An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Compact for America is a growing movement organized by concerned citizens and elected officials who want to ratify a federal Balanced Budget Amendment before its too late. Get educated at www.compactforamerica.org! If you have any questions, email me Nick.Dranias@compactforamerica.org
You need to come by here and learn why a balanced budget amendment is a ticket to depression. Start by reading Warren Mosler's The Seven Deadly Innocent Frauds of Economic Policy. It explains the reasons that "Compact for America" is a contract on America. It would flush us down the drain until repealed. Wake up, man. You are doing your country a disservice. Is someone paying you, or are you just misguided?
I'm just a patriot and sadly not paid for my work on behalf of CFA. In any event, not all BBAs are the same. We have devised a unique BBA that appeals to Keynesians as much as Austrians and Monetarists. Please read http://www.compactforamerica.org/keynesians-monetarists-and-austrians-unite-around-the-compact-for-america/
Nick, simple math shows that unless the US becomes a net exporter, if the govt runs a balanced budget then there can be no private sector net saving in aggregate, which means that private debt for the lower four quintiles will rise to unsustainable levels.
OK, I'll take you at your word that you mean well. Then I would say that you are misguided in your zeal. There is no way that the US can grow its economy along with population growth or innovate out of emerging challenges by funding the private sector solely by private borrowing if the private sector wishes to net save.
It's arithmetic and simple alegra, using the sectoral balance approach to national income.
If the govt fiscal balance is zero (balanced budget), and the trade deficit is zero (or greater than zero), then the private sector has to spend all its income (or more by increasing private debt), or else the economy will contract for lack of effective demand, that is, people who want to buy cannot afford to do so. Private credit can forestall this for some time, but credit draws income forward, and eventually the credit line is full and income is insufficient to meet payments and also pay current expenses.
Whatever your policy objectives may be, MMT analysis shows clearly how a balanced federal budget cannot lead to achieving them, presuming they are benign.
In the first place, the deficit is not controlled solely by the budget due to changing tax receipts and automatic stabilizers throughout the cycle. Even if the budget is brought into balance on paper, the outcome is bound to be different if there are other variables involved. Look at Europe, where many countries are trying to bring their budgets into balance and the result is increasing deficits and social chaos. This should signal the folly of fiscal austerity.
Secondly, balanced budget advocacy is ignorant of the nature and function of "money" in an economy. If this were realized, it would be obvious that balancing the federal budget is not a viable way to achieve policy objectives, whatever they may be.
Please watch our educational videos at http://www.compactforamerica.org/documents/. The BBA we are advancing is a different animal entirely from what you are criticizing. It should bridge the gap between your perspective and mainstream economists on the right.
I read your Balanced Budget Amendment. It's a prescription for depression, as I said. Everything I wrote above applies to it.
It forfeits virtually all federal policy space for what exactly? Limiting taxation and the national debt.
Do you realize that the national debt is the saving of net financial assets by the consolidated nongovernment sector in aggregate. The Balance Budget Amendment essentially limits the ability of nongovernment to net save in aggregate in USD. It makes no sense economically. It is moralizing.
Tom, our BBA does not forfeit any federal policy space--it imposes a regulator on the use of debt, the requirement of a broad national consensus represented by state legislatures for any increase in an initial debt limit of what will likely be around $20 trillion at ratification. If monetary value is stabilized, this is a huge policy cushion for the federal government to do just about anything. The external check of state approval for further increases in the debt limit just protects us against the abuse of debt. Does your economic philosophy preclude the recognition that debt is prone to abuse by politicians because it shifts the cost of present policies to nonvoting future generations? If it does not, don't you think its a good idea to regulate the use of debt with a wide national consensus?
One more quick note--the tax limit is designed not to be net revenue neutral but rather to structurally incentivize a flatter income tax with a broader base or a complete switch to an end-user sales tax in lieu of an income tax, together with more reliance on tariffs and imposts, all of which should be preferable to just about any economist who is concerned about growth than our current tax code. Your economic theory does not prefer a special interest loophole ridden income tax code that is progressive only for the unsophisticated and unconnected... right? How do you prevent the swiss cheesing of any income tax without the incentive we have created?
Nick, it buys into the fiction that the federal government needs to fund itself with tax revenue or finance itself with debt. The US has been running a non-convertible floating rate monetary regime since August 15, 1971, when President Nixon took the US off the international gold standard prescribed at Bretton Woods. A new agreement verified that internationally in August 1973.
Debt issuance today is hold over from the gold standard era, and it has been kept in place by a financial sector that profits from the interest payments on a default risk free parking place. Since it is no longer operationally required to issue federal debt, the interest payments constitute a subsidy to the financial sector and should be ended forthwith.
The central banking function should be formally consolidated with Treasury, ending the command system run by "politically independent" technocrats that represent chiefly the financial sector. The existence of the cb as a politically independent body running the country's monetary policy is a fourth branch of government, if the cb be considered chiefly a govt agency. This politically independent group of technocrats, the Fed Board of Governors, is neither elected nor accountable to the president, Congress or the voters. It is anti-capitalistic and anti-democratic. It lies at the heart of corporate statism.
If taxation is not needed to fund government, why tax at all? The chief purpose of taxation is to control effective demand should inflation threaten when the economy is running near full capacity-full employment. Moreover, taxes discourage taxed behavior so they act as a negative incentive and should be applied to negative externalities and parasitism like economic rents that are non-productive.
The US is a democratic republic and all republics are set up to favor the elite. In a democratic republic, this is the wealthy, and democratic republics are generally plutocracies. The US is no exception. Therefore, barring a change in the Constitution to popular democracy, laws and regulations are needed to restrain capture by special interests — regulatory capture, journalistic capture, intellectual capture, and even state capture through crony capitalism, corruption and the revolving door.
I understand that people are upset with government and why this is. I also understand that the way to address it is no through reining in the purse but rather eliminating the actual problem in the way of using the purse effectively for public purpose instead of special interests and efficiently by eliminating special interest privileges and subsidies.
In addition, the corruption is so deep now that the US has a double standard of justice in which only the "little people" are subject to the law. The privileged are exempt, and the president feels quite comfortable announcing that.
A balance budget amendment does not address the real needs of the country, which is removing obstacles to effective and efficient functioning so that resources can be committed to solving real issues.
Modern Monetary Theory show that affordability is a canard under the present monetary regime. The only constrain is the availability of real resources in the present and for the future. Concern about balancing the budget is misplaced and takes the focus off what is actually vital now and going forward.
Does your economic philosophy preclude the recognition that debt is prone to abuse by politicians because it shifts the cost of present policies to nonvoting future generations?
This assumes that taxation or debt financing is needed to fund expenditure. It is not under the present monetary system. The fact that the US operates those terms is 1) a misunderstanding, and 2) an illusion contrived by political restraints imposed either as a holdover from the gold standard, ignorance, or deception by special interests who profit from the unnecessary subsidy and erroneously think that debt issuance and monetary policy control inflation.
If it does not, don't you think its a good idea to regulate the use of debt with a wide national consensus?
You don't think that public opinion is manipulated by propagada resulting from corporate ownership of media, journalistic capture, and intellectual capture? The public is buffaloed into thinking that fiscal discipline is in their interest and the interest of their children and grandchildren. Nothing could be further from the truth economically. They are being taken for ride.
How do you prevent the swiss cheesing of any income tax without the incentive we have created?
Taxation serves two functions. First, to control inflation when effective demand threatens to outpace the ability of the economy to expand near full employment. This can be addressed by a pro-cyclical variable tax rate directed at regulating consumption, for instance.
Secondly, taxation discourages behavior taxed, so taxes should logically fall on unproductive economic rent rather than productive gain. A tax on land appreciation is quite appropriate.
Tom, not that all of your criticisms and concerns are invalid, but I am a bit surprised by your belief that fiscal discipline is a disvalue to future generations. Indeed, if that is your position, then it is unlikely that we will see eye-to-eye on any sort of constitutional amendment that would enhance fiscal discipline. Best of luck with your various viewpoints!
Nick, I strongly urge you to read Warren Mosler's Seven Deadly Innocent Frauds. It explains why the concern today is not "leaving our children with a mountain of public debt they will have to pay off" but ensuring that economic policy today ensures that future generations will have the real resources available to live a prosperous life, and hopefully, more prosperous one than today through technological innovation and productivity increases that are distributed as greater opportunity for leisure. MMT shows how this is entirely possible through intelligently designed economic policy using the full policy space provided by the existing monetary system. This will require some financial sector reforms, as well removing unnecessary and ill-advised political restraints. Proper fiscal discipline means using the potential of policy space and available real resources effectively for public purpose and efficiently also by removing dead weight, such as economic rents. MMT is based on a correct description of monetary operatons, upon which is a built a macro theory that harmonizes growth (production and productivity, capital formation, etc), full employment (job offer for all willing and able to work) and price stability (no more than moderate inflation and no deflation).
That for coming by for the exchange of views. At least we understand each other better now.
14 comments:
Compact for America is a growing movement organized by concerned citizens and elected officials who want to ratify a federal Balanced Budget Amendment before its too late. Get educated at www.compactforamerica.org! If you have any questions, email me Nick.Dranias@compactforamerica.org
@ Nick Dranias
You need to come by here and learn why a balanced budget amendment is a ticket to depression. Start by reading Warren Mosler's The Seven Deadly Innocent Frauds of Economic Policy. It explains the reasons that "Compact for America" is a contract on America. It would flush us down the drain until repealed. Wake up, man. You are doing your country a disservice. Is someone paying you, or are you just misguided?
@ Tom Kickey
I'm just a patriot and sadly not paid for my work on behalf of CFA. In any event, not all BBAs are the same. We have devised a unique BBA that appeals to Keynesians as much as Austrians and Monetarists. Please read http://www.compactforamerica.org/keynesians-monetarists-and-austrians-unite-around-the-compact-for-america/
Nick, simple math shows that unless the US becomes a net exporter, if the govt runs a balanced budget then there can be no private sector net saving in aggregate, which means that private debt for the lower four quintiles will rise to unsustainable levels.
OK, I'll take you at your word that you mean well. Then I would say that you are misguided in your zeal. There is no way that the US can grow its economy along with population growth or innovate out of emerging challenges by funding the private sector solely by private borrowing if the private sector wishes to net save.
It's arithmetic and simple alegra, using the sectoral balance approach to national income.
If the govt fiscal balance is zero (balanced budget), and the trade deficit is zero (or greater than zero), then the private sector has to spend all its income (or more by increasing private debt), or else the economy will contract for lack of effective demand, that is, people who want to buy cannot afford to do so. Private credit can forestall this for some time, but credit draws income forward, and eventually the credit line is full and income is insufficient to meet payments and also pay current expenses.
Prof. L. R. Wray lays this out in some detail in the MMT Primer, which he edited and published as Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems.
Whatever your policy objectives may be, MMT analysis shows clearly how a balanced federal budget cannot lead to achieving them, presuming they are benign.
In the first place, the deficit is not controlled solely by the budget due to changing tax receipts and automatic stabilizers throughout the cycle. Even if the budget is brought into balance on paper, the outcome is bound to be different if there are other variables involved. Look at Europe, where many countries are trying to bring their budgets into balance and the result is increasing deficits and social chaos. This should signal the folly of fiscal austerity.
Secondly, balanced budget advocacy is ignorant of the nature and function of "money" in an economy. If this were realized, it would be obvious that balancing the federal budget is not a viable way to achieve policy objectives, whatever they may be.
@ Tom Hickey
Please watch our educational videos at http://www.compactforamerica.org/documents/. The BBA we are advancing is a different animal entirely from what you are criticizing. It should bridge the gap between your perspective and mainstream economists on the right.
I read your Balanced Budget Amendment. It's a prescription for depression, as I said. Everything I wrote above applies to it.
It forfeits virtually all federal policy space for what exactly? Limiting taxation and the national debt.
Do you realize that the national debt is the saving of net financial assets by the consolidated nongovernment sector in aggregate. The Balance Budget Amendment essentially limits the ability of nongovernment to net save in aggregate in USD. It makes no sense economically. It is moralizing.
Tom, our BBA does not forfeit any federal policy space--it imposes a regulator on the use of debt, the requirement of a broad national consensus represented by state legislatures for any increase in an initial debt limit of what will likely be around $20 trillion at ratification. If monetary value is stabilized, this is a huge policy cushion for the federal government to do just about anything. The external check of state approval for further increases in the debt limit just protects us against the abuse of debt. Does your economic philosophy preclude the recognition that debt is prone to abuse by politicians because it shifts the cost of present policies to nonvoting future generations? If it does not, don't you think its a good idea to regulate the use of debt with a wide national consensus?
One more quick note--the tax limit is designed not to be net revenue neutral but rather to structurally incentivize a flatter income tax with a broader base or a complete switch to an end-user sales tax in lieu of an income tax, together with more reliance on tariffs and imposts, all of which should be preferable to just about any economist who is concerned about growth than our current tax code. Your economic theory does not prefer a special interest loophole ridden income tax code that is progressive only for the unsophisticated and unconnected... right? How do you prevent the swiss cheesing of any income tax without the incentive we have created?
Nick, it buys into the fiction that the federal government needs to fund itself with tax revenue or finance itself with debt. The US has been running a non-convertible floating rate monetary regime since August 15, 1971, when President Nixon took the US off the international gold standard prescribed at Bretton Woods. A new agreement verified that internationally in August 1973.
Debt issuance today is hold over from the gold standard era, and it has been kept in place by a financial sector that profits from the interest payments on a default risk free parking place. Since it is no longer operationally required to issue federal debt, the interest payments constitute a subsidy to the financial sector and should be ended forthwith.
The central banking function should be formally consolidated with Treasury, ending the command system run by "politically independent" technocrats that represent chiefly the financial sector. The existence of the cb as a politically independent body running the country's monetary policy is a fourth branch of government, if the cb be considered chiefly a govt agency. This politically independent group of technocrats, the Fed Board of Governors, is neither elected nor accountable to the president, Congress or the voters. It is anti-capitalistic and anti-democratic. It lies at the heart of corporate statism.
If taxation is not needed to fund government, why tax at all? The chief purpose of taxation is to control effective demand should inflation threaten when the economy is running near full capacity-full employment. Moreover, taxes discourage taxed behavior so they act as a negative incentive and should be applied to negative externalities and parasitism like economic rents that are non-productive.
The US is a democratic republic and all republics are set up to favor the elite. In a democratic republic, this is the wealthy, and democratic republics are generally plutocracies. The US is no exception. Therefore, barring a change in the Constitution to popular democracy, laws and regulations are needed to restrain capture by special interests — regulatory capture, journalistic capture, intellectual capture, and even state capture through crony capitalism, corruption and the revolving door.
I understand that people are upset with government and why this is. I also understand that the way to address it is no through reining in the purse but rather eliminating the actual problem in the way of using the purse effectively for public purpose instead of special interests and efficiently by eliminating special interest privileges and subsidies.
In addition, the corruption is so deep now that the US has a double standard of justice in which only the "little people" are subject to the law. The privileged are exempt, and the president feels quite comfortable announcing that.
A balance budget amendment does not address the real needs of the country, which is removing obstacles to effective and efficient functioning so that resources can be committed to solving real issues.
Modern Monetary Theory show that affordability is a canard under the present monetary regime. The only constrain is the availability of real resources in the present and for the future. Concern about balancing the budget is misplaced and takes the focus off what is actually vital now and going forward.
Does your economic philosophy preclude the recognition that debt is prone to abuse by politicians because it shifts the cost of present policies to nonvoting future generations?
This assumes that taxation or debt financing is needed to fund expenditure. It is not under the present monetary system. The fact that the US operates those terms is 1) a misunderstanding, and 2) an illusion contrived by political restraints imposed either as a holdover from the gold standard, ignorance, or deception by special interests who profit from the unnecessary subsidy and erroneously think that debt issuance and monetary policy control inflation.
If it does not, don't you think its a good idea to regulate the use of debt with a wide national consensus?
You don't think that public opinion is manipulated by propagada resulting from corporate ownership of media, journalistic capture, and intellectual capture? The public is buffaloed into thinking that fiscal discipline is in their interest and the interest of their children and grandchildren. Nothing could be further from the truth economically. They are being taken for ride.
How do you prevent the swiss cheesing of any income tax without the incentive we have created?
Taxation serves two functions. First, to control inflation when effective demand threatens to outpace the ability of the economy to expand near full employment. This can be addressed by a pro-cyclical variable tax rate directed at regulating consumption, for instance.
Secondly, taxation discourages behavior taxed, so taxes should logically fall on unproductive economic rent rather than productive gain. A tax on land appreciation is quite appropriate.
Tom, not that all of your criticisms and concerns are invalid, but I am a bit surprised by your belief that fiscal discipline is a disvalue to future generations. Indeed, if that is your position, then it is unlikely that we will see eye-to-eye on any sort of constitutional amendment that would enhance fiscal discipline. Best of luck with your various viewpoints!
Nick, I strongly urge you to read Warren Mosler's Seven Deadly Innocent Frauds. It explains why the concern today is not "leaving our children with a mountain of public debt they will have to pay off" but ensuring that economic policy today ensures that future generations will have the real resources available to live a prosperous life, and hopefully, more prosperous one than today through technological innovation and productivity increases that are distributed as greater opportunity for leisure. MMT shows how this is entirely possible through intelligently designed economic policy using the full policy space provided by the existing monetary system. This will require some financial sector reforms, as well removing unnecessary and ill-advised political restraints. Proper fiscal discipline means using the potential of policy space and available real resources effectively for public purpose and efficiently also by removing dead weight, such as economic rents. MMT is based on a correct description of monetary operatons, upon which is a built a macro theory that harmonizes growth (production and productivity, capital formation, etc), full employment (job offer for all willing and able to work) and price stability (no more than moderate inflation and no deflation).
That for coming by for the exchange of views. At least we understand each other better now.
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