Posts Tagged ‘economics’

If you can’t get the accounting right, you can’t get the economics right

January 27, 2012 22 comments

TC reader Greg had a good idea about a meme for our new Monetary Realism movement.  The idea:

“If you can’t get the accounting right, you can’t get the economics right”

I’d put this right up with:

“Businesses hire when they are swamped with demand”

Nice one, Greg!  I used this exact phrase today in what turned out to be an elevator pitch on Monetary Realism and MMT! We need thinking like this.

Nothing happens until you sell it…


The Useless Intertemporal Government Budget Constraint: Not Economics

August 30, 2011 11 comments

One of the amazing things about economics is that the major flaws are defined out of existence and then just ignored by most of the profession.

I’ve already went through many reasons why monetary policy sucks. These aren’t controversial statements.  Monetary policy is a bad way to try and influence an economy even if it works.

Then, one of the most common statements in economics, I = S, gets the accounting wrong.   This is the MMT view of I = S and of most of modern macroeconomics – that it gets the accounting wrong so it can’t get the economics right.

But probably the most egregious error in economics is the Inter-temporal Government Budget Constraint.

First, I think the no-Ponzi assumption is stupidly wrong.   It’s impossible to tell ever tell if it holds, and so people can make up anything they want about the IGBC and they might be right.

It turns out that Minnesota fed president Kocherlakota agrees with me, as I’ll show later in another post.

Second, I am  sure that even if it does hold, its worthless to use anything but what we know today about inflation to make decisions about it.

(Thanks again to Peter D for the excellent summary.)

So if the assumption is a boneheaded assumption, we shouldn’t use the IGBC.  But even if the assumption holds, then we must take primary market information seriously and only use inflation as our policy guide.

Now, I have a 3rd critique of the IGBC.  The IGBC isn’t economics.   Nick Rowe says that economics requires most models to contain elements of both supply and demand to be considered to be economics.

This is not a controversial statement.  It’s a common sense observation about what is and what isn’t economics.

And by this common sense observation, the IGBC isn’t economics.

Here is a link to the cannonical Walsh derivation of the IGBC.   Go to page 136.   You can get a similar derivation in Fullwiler’s “Interest Rates and Fiscal Sustainability“, pages 7-9.

Where is the demand for (G-T) in the IGBC?  There is none.

We know:

  1. G – T is the net financial assets issued by the government by identity.
  2. There is so much demand today for the assets generated by G -T that investors are willing to knowingly lose money over a period of 5 years just to have these assets.   We have negative real interest rates in the 5 year, as of August 29th, 2011, indicating massive real demand.  People hold over $14T worth of (G-T) in our real world – indicating massive nominal demand.
So the IGBC isn’t economics.  It can’t be economics, because there is no demand for G – T in the equation.
For this constraint to be economics, it needs to reflect the staggering demand for G -T.  We can call them “net financial assets” or “government borrowing” or something like that, but we know by identity that these equal G – T.
Yet, according to Walsh:
“In most traditional analyses, fiscal policy is assumed to adjust to ensure that the government’s inter-temporal budget is always in balance, while monetary policy is free to set the nominal money stock or the nominal rate of interest. “

We live in a world where the demand for (G -T) by the U.S. government has been high for the entire life of the country.  We live in a world where right now, today, this demand is so high that people are gladly losing money to purchase (G – T).

Yet, ‘most traditional analysis’ use a model that assumes zero supply or demand for G – T.

This isn’t economics.  It’s religion.

This is seeing the world through a stunted belief regime.  Enforcing this through deliberately hiding the truth of the matter though deliberately confusing non-experts and appeals to authority is anti-democratic.

Of course, the second you put demand into the IGBC, it becomes an equilibrium condition, not a constraint.  And then you get something very much like MMT, called the Fiscal Theory of the Price level.


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The FT gets jiggy with tax driven demand for currencies

August 21, 2011 14 comments

Strange things are happening in the world – people are paying attention to MMT.

Chris Cook goes all MMT on us:

He talks about:

  1.  Money as tax credits,
  2. The myth of taxing first and spending second
  3. why the money multiplier is false.

This is straight up MMT.  People like Nick Rowe think that MMT is accounting identities.  It isn’t. Rather, MMT requires understanding the accounting identities along with their obvious implications.

If you assume government out of existence, you’re getting the accounting wrong.  You’re assuming money as tax credits out of existence, and the base demand for money out of existence.  Therefore you cannot make any reasonable statements about interest rates, no matter how good the model.

Note this isn’t Nick’s fault – its the mainstream theory’s fault.  He’s just great at explaining stuff, so the faults of the mainstream become 100% clear.

I am working on a longer post on this topic that points out exactly where and how the mainstream gets the accounting wrong.

Back to Chris Cook. They call it the fiscal theory of the price level, but it’s 95% MMT.  And the reason this idea is getting traction is because MMTers are everywhere.

[Update:  originally mistook Chris Cook and Clive Crook. Reading/Writing prior to a party yesterday at top speed!]

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Winning even when you lose vs. losing even when you win

August 6, 2011 7 comments

I like to win even when I lose.  I like to frame debates where even when someone doesn’t agree with my strongest claims, the result is I win the intellectual battle.

This is something that Republicans know. They lost the battle on the debt ceiling – but even talking about the debt ceiling is a huge win.

This is why I am nearly furious at Paul Krugman.  Payroll tax cuts are a winning political stance – we win even when we lose.

The payroll tax cut is excellent politics.  You mean we get to have Republicans reject a tax cut that helps working people over and over?  This is a fight that we win even when we lose.

If we get the tax cuts – Great!  We have a better economy.

If Republicans block the tax cuts – great! They are exposed as odious monsters that dont’ like working people.

But Paul said we should lay down in front of the freight train – We’re doomed:

“I mean, there’s good reason on economic grounds to be skeptical about the effectiveness of temporary tax cuts as stimulus; Milton Friedman’s permanent income hypothesis tells us that much of such cuts will be saved, not spent. But leave that on one side, and consider a point Mr. Roche doesn’t seem aware of: Republicans have already rejected a payroll tax cut.”

Cullen smacks down PK with an effortless backhand:

” For instance, President Obama made it pretty clear that he was going to reject any debt ceiling agreement that involved a balanced budget agreement last week.  But you didn’t see John Boehner roll over like a dog and take his ball and go home.  No, he turned into a bull dog and ultimately, the Republicans ended upgetting something for nothing.  THAT’SPOLITICS.  It’s called tough negotiating.”

We need to act like progressives.  Stephanie Kelton says:

“Is this really what it’s come to?  Experts in the field — even those with a Nobel Prize — can’t stand up for what they believe in unless they consider it politically feasible? An extension of the payroll tax cut — or, far better, a full payroll tax holiday (a 0% withholding for employers and employees) should have been a key component of the stimulus from the beginning.  But the deficit doves (the most high-profile progressives out there) never supported it.  Had they advocated such a policy, there’s a good chance the economy would be on sound footing by now.  “

I want Paul Krugman to think about this.  He is avoiding a fight that turns out great for us even if we lose it.

Someone call Paul Krugman and tell him to fight this fight.  Get a payroll tax holiday out there into their minds.

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Why Monetary Policy Sucks, Part 2: It promotes debt slavery

July 30, 2011 3 comments

I was thinking a ton about debt slavery during the day, and then my ol’ man beowulf chimed in:

“Michael Hudson’s made the point that banks want property taxes as low as possible so they can expand the share of income they can take in mortgage payments (and other monthly credit streams).”

Yep!  What another bad reason to use monetary policy.

I ended up with a whole list of reasons why monetary policy sucks, and Neil Wilson added another.  There will be another post with that full list.

But this post is about how monetary policy promotes debt slavery.

Monetary policy can only work by giving a middle man – banks and lenders – claims on our future income.  This is the expressed goal of monetary policy – increase or decrease the amount of credit in the economy, and therefore stimulate economic activity.

The primary way the economy expands is by people taking on more debt.

Now, I am not an enemy of debt, but I want to be clear.

The way monetary policy works is through increasing debt in the system.  Monetary policy only works by taking a portion of future income and giving it to banks.  

Of course this is great for the rentier class, but for the economy, not so much.  We’re basically taking an ever larger chunk of our earnings and giving it to lenders.

  • So why do we have a real estate tax exemption?  Higher housing prices for banks to lend against.
  • Why do we have banks pushing for low land taxes?  Higher housing prices for banks to lend against.

Higher prices for real estate means more money for banks and less money for people.  And it isn’t just a one off payment – its a stream of payments over years and years!

This is another big reason why monetary policy is a horrible choice to control our economy.





Debt Ceiling Unconstitutional

July 5, 2011 34 comments

This idea has legs.  Tom Hickey pointed out a few weeks ago that the idea was getting a bit of attention.   I thought that would be the last we see of the idea.

But people are looking at this closely.

Brad Delong calls it Plan B.

Firedoglake hears rumors that Tim Geithner is thinking about this option.

Mike Konczal seems to think it is viable.

I sure hope someone keeps this meme going.

[Update from Tom Hickey:  People are keeping this going, and prominent conservatives are signing onto the idea.   Plus, I forgot that this was THE 14th amendment.  The 14th is the the one that abolished slavery, and made it clear that traitors to our great nation should not be allowed to hold any government power in the U.S.

Traitors…hmmm.  Why would opposing paying the debts of the United States be so closely associated with opposition to human freedom, and being a traitor to the United States?  It’s almost as though opposing paying government debt is strongly associated to being a traitor to the United States.]

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The TC Rule: MMT Inspired Fiscal Policy

June 21, 2011 50 comments

If you were going to make a rule on fiscal policy, what would you do?

A while back I had some thoughts on what a rule might be that could guide fiscal policy.  I came up with:

c(u-u) + (i-i) + f*Population Growth = %G [Update: This is %G Deficit]

Where :

c(u-u) is Okun’s law, relating the change in GDP to change in unemployment.  According to most people, c is about 1.8 and (u-u) is the difference between the “natural” rate of unemployment and current unemployment.

(i-i) is the difference between the current core inflation rate and the target inflation rate

% Population growth is for the entire currency area – we might want to include China in this area given the current policy of China.  f is a multiplier, set to 1 for now.

This is a rule for the size of the deficit the government should run to get the economy back to full employment. It would tell us how much we should be spending to get the economy moving back to full employment.  It can even tell us to cut back on spending.

Then, I wanted something we could plug and play tomorrow. The rule targets the important things we’re concerned about on a large scale.  Employment, population growth, and inflation – these are the concerns, right? That’s what the TC rule targets. I’d suggest any rule for fiscal policy should have these as first order concerns.

I had some conversations with people about the TC rule, and they had great ideas.  Beowulf had one of the best observations. This spending needs a place to be spent.  Where should the spending be targeted?

Probably the best place to spend is on payroll tax cuts. The reason why is simple – it targets effective demand.

When the economy needs to get moving, effective demand is the place to look.

Not aggregate demand, but effective demand.  We don’t need some random spending thrown around the economy, we need money spent where it will make maximum impact.

Why not infrastructure spending?  I am not always 100% confident about government spending being spent wisely.  It might be spent, but frankly, spending $1T in Iraq doesn’t quite have the same attraction for me as spending $1T on infrastructure projects. But they all count to the deficit.

This feeling is wide spread – people don’t like the government just spending.  Tax cuts are a much easier sell.

One good way to target effective demand is through payroll tax holidays.  In fact, its probably the best way to target effective demand that has any hope of being implemented here in the United States.

For this, turn to Pavlina Tcherneva:

“As already noted, for Keynes, the principal goal of fiscal policy was to secure true full employment and the principle measure for adjudicating among different policy responses was their employment-creation effects (Kregel 2008). Unfortunately, what is considered to be Keynesian policy today is largely a misinterpretation of the Keynesian prescriptions, which largely stems from a fundamental misidentification of Keynes’s theory of effective demand with the theory of aggregate demand (Tcherneva 2011). In the General TheoryKeynes carefully articulated that employment determination depended not on the volume of aggregate demand but on the point of effective demand which was very hard to stabilize and fix at full employment.” [Bold Mine]

Wow!  That’s bold stuff.  She makes an excellent case that the optimal way to do this is through targeting employment directly.

But let’s face it. We are not going to see an Employer of Last Resort program next year, or any time in the next 2 score years here in the U.S. It’s a political non-starter.

But tax cuts…everyone loves tax cuts.  They are the sweet, sweet words that every politician likes to say, over and over again.

So the TC rule is going to target payroll tax holiday.   It’s a tax cut.  People love tax cuts.  And a payroll tax cut is probably the best place to target effective demand we’re going to get.

Remember those posts about corporate profits not causing hiring? I am trying to start a meme about hiring:  Businesses hire when they are swamped with demand, not when corporate profits are high.

Well, a good way to swamp companies with demand is to have people spend more money at the store.  Payroll taxes target people who are extremely likely to spend more money.  If we want more people to be hired, one good way to get this moving is through a payroll tax cut.

The formula beowulf suggested was to balance the dollar value of the amount of deficit spending with the size of the payroll tax cut.  This would target effective demand as well as we could, given the political climate.

The more spending required, the higher the payroll tax holiday.  It could be reset monthly, or every 8 weeks like we have the fed do with monetary policy, or every quarter.  My suggestion is to reset the level every month, as new employment and inflation numbers come out.

I don’t have the actual amount of tax holiday for different amounts of needed deficits, but maybe soon…and much thanks to beowulf!

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