way-you-think.html

[BzaDem]

51. "In fact, MMT-ers NEVER have said any such thing."

Galbraith consistently says otherwise with regards to our specific long-term budget outlook. He consistently says that our particular outlook is not a problem and it will not be a problem in the future. If he denies that our particular situation will not be a problem in the future (which he does), I do not care what he says about inflation being a problem in a theoretical, abstract way. His claim that our current plan of ever-increasing deficits as a percentage of GDP could not be a problem in the future (which he makes over and over and over) -- that's all I need to know to determine he is a crackpot on this issue.

"Krugman never actually addressed Galbraith’s points that insolvency, bankruptcy, or higher interest rates are non-issues for a sovereign government."

Inflation can be an issue, but higher interest rates is always a non-issue for a sovereign government? REALLY? Do you see what is wrong with this picture? They are really saying that in a period of high inflation, interest rates will not reflect the inflation rate and therefore be high? So if inflation is 30%, I would be willing to loan you money at 5%?

:rofl:

[girl gone mad]

52. Now you're just putting words in the man's mouth.

I've read most of what Galbraith has written, and he certainly doesn't say that inflation could never be a problem in the future.

Here is Galbraith, in his own words, responding to Krugman:

Let's first notice that the concerns about national bankruptcy, hyperinflation and so forth that characterized your first post have now disappeared.

At this point, we agree on the (fairly trivial, and highly remote) thesis that at full employment, a higher rate of (garden-variety) inflation can be a problem.

And we agree that this thesis is both trivial and highly remote.

However, there still remains an important question.

Should we, or should we not, act *today* to cut *projected* deficits at some future date?

For instance, by cutting Social Security and Medicare?

I say no.

I say there is absolutely no economic reason to enact future cuts in these vital programs.

I say that the economic forecasts of vast deficits and high interest rates *after* the return of full employment are implausible and internally inconsistent, for reasons given in my testimony to the deficit commission, and elsewhere.

I say that good policies cannot be based on bad forecasts, that we should solve the unemployment problem first, and that when we have done so, the most likely thing is that tax revenues will rise and the deficit forecasts will be proven wrong.

This is what happened in the late 1990s. Why should we think it wouldn't happen again?

As it is plain to see, Galbraith says that inflation could be a problem if deficits remain high. However, he does not believe that deficits will remain high once we return to full employment.

That's miles apart from your assertion that he claims "our current plan of ever-increasing deficits as a percentage of GDP could not be a problem in the future."


ETA: As for your second question, if you want to know why MMTers say interest rates are non-issues for a sovereign government, why don't you read what they write? This is very basic to the theory. It might help you be a better critic if you actually understand what it is that you're criticizing.

[girl gone mad]

29. The Clinton surpluses lead to a recession..

once the credit binge subsided in the early aughts.

[pansypoo53219]

20. 1st it should go to black farmers and ndians who ARE OWED

the money and the senate won't fucking FUND it. a pox on this stoopid senate of rich men.

[stray cat]

24. So if it does go to the deficit - we should KEEP the Bush tax cuts for all and the estate tax?

[Kurt_and_Hunter]

26. If those were the only possible choices, yes. (But they are not.)

Tax cuts for the rich are poor stimulus but do have a stimulative effect.

If the only possible mode of stimulus was tax cuts for the rich then that would be a forced move in a depressed/deflationary economy.

Fortunately those are not the only choices.

[Oregone]

41. Just doing a little math I realized...

(using Moody's general numbers and some assumptions)


If just 20% of what is saved is spent on infrastructure, it would have a positive stimulative effect (more money injected than letting them stand). So, there are definitely a lot of choices.


I think your number 1 choice is best *now* (full stimulatory spending). But in the end, it may be half repealed only for the rich, semi-reinvested in the economy, and half paid down into the deficit (and who knows what the money saved on interest will be used for). The discussion can get complex, but not every option besides repeal/reinvestment is worse than letting them stand.

[Kurt_and_Hunter]

54. I agree. My comments apply only until we approach full employment...

...or until real inflation and/or interest rates demand a change of course.

At some point it will be good to reduce the deficit.

What frustrates me is that the day when it is okay to work on the deficit is being pushed further and further away by worrying about the deficit now.

Get more jobs and a little inflation in the economy at any cost, as fast as possible. Get some growth and deficit reduction occurs naturally.

[Motown_Johnny]

25. the stimulus was already deficit spending.

we should let the Bush tax cuts expire but we should have a Democratic alternative that kicks in the next day.

We need to correct the disparity created by the Reagan/Bush/Bush policies.

[sendero]

37. Tax cuts for the rich.

.... do NOT stimulate the economy so this article is full of shit on its face.

There is NO reason to extend these DISASTROUS tax cuts, period.

[Oregone]

38. They do not stimulate the economy efficiently

But they do, at least, according to Mark Zandi of Moodys. About every $1 dollar handed out in those tax cuts put 30 cents into the economy. Thats pitiful and wasteful. That said, repealing them may take 30% of their value right out of the economy (and put 100% of their value back in government coffers). Depending on what the government decides to do with that extra dough determines how stimulative a repeal would be (if at all). If its not spent in any manner that mitigates the withdraw, then it could be bad for the economy (if only 20% of the money saved was spent on infrastructure, then it would be more stimulative than all the tax cuts).

[moriah]

48. And if people want to stand on the moral principle of reducing deficit spending...

... then repealing the tax cuts and putting 80% of the money into paying off the deficit, and the 20% into programs that stimulate the economy as well or better than infrastructure (UI extensions, food stamps), then it would still be better than leaving the current tax cuts in place.

I think that's the fourth option that the OP left out.

[Kurt_and_Hunter]

56. That is a political tactic

The OP is about what is best for the economy.

Now if one said that getting Obama reelected is best for the economy (true) and thus political tactics are part of the equation that is fair.

What you favor may well be plitically correct. It just isn't good for the economy at this time.

Presumably reducing deficit spending is not a moral principle, but rather a tactic one espouses to align with some moral principle. There can not be a legitimate moral principle of reducing deficit spending if reducing deficit spending is a disaster, which it would be.

For instance, if cutting the deficit today leads to the deficit being higher in a decade (which it probably will, as Japan can attest) then it would be a weird moral principle.

[moriah]

57. That's pretty much what I was getting at

You phrased it better.

But if some deficit reduction is put into place for political reasons, it does need to be balanced with actual, realistic stimulus that has an effect worth much more than the current tax cuts to get a net benefit to the economy.

[Kurt_and_Hunter]

58. A republican take over would plunge us into a depression, so everything is on the table

[Kurt_and_Hunter]

55. A false statment is ineffective refutation

For some reason elements of the left and the right both seem to think economics is a buffet.

Some on the left think tax cuts are not stimulative but government spending is.

Some on the right think that tax cuts are stimulative but government spending is not.

Both are incorrect views. (The left wing incorrect view is a little less wrong, hence I am mostly a leftist. But both extreme views are wrong.)

Tax cuts, even for the very richest, are stimulative. The question is whether they are optimaly stimulative, which they are not.

The revenue lost to the Bush tax cuts would be better directed to almost any conceivable purpose.

Irronically, the only use of that revenue that would be even worse than the Bush tax cuts is being cited as a reason for letting them expire!

It is a despair-making spectacle.