Monday, October 4, 2010

Just Changing Numbers

A review of Warren Mosler's Dallas address.

These first few excerpts summarize Mosler's economic plan:

"I believe that the surest engine for full economic recovery is a full payroll tax holiday."

"This fixes the banks and fixes the economy, from what I call the bottom up."

"And what all businesses need most to expand output and employment is people with spending money who can buy their products."

I agree with that one. One thing every business needs is customers with money.

"What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year."

Okay, he's talking about a Social Security tax holiday. Hmmpf.

"Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down..."

Yeah, yeah, yeah. First of all, "the financial crisis" is not "how we got to where we are at this moment in time." If you want to look at the problem and see how we got here, you have to start back when the economy was still good. The 1950s maybe.

the blogosphere is full of concern about how high the unemployment number goes "if you count workers who have given up looking for a full time job." Where was all that concern, back when they decided to stop counting those people as unemployed? I remember it in the news, early in the Reagan years if memory serves. It was wrong, then. Similarly, in the Clinton years (again, if memory serves) they fiddled with the way they figure inflation, to make the inflation number sound not so bad. That was wrong, too. But I guess it worked, because nobody complained about inflation for a long time.

Third, Mosler is right -- finally! -- about the bottom-up thing. He is right that it's "people who can’t make their payments" that make loans go bad. And the payroll tax holiday, while it does not address the underlying cause of our troubles, certainly would provide some relief.

But remember: it does not address the underlying cause of our troubles. Suppose we go with Mosler's payroll tax holiday, and the economy recovers, and growth resumes, and debt growth resumes. Then what?

Pretty soon, another financial crisis. Then we'll need an income tax holiday. They again maybe the economy recovers, and debt grows for a while again. And then we have another financial crisis.

What do we holiday then, excise taxes?

Meanwhile, we've painted ourselves into a corner, and we're printing more and more and more money, and serious inflation is starting to become a reality.

The alternative that I see is to rely more on "printed" money, but also we must rely less on credit. We should use credit for growth, not for everything. In a static economy we shouldn't need any credit at all. In an economy that has grown too slowly for too long -- our economy -- we should have very little credit in use. Credit is for growth.

Actually, if our economy had very little credit in use, we would have very little debt. And if we had very little debt, our economy would be growing like crazy. And then, yes, debt would be accumulating. And we would need to deal with that.

Again, again, again I say: We must then use tax incentives to accelerate the repayment of debt. This will stabilize debt at a low enough level that debt does not hinder growth. And since debt repayment drains money from circulation, it will help us fight inflation.

But that's just me.

"This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living."

It's not the answer, but it is an answer. It does not directly address the problem because, contrary to everyone's pocketbook opinion, taxes are not the problem. Taxes are only a problem. But if we actually fixed the problem, taxes would not be a problem. Meanwhile, Mosler's solution would ease the pain as we draw closer to calamity.

Next, Mosler gets into the same "how government spends" thing that I criticized two posts back. He even uses the same Bernanke quote. And then he says

"All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping."

Retard. The stadium doesn't get the points, the team does. And it is almost always a struggle to get them. The struggle is one of the great things about football. Nobody goes to the stadium to watch numbers change. People go for the game.

With football it's the struggle. With money it's the obligations. It's not just a number. It represents work, value, struggle, and achievement.

Mosler says; "Government can’t ‘run out of money’ ... There isn’t anything to run out of. It’s just data entry, it’s score keeping." Yeh, score-keeping, plus the struggle to get to the goal line. Plus the obligations. Mosler is just plain wrong about this.

What else? Well, Mosler says, "we are grossly overtaxed." And he wants a payroll tax holiday. But he doesn't say how he would pay for it. He doesn't say he's just gonna print money. He only keeps talking about "changing numbers up" and "changing numbers down."

He should be embarrassed to say such foolish things.


Greg said...

I think you get Mosler wrong.

When he talks about the stadium not needing points he is correct, they like the govt are only scorekeepers. They simply tally the points. The teams work for the points and the citizens work for the money. When the govt runs a $1trill deficit it is simply saying, "Score today....... govt sector MINUS $1trillion non govt sector PLUS $1trillion" How this affects prices and therefore inflation depends on the distribution of these dollars.

If you read him more you'll find that he in fact is in favor of debt free money. The govt issuing debt when they spend is maybe the most unnecessary thing they do.

he argues that we are grossly overtaxed relative to the size of our govt. The proof in his view is the unemployment rate. Check this out;

This is his interview about his Senate race, its about an hour long.


The Arthurian said...

Greg -- Good. Stay on my case. Maybe I'll learn somethin.

I really don't like the stadium analogy. If "points" are "spending" and the government is only "keeping score" then the government cannot be allowed to spend. But obviously, the government does spend. So the analogy falls apart.

The impression I get of MMT so far is... MMT tells us that because money is no longer backed by anything, government is now able to do whatever it wants, without regard for cost. And... If only you (that is, the person who does not understand MMT) would understand that every time an asset is created an equal and opposite liability is also created, if only you would understand this, you would see that money is no longer a stumbling block.

One of my objections to the school of economic thought arising in the U.S. since the 1970s is that there are many arguments, all along the same conservative theme, but that these arguments do not fit together into a theory. They are just all separate arguments with a common theme. My objection to MMT is identical to that, save we must swap the word "liberal" for "conservative." Granted, I barely have a toe in the water.


Greg said...

The stadium analogy does break down where you point out but the real point of it is to illustrate that in fact money is created at will out of thin air and in fact "comes from" nowhere, like the points on a scoreboard. The govt can spend, in fact they are the ONLY ones who can add money to the economy (banks only add credit). When they Do spend it shows up as a negative sign on their side of the ledger sheet (a deficit) and a + sign on OUR side (the non govt) It really is that simple

Anyone else trying to add new money is counterfeiting. This is why its nonsensical to describe China buying a bond as lending us money to spend. China has no dollar that they didnt first get FROM US!!

Another way to think of money is simply a pricing mechanism. It is that which we have decided to use as the unit for pricing things. Therefore it is unlimited because we know that the price of something can go to infinity.

The Arthurian said...


I have no trouble accepting the statement, that money is created at will out of thin air and comes from nowhere, as a fact of modern life.

(I do have immense trouble accepting the unstated possible implications arising from obviously false analogies. I prefer to dismiss the analogies and take my facts straight up. The simpler, the better.)

It may be true that China has no dollar they didn't get from us. But that does make it nonsense to say they are lending us money. If they didn't have it, they couldn't lend it to us. Since they do, they can. Since we don't have it, we borrow it.

One possible implication arising from this observation, comes by way of considering why we don't have the money ourselves.

We don't have the money because our economic policies since the end of World War II have
(1) Restricted the quantity of money in circulation (to fight inflation) and
(2) Encouraged the use of credit (to stimulate growth).

Since the use of credit is no less inflationary than money, monetary restriction continued to an excessive degree. And since monetary restriction is harmful to growth, encouragements of the use of credit also continued to an excessive degree. This analysis of "policy conflict" explains not only our inexplicable debt, but also why we don't have the money ourselves.

The possible implication (noted above) is that the proper solution to the economic problem is to correct the imbalance we have created -- to increase the quantity of money in circulation while restricting the growth of credit-use. Thus it would be necessary to "print money," but only up to the point where monetary balance is restored.

That is Arthurian economics. Does MMT say anything comparable?


Greg said...

You didnt watch that video I linked to did you? Watch it, its very good. Mosler gets a chance to really describe a lot of things at length. I think you'll see things a little differently after seeing it.

One thing he addresses is China "lending" us money. It goes like this;

China sells us stuff and acquires dollars. With their dollars they have some options 1) buy some of our stuff 2)put it in a non interest account at the fed (China has a reserve account at the fed as do ALL our trading partners and all banks) 3) put it in an interest account at the fed. This interest account is called a Treasury Bill. The presence of that money in their account gives us NO additional funds to spend. Any more than when we have a savings account at a bank, the bank should say we are "lending" them money.

Again to say we wouldnt 'have" dollars without China is nonsensical. China wouldnt have dollars without us.... ALWAYS AND EVERYWHERE

The Arthurian said...

Ah, ya caught me, Greg... and made me laugh, too. Okay, I'll give up an hour for it... I'll get back to ya.


The Arthurian said...

There ya go, Greg.

"The presence of that money in their account gives us NO additional funds to spend. Any more than when we have a savings account at a bank, the bank should say we are 'lending' them money. "

But of course the presence of that money in their account gives us additional funds to spend. And of course I am lending money to the bank, when I save money there. Denying that the "standard" concepts are true does not make them false.

If you want to say that we could avoid using China's money by just "printing" more of our own, well, I suppose we could. But that's not the same thing. And "printing" has implications that seem to be overlooked by MMT.

Tschäff said...

The take home message most people get when initially learning about MMT is that government can print and spend without considering the consequences.

I think MMTers labor the point that government isn't revenue constrained so much because most the population believes the government is bankrupt, as a result voters will support politicians which cut social services and stimulus plans regardless of the physical economy's capacity. As a consequence we get things like lost decades and avoidable human suffering. MMTers say the limit to government spending is inflation, not some arbitrary debt to GDP ratio.