I’m not sure about you, but I can’t see this post being any more sensible than the previous one. Heteconomist is not the most disciplined or focused blog at the best of times, but when the whole world seems to have gone mad, I feel more than ever that some kind of relief from the insanity is in order.
In my country, the prime minister is determined to “pay as we go” for the work that is needed as a result of devastating floods north and south. She is intent on raising taxes in other areas of the economy to spare our poor children from the crippling debt burden that would otherwise follow such reconstruction efforts.
Perhaps nobody has told her that the real cost of this work will be the labor power and natural resources expended, not the crediting of bank accounts with the tap of a keyboard, and that these resources will be expended in 2011 by the present generation, not by debt-crippled children of the future. But, then, who in a government intent on bringing the budget back into surplus alongside mass underemployment and deep private indebtedness would be likely to tell her that?
Meanwhile, in the United States, President Obama has been working hard – most recently in his State of the Union address – to doll up the tired neo-liberal formula of “austerity plus” (austerity plus the chimera of export-led growth). Someone in his brains trust apparently had the vision to frame this as Obama’s “Sputnik Moment”, which seems to be a mad race conceived in outer space to ward off the latest in a long line of evil enemies – in this case, those scary Chinese. Just what the doctor ordered. Cuts, cuts, and more cuts. All this alongside 16 percent labor underutilization.
And then, of course, there’s Ireland, where the government’s falling apart. And how about those Brits? Only six months into an austerity drive, and it’s already delivering results: negative growth (-0.5%) in the final quarter of 2010, and the real kickers haven’t yet come in to play. Even allowing for the estimated effects of the weather, zero growth (down from 1.1% when the new government came to office) would have represented an impressive start. Who says fiscal policy is ineffective? The voters must be pleased with their selection. I guess if you beg for a kick up the butt and a smack over the head, you’re entitled to a certain self-satisfaction when they come your way.
Since others have waded through the above swamp of human wreckage and political excrement – see, for instance, here, here, here and here – I feel at liberty to leave it all behind and write about something else.
It may be surprising to learn that I receive here at heteconomist a very large number of comments on a daily basis, mostly unfit to publish.
Some of these messages are supportive, albeit often in only the vaguest of terms. For example, to pull an example out of the inbox at random, casinos online writes “Never heard of that before, but thanks for opening up my eyes.” So, you see, quite encouraging.
But there are also messages that are critical. For example, penis enlargement recently wrote: “Why did you delete my comment? It makes a lot more sense than the ones above it.” This comment may seem tame enough, but there were no actual comments above penis enlargement’s comment. Clearly, penis enlargement was taking a shot at this fact. Hurtful, isn’t it?
Sometimes the comments are so antagonistic that I am provoked, against my better judgment, into sending a reply. A recent example was a comment I received from ubiquitous bot. I will not repeat what he or she wrote in the initial comment. Suffice to say it was negative. But I would like to relay our subsequent exchange. I think it illustrates the high level of argumentation MMT advocates regularly confront. I do this as a service to anybody out there who might be considering starting up their own blog to present MMT ideas. To any such person, I encourage you to do so. Just be aware of what awaits you.
In response to ubiquitous bot’s initial comment – which, again, I will not reproduce here – I sent a reply in the form of a question:
Why doesn’t the government just stop issuing debt altogether? Why not just spend what it needs to spend to maintain strong employment, and tax what it needs to tax to maintain price stability, and leave it at that? The government doesn’t need to obtain funds from anybody else. It creates its own money.
It was not long before I received the following rather lengthy response:
I don’t understand the question. Are you an atheist? A communist?
Money is only real if it appears spontaneously in the midst of private production and exchange, and circulates with the seasons. Any counterfeit of this would be theft and an abomination in the eyes of the Lord.
Issuing money artificially through police-state measures would interfere with the real determination of the rate of interest, which is nature’s way of allocating resources between current and future consumption, and ensuring fair recompense to usurers and penalties for the impatient.
Issuing money artificially would create distortions, allowing activity to occur that natural market processes have indicated to be unproductive. That would leave the economy open to the corrupt influence of the political process (“democracy,” etc.) and cause major disruptions in the allocation of capital.
It is distorting enough to issue an amount of artificial money equal to the amount stolen (“taxed”) or mooched (“borrowed”) off the productive. But to issue artificial money without taxing or borrowing back an equal amount would be cataclysmic.
First, it would enable grand theft larceny (“hyperinflation”). There would be an apocalyptic increase in bank reserves, which form part of the money base (currency plus reserves). If you consult any of the seven editions of Macroeconomics by Harvard Professor of Economics, N. Gregory Mankiw, you will see that this increase in reserves must lead inexorably to a much larger increase in the broader money supply (currency plus private demand deposits) through the money multiplier. There are some people – for example at the Bank of International Settlements, the central bank for central bankers – who doubt this process, mostly because reserves don’t affect the ability of private banks to lend, and can actually only be lent out to other banks to facilitate final settlement. But their disagreement is not with me. It is with Harvard Professor of Economics, N. Gregory Mankiw.
Second, the increase in reserves would crowd out private-sector activity by causing escalations in interest rates. There are some people who question this also – for example, here – because a build up in reserves puts downward pressure on the short-term interest rate. When this happens under current arrangements, the Fed sells bonds to drain the excess reserves, which prevents this reduction in the short-term interest rate. But if the Fed stopped doing this, it could only maintain its target rate by paying its target rate on reserves. The crowding out would be astronomical! There are some people who suggest that this would not actually cause crowding out, because the interest rate has not risen even after the Fed’s actions to prevent it from falling. Again, their argument is with Harvard Professor N. Gregory Mankiw, not with me.
Third, the increase in reserves would require massive future taxes to pay them back. Those reserves are an asset of the non-government sector and a liability of the government. The burden on the government to meet those liabilities – which it has so frivolously spent into existence through artificial means – would be crippling. Since we in the non-government are the ones who fund the government, the tax burden on us would be equally crippling. I would say more so! It may seem that if the government just printed money, as you so flippantly suggest, without issuing debt, there would actually be no debt, and so nothing to pay other than any interest owed on reserves. But to suggest this would strike at the heart of everything we have been taught in Economics 101. It would be lunacy. The idea does not even merit refutation.
Look. Is N. Gregory Mankiw a monetary economist? No. Is he a central banker? No. But he is an expert in other areas as well as being a Harvard Professor and the author of an introductory textbook that has influenced many students and includes a chapter on money.
It is difficult for me to treat your meaningless question with the pomposity and air of dismissal it deserves. If it seems that I have no argument against you, it is because it is unthinkable that such an idea could even be put forward for serious debate.
It is not what nature intended.
Although I disagree with ubiquitous bot’s arguments, I couldn’t help noticing how neatly they dovetail with the neo-liberalism of the government in my country. In keeping with my strong humanitarian instincts, I suggested in a follow-up response that a career in politics might fruitfully be pursued in my neck of the woods, which, to my satisfaction, drew a cordial response.
Thank you for your thoughtful suggestion. My studies are soon to be complete. I would very much be interested in a political career. An apprenticeship in the capital of a US client state could be just the ticket.
I would prefer to stay in America, of course, but the standard here is very high and the competition among young economists cut-throat.
Your joint seems a more realistic goal. I’ve heard they’ll employ anyone with an American economics degree.
Nice. Just because someone is an MMT hater doesn’t mean they can’t be a friend.