Background

Today (really, yesterday) I attended the Fiscal Sustainability Teach-in (or counter-conference, or counter-summit) held at George Washington University in DC.  It was held partly in protest of another conference being held by a right-wing think tank, also in DC, about how to gut the remaining pillars of the US welfare state: Social Security and Medicare.  This counter-conference presented an alternative vision based on full employment as the primary target of all economic policy and unemployment as a massive ongoing cost that dwarfs most other costs, including particular consequences of moderate inflation, if there even are any.  This is particularly relevant in light of the recent and obvious failures of some highly prevalent economic dogmas.  We heard talks from a group of heterodox economists of what is known as the Modern Monetary Theory (MMT) school of thought.

I liveblogged or took notes about it variously depending on wifi connectivity, and they're all posted in their original form at this category.  However, they're out of order on this blog since the offline notes were posted after the conference.  The right order is: Mitchell, Kelton, Mosler, Auerback, and Wray and Tcherneva.

So why did I go?

Is "because it's there" not enough?  Well, no it isn't.  It was at an ungodly hour of the morning---are academic economists really awake enough to talk at 8am?  No wonder they let the one from Australia speak first.  

I went because I have the strong conviction that the massive upward wealth transfer we have seen---in the US, in Canada, and elsewhere---not just recently but over decades now threatens the human race's very capacity for survival, because it has crippled our ability to respond to the decay of our institutional and physical infrastructures and made it nearly impossible to deal meaningfully with the interlinked environmental and social crises which grow increasingly dire as time goes on.  

The scalpel that has been used to slice away the tendency towards socioeconomic equality/social justice needed to deal with our crises is, for many of us including me, neoliberal economic ideology.  To me, the primary manifestation of this has been the use of trade policy to undermine the bargaining power of labour in developed countries.  However, it's arguable that the cutting of the welfare state is also partly or primarily responsible for this trend.  In the USA, the pillars of social solidarity are Social Security and Medicare; and that is exactly what the American economic right has always had in its sights. 

So I came to see six academic economists, some of them relatively well-known bloggers (more than me, at least) present another academic concept that views greater social equality as both desirable and even achievable within existing political frameworks.  I am not an economist by profession, but I've been reading about it for years, and the remainder of this is what I understood from the talks and what I think about it.  My opinions are at the end; I attempt a back of the envelope explanation of the ideas first.

The ideology of scarcity

According to the panelists, the analytical tools of right-wing economics are founded on a false analogy of money to the resources that can be acquired with money.  Therefore, money is treated as a finite resource itself, and the question becomes how to slice up the money pie.   Government budgeting essentially becomes household spending writ large; governments must raise taxes or borrow to acquire money-resources to spend thereafter.  A government becomes insolvent when it can do neither---it must cut spending.  In this view, like a household, surpluses are prudent and desirable.

Some of this made sense back in the days of the gold standard, when money effectively really *was* a scarce resource.  But it doesn't apply in the days of a fiat, nonconvertible currency (such as the USD, the CAD, and so on---but NOT the Euro, more on that).  We aren't about to run out of electrons to store the large numbers of money we transfer around constantly. 

The assumption of money scarcity is ideological and political, not *real* in any economic sense.  If we make money less scarce, we are presumed to destroy value through inflation.  Alright.  (The panelists probably would not agree.) But making it more scarce destroys aggregate demand.  So even if we accept the assumptions of mainstream economics, it's still a question of whom we want to hurt.  A political question.

In that sense, pension reform guided by the idea that Social Security will run out of money---is a political decision.  It can't run out of money---if the USA decides that it doesn't want it to run out of money. What can happen is a misallocation of resources---for example, pensions may be too generous relative to other sectors of the economy.  When we reach a world in which senior citizens as a whole are overcompensated and not eating cat food, we can worry about this; but it's not a matter of the money supply.

Fiscality and sovereignty

So what *is* this "Modern Monetary Theory"?  According to Stephanie Kelton, it's a misnomer.  It's not a theory, but a methodology or analytic approach.  It's an approach that dispenses with the ideology of monetary scarcity in the pursuit of economic policy at a macro level.  That doesn't mean that MMT holds that resources are somehow infinite. All it means is that with a fiat, nonconvertible currency backed by a sovereign government, the government is able to generate funds in the service of reallocating resources.  Essentially, money is abstracted away from resources, and resource allocation is relativized to the way in which the government distributes funds---once again, a political decision.

Conventional economics, under monetary scarcity, presumes (and designs entire experimental and theoretical engines around) the idea that money achieves its value by the belief that individuals have about their ability to buy resources with it---and fiat money is just an extension of barter or gold where the citizenry has politely decided to ignore the fact that there isn't any actual gold.  MMT, on the other hand, grounds the value of money in the power of a sovereign government to levy tax---essentially, a social participation fee.  If we must pay this fee in the currency prescribed by the government, then we in turn must be paid in that currency.  The ultimate receiver is the government; but the government is also the ultimate payor, as it distributes the currency.

(The Euro is a fiat currency but it is not backed by sovereign spending power.  This explains why Greece actually can go bankrupt, as can any country that does not really fully control the power of taxation and spending.  Like US states, except they are more likely to get bailed out without too many strings.)

Learning to love deficits

So what does it mean when the government distributes currency?  It means that the central bank increases the value of the accounts it holds on behalf of financial institutions, like a scorekeeper.  (One of the panelists suggested that a sovereign government running out of money was like a sports stadium running out of points.)  When a bank increases the value of your own account, you become its creditor and it your debtor.  Just so with the government.  But the government is the Original Debtor, which also forces you to accept "repayment"/taxes.

In fact, every cheque the government writes has exactly this characteristic.  And the government can write as many cheques as it wants.  That doesn't mean that inflation does not exist; it just means that inflation is simply another instrument of reallocation, subject, once again, to our political and social mores.  Is there catastrophic hyperinflation?  Yes, and the obvious examples are Weimar Germany and Zimbabwe; but in either case, there was a deliberate, large-scale destruction of productive capacity.  In the latter case, hyperinflation staved off immediate mass starvation.  The USA is not in danger of hyperinflation. 

The deficit, therefore, represents investment in the economy whose repeated application fuels aggregate demand.  Surpluses, especially when accrued by cutbacks and regressive tax hikes, are actually a disinvestment.  Taxation is not required for the government to spend (it can run a deficit, simply by saying it is running a deficit); it is simply necessary to valuate money and to disinvest from undesirable things.

So what does this mean? It means that we have no need for unemployment.

Guaranteeing a minimum quality of life

"Bwuh?" you ask.  "How does fiat money from a sovereign government get us out of unemployment?" 

Consider, first of all, why we would want to make full employment our primary economic goal.  Not only are the unemployed idle productive capacity, but they also impose long term and growing social costs the longer they remain unemployed.  In fact, for society as a whole, they impose at any given time such a huge cost that really dwarfs most other costs! The only reason why we would want unemployment is that it drives down the cost of labour, and who, pray tell would want to punish workers that way?  (Heh.)

So the solution to unemployment?  Give people jobs!  Yep, just give them money.  Money at a living wage, to do things that keep their employable skills available for private sector employment when such becomes available.  Money allocated to doing jobs of social benefit that the market has failed to provide, but we know are necessary or desirable through our political decision-making processes.  This sets a floor on the quality of life all wage-earners will live, but at the same time, it doesn't waste human resources in the most costly way possible.

Is this inflationary? *shrug* Could be.  This is not a license to run deficits without limit; it's merely to run *enough* deficit to absorb the reserve army of the unemployed.  It's possible to limit the inflationary effect through judicious taxation.  It's also possible simply to live with a reasonable rate of inflation; other countries have done it and had full employment and lived well.

This is exactly the opposite of what mainstream economic policy makers seem to believe is the correct approach.  Unemployment and interest are used as instruments to control inflation.  But as inflation is not necessarily toxic, it is, yet again, a political choice.  Worrying about the solvency of Social Security is another political choice; it's as solvent as the government says it is.  Far better to worry about the well-being of labour and real people, and to worry about the environment and the scarcity of real resources directly through laws, rather than by cockamamie currency schemes.

What I like about this idea

Believe me, as a Canuck, I'm no friend of deficit-hawkery, and all too familiar with it.  The Canadian Liberals have been pressing a deficit-hawk line long before the US Democrats, and they only got away with it because they had surpluses due to high growth.  It's long been known on the left side of the political spectrum that inflation control is used as an excuse to grow unemployment, which reduces the bargaining power of labour---and that deficits are flaunted as another ideological tool used to squeeze public spending, further hitting employment.

So I like this idea of putting economic policy back where it belongs: in political choices.  The fiat currency controlled by a sovereign government allows us to decouple the actual resources from the resource allocation.  This is the opposite of what governments currently tell us: that monetary policy must be insulated from politics, and that the government is constrained because it is constrained by by its scarcity of money, which in turn is constrained by resources.  

It reorients the purpose of economic policy towards supplying the needs of people, rather than abstract claims of economic soundness.  It doesn't deliberately protect property accumulation.

My problems with it

While I mostly liked it, I had a couple of niggling concerns.  Not enough time was spent during the talks on what I thought was an elephant in the room: trade and trade deficit issues and foreign investment.  Right now, foreigners have invested in the USA and are tied (particularly China) to the USA in deep economic ways.  If the government uses its deficit power to reorient the economy to full employment, this is a reallocation of wealth, in a sense.  But foreign investors made their investments under radically different assumptions.  How does the transition to full employment affect this?  If the USA de-emphasizes inflation targets, doesn't that mean the value of their investments goes down?  Do they respond by devaluing their currency even further?  I think this was asked once during a Q&A and I didn't understand the answer.  For all I know, it's not an issue..

At another point, someone asked about resource shocks.  A panelist said that this would have very little permanent inflationary effect.  So say the price of oil rises dramatically...then the government does what?

Another problem is my usual one with some lefty bloggers and policy wonk types: political marketing.  Some of the panelists suggested that they had experience even with convincing right-wing crowds that this form of job guarantee/full employment is actually more optimal than paying welfare or incurring the long-term costs of unemployment and poverty.  You can convince crowds to support a lot of nice ideas.  But can you get the crowd to actually vote for your candidate?  I've come to think that a leftist conceit is the belief that if you convince enough people of the efficacy of a policy, they'll actually put it into place.

And so?

I write a blog that's really only read by a few (of course highly valued) readers, at least partly because I don't update very often---I had a choice a few years ago to be a bit more prolific and thus higher profile, but I let life take me somewhere else.  Nevertheless, by writing it out, I clarify my own thoughts on a matter I consider of central importance to our survival: economic inequality.  

Whatever is incomplete about this MMT approach---if there is any I've identified---the very discussion allows us to recenter economic arguments on the politics of human well-being, and to view artificial limitations on government policy as just that: self-imposed restrictions for ideological satisfaction.  Hopefully, I've left down some notes in the previous posts that other people can use (and find via web searches), even though the talk slides may come online at some point, for all I know.

Final disclaimer:

This was my first close encounter with MMT, so if anyone feels I've misunderstood something, please feel free to correct me in the comments!

• Stephanie Kelton: Are there spending constraints on governments sovereign in their own currency?
  • MMT is not the right brand---it's a misnomer. Neither non modern nor a theory.
  • It is simply a description of operational realities of money without [gedanken]experimental assumptions.
  • Diff between conventional economics and MMT approach.
    • Conventional: things start with barter. emerges spontaneously. some entity (gold, etc) used as exchange. Money is a private system in which government has intervened.
    • MMT: money *really
    • comes from state obligations. Taxes are a debt imposed on the public that must be repaid via money. It is the government who makes fiat money necessary/acceptable.
  • Central MMT thesis: government's power to tax and its power to create and destroy money is the right framework to think about monetary policy
  • Household/gov't analogy:
    • Household budget constraint: How much we can transfer in government liabilities to other entities.
    • Gov't ability to spend NOT limited by its ability to tax or borrow.
    • Gov't is ISSUER of currency, it must spend first.
    • Any other constraint is self-imposed.
  • Gov't spending
    • Illusion that gov't spending is based on raised taxes.
    • It is simply the scorekeeper: it doesn't have or not have money.
    • Gov't cheques to private sector increase the money supply---new money. Debit Treasury account/score.
    • Taxes destroy money by marking up the Treasury account.
  • Why tax?
    • TREASURY SHREDS CASH submitted as tax payment.
    • Gov't doesn't NEED the money.
    • All taxes do is maintain the demand for money. Gov't uses it for demand regulation.
  • What are bonds, then?
    • "Nothing more than a savings account at the fed."
    • Get more money at a future date for parting with money now.
  • Debt clock: a lie. Should be called "World US dollar savings account."
  • Solvency: can the US gov't run out of money?
    • NO! No more than a sports stadium can run out of points.
    • Greenspan: Fiat money system cannot run out of money.
  • PIIGS in trouble because they are in the Euro zone: they are no longer using a sovereign currency.
    • Solvency is now a legit problem for gov'ts that use Euro.
    • Euro nations are now states like US states---just users, not sovereign.
    • We see the same problem for all of the other countries that converted their currency into another country's currency (e.g. mexico, russia).
      • Kelton cannot name a country with a fiat floating non-convertible currency that has these problems.
  • Can the gov't spend without limit? NO!
    • Spending will be needed to regulate inflation.
    • But we need to loosen up now.
  • Q&A
    • Harrison from audience: What's diff between Russia and Argentina? [I didn't quite understand Mosler's answer.]
    • Kelton [off of another question from Harrison]: debt-to-GDP relation irrelevant.
      • Mosler: inflation is a political problem. Italy had double-digit inflation, did well in 80s.
      • Tcherneva: Argentinian provinces generated their own currencies during crisis. Not needed when Argentina's currency again floated.
    • Series of questions on treasury bonds: do governments need to sell them?
      • General answer: only if their laws require it; otherwise, if they pay interest on reserves, no.
      • Is deregulation connected to this? Deregulation of private sector vs. extreme regulation of monetary policy.
        • Desire to choke public sector due to distrust of democracy among conventional policy-makers.
    • Question from journalist: did EU policymakers know about the consequences of introducing common currency without common states?
      • Yes, but they were hoping for political union to eventually ensue.
      • Why expand Europe so much: various reasons, generally political.
    • Ed Harrison: another question why we need US treasury bonds. Liquidity? Setting fed funds interest rates?
      • Mosler: bonds not necessary for that; only political. Other countries do not use that mechanism.
    • Investment manager asks: fed can create currency, what is the inflation consequence? "Democracy only lasts until the voters realize they have access to the purse strings."
      • Wray: deal with this in terms of real issues and real resources. Do we want to allocate resources one way or another? That's democracy. [As opposed to setting artificial ceilings.]
      • Auerback: Do we apply affordability to defense? No. We only argue about money when it comes to eg. health care. Skewed values.
      • Kelton: interest payments on debt paid by current generation, not allocation issue.

That's it for talk summaries. In a few hours, I'll write my own summary thoughts/reactions to it. In a nutshell, I liked most of what they had to say but have one or two reservations.

So, these are my notes on the first fiscal sustainability counter-conference of the day, on Bill Mitchell's talk.  I took them in hierarchical form in a text file because I couldn't get to this (IMO execrable, but whatever) TypePad app until I figured out how to use the GWU wireless.

• Arrived a little late, still caught most of Bill Mitchell's talk.
  • Mostly about deficit terrorism, why households are not the same as gov'ts.
  • Public purpose: maximizing employment.
    • Governments: render private sector expectations in line with full employment.
    • Therefore budget deficits are necessary in some cases and should be included in defn of sustainability (not everyone can run deficits.
    • Government voluntary constraints that pretend that we're in the gold standard.
    • A sovereign gov't can spend whatever it wants [really?] being a currency monopoly.
      • Can only buy what's available for sale, as well.
      • Unemployment is a sign that there is no real resource constraint (gov't can always buy).
    • The number that appears as the price of labour is not a cost
      • Costs are only relevant at full employment[?].
    • Ratio of X [gov't/deficits] to GDP is a bogus measure.
    • Long-term pressures: intergenerational debate---about real resources, not currency.
    • Current account deficit is not relevant? Somewhat flippant dismissal.
    • NO sovereign debt problem.
    • We need a new macroeconomic narrative. Reorient against financial matters and for the real economy.
  • Panel
    • Randy Wray: Discussion of the gov't efficiency to solve problems.
      • Insofar as there is unemployment, the most efficient employer is the gov't.
    • Auerback: media absurdities, missed this
    • Mosler: More media absurdities: does gov't have to tighten like private sector.
    • Kelton: If gov't runs surplus, the rest of society runs into deficit.
    • Cherneva: same with debt. If gov't pays down debt, private sector loses bond assets.
  • Q&A
    • Someone mentions inflation.
      • 70s inflation was caused by OPEC, not monetary policy.
    • How to sell counter-intuitive MMT ideas to public.
    • How to deal with voluntary and involuntary constraints: going to China is unnecessary.
    • Mitchell told us that he has sacrificed journal articles for his blog.
    • Oooh, Edward Harrison is here: dealing with the big government talking point. What do we want the gov't to do? Emphasize "public deficit == private surplus" talking point.
      • Political decision: what do we want to do with our money? MMT orthogonal to this.
    • Kelton: Japan's recent expansion/recession cycle. Recessions happen when deficits cut.
      • Re: politics. Hope when people understand they'll make the right choices. [increasingly dubious...]

We are shortly to begin the last talk: "A path to full employment: options for policymakers" with Pavlina Tcherneva and Randall Wray.  As usual, INSERT STANDARD LIVEBLOG DISCLAIMER HERE. 

Wray starts

Causes of unemployment, short vs long run.

Short run: financial crisis and unemployment.  9megajobs lost, all projections say that unemployment will remain high for years.

• Consequences of unemployment: lost opportunities, output.  Part-time jobs, career advancement hindered.
• Need 20megajobs to make up for it.
• Washington focused on Wall St at the expense of Main St.  Good policy blocked by deficit hysteria.

Long run problem: Demand gaps and structural unemployment.

• NAIRU: unemployment policy tool.  Reserve army of unemployed. Cuts bargaining power of labour, keeps inflation low.
• Structural unemployment: difficulty for young people, women---long term costs.
• ILO: 2007 strong growth, but 200M unemployed.
• Growth not a solution!  Fuels productivity growth, but doesn't necessarily create jobs.

Sovereign gov't goals: primarily full employment.  Gov't has capacity to make it happen.  For political reasons, price stability needs to be a goal as well.  Yes, we can have full employment AND price stability at the same time.

Unemployment costs: labor underutilisation --> net income loss!  Huge social costs (e.g. poverty, health, human capital loss, etc).  Long-term unemployed become unemployable.

Benefits of goods and services.  Obvious one: production.  But there are many benefits not accounted for by economists: e.g. social, political stability.

New Deal lessons

• Finance constrained/downsized. (We have now prevented it this time.)
• Direct gov't job creation. (died in postwar boom, reinforced belief that growth is enough.)

Post-WWII capitalism: golden age.  No depressions, created middle class, committed to high employment.  Minsky predicted that this "stability is destabilizing."---banks would "break free" of regulation.

War on poverty by Kennedy and Johnson.  Supply side plus welfare: misguided emphasis on growth.  Minsky: this will fail.  It needs an emphasis on jobs!  1 min wage job per family will eliminate 2/3rds of poverty.  (Wray and Kelton have computed the same number.)  Politically: Americans will support giving jobs, but not welfare.

Poverty did fall, but not due to war on poverty: civil rights and social security.

Free market ideology's rise killed full employment.  Reagan's "Welfare Queen", "trickle down."  Clinton: end welfare as we know it, deserving poor.  Intuition of reducing welfare correct but only by giving jobs.

Bush: ownership society, "compassionate" conservatism.  This kind of thing actually reduces ownership through home foreclosure.

Democrats then adopt "fiscally responsible".  But their surpluses during Clinton were BECAUSE of growth, not a cause of growth.

Tcherneva continues

She is going to talk about responsible policy and "get past the obsession" with financial ratios and dogmas.   (Adam) Smithian vision---as he intended it.

Strategy: do not use unemployment to control inflation.  Measure fiscal policy in terms of employment creation.  No one has really been able to find a stable/well-defined link between NAIRU and inflation...

Therefore: plug labour demand gap, don't target output/GDP gap.  Deal with employment directly.  Tie deficit spending directly to employment.  Need N jobs, then you know exactly what deficit spending you need.  Just employ N people, and that is exactly the cost!

Direct job creation!

Guarantee full employment in short and long run---don't simply apply Keynesianism during depressions.

Theory of job guarantee

• Replace NAIRU with employment buffer stock. (rather than block inflation via unemployment.)
• Bottom-up policy, not trickle down.  Deal directly with unemployed, hiring off the economic bottom.
• Can still handle labour flexibility via buffer stock mechanism.
• Keeps labour employable, targets problem areas.
• Make it valuable work.

Mechanism: establish wage floor of labour, public sector employs at that rate; private sector bids above that floor to hire.

Other features: job guarantee is voluntary.  Spending is right level to keep people employed, not more, not less.

Firms benefit: by having a fully employable pool of labour rather than chronically unskilled labour, reduces training costs.

Macro stability:

• Inbuilt inflation control.  Budget shrinks counter-cyclically when private sector doing better (as more are hired into private sector).
• Effective labour supply at minimum wage---"high quality anchor".
• Doesn't solve all problems in the labour market, but must better than unemployed/NAIRU buffer stock.

Has been put into practice in Argentina in miniature.  4h of community work at min wage.  Had major effect on poor, women, minorities.  Countercyclic, affordable.  People move into private sector--->program shinks.

Unemployed themselves helped generate social improvement projects for the Argentina program. 

Growth is not an appropriate target---does not create jobs, can be unequal, can harm environment.  On the other hand, job guarantee has many social benefits. 

It has been done in the past and in other countries (India eg.), it's right and just.  Having access to a job is a basic human rights. 

Implementing in the USA: wage bill will only be $350-$500gigadollars. US gov't has a deficit in convictions, not resources.

Q&A

Q: Cato Inst would *love* this, could eliminate minimum wage. (ie, sarcasm).  Universal living wage.  Index wages to cost of housing.  Can we use this as a job guarantee wage?

A: Mosler: sure, if the will is there.  As an aside, employment buffer stock would be lower than NAIRU stock---and still maintain price stability.  This still allows us to use competitive "American" approaches to employment.

Q: *couldn't hear*

A: Mitchell: Need to decide what a humane wage is: do we want to allow people to pay less than a living wage.

Q: How do you do this over a large population without military control?

A: Mitchell: But India does it. 

Q: But how did they do this politically?

A: Mitchell: They figured out that the rural poor moving into urban areas was going to be a problem due to unemployment.  It was politically necessary for them to create jobs where the private sector won't.

Q: So how to do this in the US Congress?

A from audience member: Need grassroots pressure.  Congress won't do this.  Left need noise machine like right.

A from Auerback: It's actually not that hard.  Sell it as making welfare redundant.  Surprisingly good reception even from some right-wing policy-makers.  And some unions have a problem with job guarantees: permanent slave worker class---at least until the mechanism is better explained to them.

Q: America seems to be very averse to things that sound "socialist."  Industry will complain that they won't be able to hire out of the buffer stock.

A: Mosler: This can be managed by other levers of fiscal policy e.g. taxes.  In reality, this will shrink public sector because the employment buffer stock will be smaller than the social costs of high unemployment.

A: Wray: no, this is not guaranteed employment in the sense that no one would be able to be fired from the buffer stock employment.  Not true.  Show up drunk, one *can* lose a buffer stock job.

Q: Workfare?

A: No, workfare does not provide the jobs.  The key is that jobs at a living wage must be provided by the gov't.

A: Mitchell: Note: unemployed are ALREADY in the public sector.  They're just doing nothing---and doing nothing means social costs.  Not THAT hard to convince business.

A: Wray: Another problem with workfare: administered and funded by American states, not based on sovereign deficit. Simply cannot succeed.

A: Mitchell: Australian workfare is nothing like a job guarantee.  Not living wage, not ongoing until better employment, not productive.

A: Tcherneva: Workfare was simply counted a success by reduction of welfare rolls.  But didn't change poverty and social costs thereof.

Q: Do the panelists have to hide their true (unorthodox) views to get a career in economics?

A: Wray: Not any of the panelists, but if you want to work at the Big Schools, then you need to do so.

A: Kelton: There are definitely cases, though, like Notre Dame.

Q: More idea than question: Obama budget commission is being run by Peterson Foundation (right-wing) as it is not funded.  There are 20 Peterson-funded public hearings.  Can job guarantee supporters attend and influence?

A: Kelton: Actually, the public openness may be fake.  Might actually be hard to attend, gatekeepers and all.

Q: (missed, about Soc Sec insolvency I think).

A: Kelton: if you dogmatically insist that Soc Sec be funded out of payroll taxes and other self-imposed restrictions, things are going to go bankrupt (Soc Sec, Medicare).  The parts that won't (Medicare part B and D) are being guaranteed by the gov't.    It's only because the gov't says so...

A: Mosler: unemployment causes environmental damage.  Creates pressure to kill trees.

A: Mitchell: US health care is crazy.  No one suffers from lack of health care in Australia because of poverty.  Environment: market-based schemes for emission control is ridiculous, do it by rules!  Financial sector: stop banks from being speculators.  Outlaw OTC trading, redirect workers into more productive/socially beneficial tasks.   (Use gambling addiction control for those addicted to speculation.) Massive injection of funding into education for productivity in the future. 

But the current solution is to starve education...

(Last) Q: Hard to discuss this issue in other countries than USA?

A: Mitchell: No, no way as bad in Australia.  Fox News could not exist in Australia.  Possibly due to religious zeal in USA.  But neoliberals invaded Australia as well, but welfare state has survived in a degraded state---but far better than USA.  This is cultural: Australian "mateship".  [How does this play out for Canada?]

(Last last) Q: Why does the right-wing do this?  Why do anything so destructive?

A: Just because.  Just for funding.  We're not psychologists. 

Wray: due to groups of narrow interest, individual narrow interest.  Adds up to bad things. 

Mosler: Faith in self-reliance (unjustified).  Those people with that faith/ego in their own abilities fund think thanks, etc.

Auerback, Mitchell: Canada and Australia did not allow weird AIG tricks, largely escaped worst of economic calamity.

Called to a close.

Wrapup: I will post the notes I took offline fairly soon, as well as a summary. But I'm heading off now.

Reassembling again for the event.  This time, it's Auerback on "Will the US turn into a modern Weimar Germany?" Reminder: This liveblog is just a liveblog, no claims for accuracy or correctness can be made absolutely.  I try my best but even I can only type so fast...

Remember that some of the panelists are bloggers themselves and later I'll try to give the links to their blogs.

So, now, it begins...

Why we tax: Abba Lerner says: The state can make anything into money, but it means nothing unless taxes/obligations are denominated in it.  Then it becomes sovereignty.

Taxes also serve to regulate aggregate demand, not to "raise" money.  We should evaluate policy in terms of effects and impacts in the real world, not dogmas of "soundness".  Operational reality.

Weimar Germany

• Extremely harsh foreign war reparations.
• One third of gov't spending, half GDP.
• (But the USA only has 8% deficits at most.)
• German debt: denominated in foreign currencies, no control.

Foreign debt vs domestic debt.

• Germany hadn't enough gold to pay off its debts.
• Had to aggressively buy foreign currency --- massive price inflation!

Unions

• Weimar had a much larger unionized power and population, with COLA.
• Price inflation (BUT Auerback thinks that unions are a good thing in most circumstances.)
• No such mechanism in the USA; wages don't rise with prices, have declined.  Potentially deflationary.

Obama has presided over a massive wealth transfer to the wealthy rather than raise wages.

Diff between Weimar Germany and USA: Germany operated in a gold-standard world, the Mark was worthless vs gold.  French/Belgian occupation of Ruhr, met with passive resistance.  But money was still paid to workers.

Is Zimbabwe a better example than Weimar?

• Zimbabwe civil war.
• Zimbabwe growth happened before drought, not perfect but happened.
• Problem: land reform.  Whites resisted it, so the political response was a misguided land reform that pushed the productive capacity down. 
• (Auerback notes that the political cost of inequality is very high, warning for USA.)
• Zimbabwe forced to buy food on foreign markets.  No funds left for raw materials, collapse of manufacturing, 80% unemployment...

The Zimb. gov't response was to buy favour by increasing spending: hyperinflation!

USA is not quite as bad as Zimbabwe in these departments, so Zimbabwe is probably a poor analogy.

Bad gov'ts can wreck any economy.  But with fiat money, a wise gov't can sustain price stabillity AND full employment.

Long-term unemployment yields lower productive capacity.

Q&A

Missed first question, got distracted.

Mitchell summarizes Auerback:  Take a country, destroy its productive capacity---then any gov't spending will cause hyperinflation.  But Zimbabwe could not have stopped inflation without starving everyone to death.  US going that way too?

Q from Ed Harrison: Social security -> inflation?

A from Wray: No, wages might do it, but soc sec "passes through" much more slowly.  Misallocation possible in future.

Q from Ed Harrison: Inflation -> currency depreciation -> interest rate -> inflation?

A from Mosler: This is a political problem.  Interest rates are a political decision. 

A from Mitchell: Depreciation is not inflation.  It's a one-off price increase.  So the premise behind Harrison's claim is not quite right. 

Objection from Harrison: So if the price of the currency goes down, doesn't everything become more expensive? (Oil, for instance.)

Panelists (mainly Mitchell): But...that's a once-off adjustment.  A once-off adjustment is not inflation, inflation must be systemic.

Harrison: That's just a "definitional issue".  A rise in price over defined time is inflation over that time.

Mitchell: But that's the point, it's a bad definition. If it's not systematic, it's not inflation.

Wray takes premise for the sake of argument.  Yes, there is a political propensity to increase interest rates.  But this can backfire.  It's very hard to find a correlation over a long time that shows that interest rate and currency are connected.  Central bank myth.

In response to another question (missed but answer interesting), Mitchell: The era when wages were tied to productivity didn't have hyperinflation; this didn't change in the 90s onward where productivity went to owners instead of workers.  They aren't connected.

Mosler: Wages will stagnate without the support of the state, due to game theory.

Q from New Deal 2.0 blogger: Are there things that can be done to prevent inflation that the USA could be doing, or is the USA safe?

A from Mosler: pretty safe. The risks of inflation, anyway, are political, not economic.  Doesn't hurt e.g. productivity.  But may have ballot box effects.

Auerback: things are still heavily weighted to deflation, not inflation.

US oil price inflation will end itself very quickly, because there aren't government systems to keep it going [by demand destruction?].  If the USA had such systems, it would require institution reform to stop it.

Mitchell: so many developed economies have high unemployment; so it's be ridiculous to worry about inflation.  High unemployment is so much more costly.  It's the success of neoliberal ideology that we don't take unemployment into account FIRST.  Gov'ts are wasting billions of dollars worrying about inflation over unemployment.

Unemployment in central bank ideology is a TOOL for the control of inflation, not the other way around.  Outrageous, should be the other way around.  Losses from last two years from unemployment in USA dwarf ALL historical US war costs.

Mosler: Financial sector is most useless waste of human resources ever. Keynes wanted "euthanasia of the rentier."

We've been on break for a few minutes.  I'm going to start a new thread for the next and last talk shortly.

Mosler's talk is about "Fighting back against slashing social security and medicare". [INSERT STANDARD LIVEBLOG DISCLAIMER.]

So, what is money?  We aren't on the gold standard, but we act as though we are.

• We believe in balanced budgets, balanced trade [ed. this is my biggest problem with this whole MMT biz], reserves.
• How can we spend with a gold standard?  Via taxes, debts, money printing with fractional reserves.
• Does not apply now.

Gold standard thinking: Democrat cut of Medicare, tax hikes, China, bipartisan committee.  Why are we here?  They think the gov't has run out of money.  "Leaving debt to children."  "Going to China."

But we have a nonconvertible currency.  So, what is the purpose of currency?

• Provisioning the public sector: command economies, selective command (British Navy). --- OR, today's monetary policy.

What is unemployment?  People looking for paid work.  So, taxes create unemployment.  Gov't spending to employ the unemployed  If there is unemployment, then the deficit is too small!  Adjust fiscally.

Monetary operations

• Fed gov't is not an entity to which we can ascribe money.  It creates money.

• WHAT ABOUT INFLATION?  WARNING: OVERSPENDING CAN CAUSE INFLATION! OH NOES.  Whatever!

Cash is just a representation of the reserves accts at the Fed.

Savings: Federal deficit = cash in circulatinos or in Fed checking/savings.  This is the total net savings of $ assets. 

He is repeating with a diagram what Kelton just said about taxes being a means of valuating money, generating obligations that must be paid in $.

He gives a one-person-economy example of how deficit spending works.  If I am a consultant with $100 in the bank, if I spend it on Treasuries, and then the gov't pays me, I have both the Treasuries and the $100.  Circular. 

Deficit clock == savings clock.

Mosler: everything else is self-imposed constraints for various reasons.

So now, the meat of the issue: What's the point of social security?  Obvious: provision seniors.  Collectively rather than individually.  And we have NO SHORTAGE of goods to feed and house seniors.

Is there a "problem" with Soc Sec?  Are seniors living too well? Is this a misallocation of resources?  Is the fund a problem?  (The answer to the latter is NO.  The fund is just a record.  It's just an account.)

REAL PROBLEM: Dependency ratio.  If there is a shortage, it's of actual labour/goods to help seniors in the future, not money.  But we cut back now because of money issues.  But we need education for future productivity, so why do we keep cutting education?

One problem with Soc Sec: contributions are regressive, but payouts are progressive.

Consequences of Social Security growth:

• Lower unemployment
• Fast growth
• Senior life improves too much

If these are problems, we can fix them by raising taxes or cutting benefits.  But these are political choices about unemployment and values.

He just touches on China: chinese debt is in an account in the fed.  Servicing it is just a matter of shifting money around in the accounts.  Chinese debt doesn't matter.  We can't both demand a renminbi revaluation AND want to pay it down. [I find this part dubious, he doesn't explain in detail, another talk.  Maybe someone will ask him.]

Eurozone: US/UK can't end up like Greece because Greece has no currency sovereignty.  Eurozone has no credible deposit insurance.  There's no agency in EU to offset down cycles. 

Panel Comments/Q&A

(I usually miss a lot here, too fast.)

Q: EU moral hazard?

A: Mosler: need central spending authority, eg, EU Parliament to offset race-to-the-bottom. [Yes!]

Q: [missed question, answer still interesting.]

A: Mosler: Fiat "debt" is not really debt; EU doesn't book "debt" as debt, but you can only have debt when you owe e.g. Gold.

Q: Tragic mistake theory vs. deliberate policy (in deficit hawkery)?

A: Mosler: presume innocence.  Actually more damning.

Q response: What is the evidence for innocence?

A response: Presume innocence is a superior rhetorical technique, not on a factual basis. 

A response from Mitchell: Did the EU leaders know about options to solve their issue? They knew the options.  Not innocent.  Doesn't think innocence is a better rhetorical tactic.  It was ideological.

Q new: Raising taxes reduces demand?  What about wealth accumulation?

A: Mosler: These are all legitimate political concerns.  They are orthogonal to the question about whether government will come out of money. 

Q response from someone else: Then what about this business with taxes regulating demand?  Isn't this about wealth concentration?

A: Mosler: Even raising taxes on the rich can be offset with giveaways.  (Wealth concentration in 90s).  Still political.   And worrying about deficit actually distracts us from dealing with wealth concentration.

A from Wray: Redistribution not via taxes.  You need to control income in the first place.

Q on why these things are not publicized well, couldn't quite hear the question. Also on EU.

A: Auerback: says that EU Maastricht, etc, are the most prominent examples of neoliberal overreach, and Greece/PIIGS crisis may be the tipping point.

15 min break.  I think I'll post the notes for the first two talks this evening rather than in break.

Finally figured out how to manage the GWU wifi.  I can now liveblog the rest of this thing, in case anyone is reading.  I will try to put up my extensive offline notes on the previous talks in a break or later on. 

Currently, Mosler is having a lot of trouble with the laptop.  Anyway, here's the link to the summit web site.  Next post, I will try to liveblog Mosler's talk.

I am at the Fiscal Sustainability counter-coference at GWU. Came down to DC just for that,and to satisfy my curiosity. Unfortunately, I lack wifi and am posting this from a mobile. GWU is stingy with its conference room wireless it seems. There's no long lunch break so I'll write back this evening if I can figure out how to steal away to a Starbucks. A little context: at the same time, a "fiscal sustainability" conference is going on in DC, essentially a right wing venture to gut pensions, etc. *This* meeting is intended in protest of that, and of misguided right-wing ideas about money. I'd post a link to both but my mobile browser is not suitable for this. I may update again but a liveblog is infeasible.

Updated: Welcome Brad DeLong readers. I eventually managed to liveblog once I figured out how to get onto the GWU wifi, and I have even posted the notes I took when offline, one post per talk.  I will soon post a summary of what I learned and what I think about it.  Check the category I created to file all of the counter-summit related posts.

Updated: My summary post.