Its What You Know for Sure      That Just Aint So              Stephanie Kelton       Associate Professor, Economics      ...
A New Brand of Macro• The Washington Post, The New York  Times, The Economist, CNBC and  many more• Discovering an emergin...
The High Price of Unemployment• Direct Costs • Loss of output/income• Indirect Costs •   Social exclusion and the loss of ...
The Annual Social Costs
The Lifetime Social Burden
The Aggregate Loss of Output
The Daily Losses Due to                 Unemployment"[E]very day the US government is allowing $9.7 billion to go down the...
What is Sensible Job Creation?
ECON 101• Sales Create Jobs• Income Creates Sales• Spending Creates  Income• Cutting the Deficit  Will:  • Reduce Income  ...
Every Government MustChoose Which One to Accept• Pure Unemployment • Labor Buffer Stock with zero wage and no tasks• Unemp...
MMT Favors the Transition Job • ELR provides a transition job, something useful to do until   the private sector is ready ...
Other Benefits• Maintains wages and benefits for those who  lose jobs in a downturn• Helps support aggregate demand• Preven...
The New Deal• Roosevelt’s WPA, CCC, NYA and other job  programs• Built hospitals, schools, parks, bridges, roadways,  airp...
A Deficit Hawk• Opposes deficit spending on principle• Often favors “sound money”  (e.g. Gold Standard or 100% reserve back...
A Deficit Dove• Supports limited deficit spending in tough  economic times• Wants government budget balanced over the  busi...
Why Do They Worry?• The hawks and the doves both worry about the  negative consequences of running a deficit• They are con...
MMT Knows Better•   If the government takes advantage of its status as the issuer of the    currency, the government can f...
The MMT Deficit Owl•   Would allow the deficit to    expand as needed to    maintain full employment•   Assigns no arbitrar...
Stadium Analogy•   Suppose you’re watching a football match•   Think of the government as the scorekeeper•    Question: Wh...
How Does a Government with a Sovereign Currency Spend?• By directing its bank (usually the central bank) to  credit someon...
Becoming an Owl• You cannot examine the government’s budget in  isolation• The government is only one sector• It’s useless...
What They Show• In any given period, sectoral balances show  whether a particular part of the economy is: • Spending more ...
Three Sectors• Internal Sectors • Domestic Private   •   households and businesses • Domestic Public   •   local, state or...
Two Rules• Three Sectors • Domestic Private • Domestic Public • Foreign (Rest of the World)• Two Rules • They can’t all be...
The Laws of Accounting• Instinctively, we probably tend to think it’s  “better” to be in surplus• But there is no way to p...
A Simple Rule                               $$$$$$         Non-Government Government                          Sector(Publ...
Two Options• Two Heads, One Tail • Two Sectors in   Surplus, One in   Deficit• Two Tails, One Head • Two Sectors in Defici...
The Private Sector  Needs to Be in Surplus• As a general rule, the private sector needs to be in surplus• Households and f...
The Private Sector Cannot    Put Itself in Surplus• If we just take households and businesses – what  we call the ‘private...
Where do Surpluses          Come From?• Private Sector =         Public Sector +      Current Account     Surplus         ...
Possible Outcomes• We have three sectors  •   Domestic Private, Domestic Public and Foreign• We can look at the income flo...
Deriving the Sectoral Balance           Identity • Y = National Income • Sources of Income        Y=C+I+G+X • Uses of Inco...
Compare Domestic Public          andDomestic Private Balances    Notice how increases in the government’s deficit     Help...
Italy                 15%                 11%                  8%Percent of GDP                  4%                       ...
Ireland                 40%                 30%                 20%                 10%Percent of GDP                     ...
Greece                 10%                  5%                  0%Percent of GDP                                          ...
Spain                  8%                  4%                  0%Percent of GDP                                           ...
Germany                 10%                 8%                 5%Percent of GDP                 3%                        ...
United Kingdom                 11%                  8%                  4%Percent of GDP                  0%              ...
Japan                 15%                 11%                  8%                  4%Percent of GDP                       ...
United States                 11%                  8%                  4%Percent of GDP                  0%               ...
The Previous Slide Shows • That the private sector (blue) is almost always in surplus • That the US has been running curre...
The Next Slide Shows• That every post-WWII recession (indicated by  grey bars) was preceded by a sustained  decline in the...
Private Sector Balance with Recessions
www.NewEconomicPerspectives.org       Twitter @deficitowl
It's What You Know for Sure that Just Ain't So
It's What You Know for Sure that Just Ain't So
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It's What You Know for Sure that Just Ain't So

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  • It's What You Know for Sure that Just Ain't So

    1. 1. Its What You Know for Sure That Just Aint So Stephanie Kelton Associate Professor, Economics UMKC
    2. 2. A New Brand of Macro• The Washington Post, The New York Times, The Economist, CNBC and many more• Discovering an emerging school of economic theory• Modern Money Theory (MMT)• Exposes the fallacies in conventional economic theories• Views unemployment as socially harmful and economically inefficient• Supports a full employment economy
    3. 3. The High Price of Unemployment• Direct Costs • Loss of output/income• Indirect Costs • Social exclusion and the loss of freedom • Skill degradation • Psychological harm, including increased suicide rates • Poor health and reduced life expectancy • The loss of motivation • The undermining of human relations and family life • Loss of social values and responsibility• Can be hard to quantify• But there are estimates
    4. 4. The Annual Social Costs
    5. 5. The Lifetime Social Burden
    6. 6. The Aggregate Loss of Output
    7. 7. The Daily Losses Due to Unemployment"[E]very day the US government is allowing $9.7 billion to go down the drain in lost income just because it is too stupid it implement sensible job creation strategies." ~Bill Mitchell
    8. 8. What is Sensible Job Creation?
    9. 9. ECON 101• Sales Create Jobs• Income Creates Sales• Spending Creates Income• Cutting the Deficit Will: • Reduce Income • Reduce Sales • Destroy Jobs
    10. 10. Every Government MustChoose Which One to Accept• Pure Unemployment • Labor Buffer Stock with zero wage and no tasks• Unemployment Compensation • Labor Buffer Stock with a wage and no tasks• Transition Job/Employer of Last Resort (ELR) • Labor Buffer Stock with a wage and a task
    11. 11. MMT Favors the Transition Job • ELR provides a transition job, something useful to do until the private sector is ready to reemploy people • Performs the job of a true automatic stabilizer • Absorbs workers into the ELR pool when the economy turns down • Releases workers from the pool when the economy improves • Reduces losses borne by the private sector (indirect costs)
    12. 12. Other Benefits• Maintains wages and benefits for those who lose jobs in a downturn• Helps support aggregate demand• Prevents skills from degrading • Makes workers more employable• Gives people a sense of purpose
    13. 13. The New Deal• Roosevelt’s WPA, CCC, NYA and other job programs• Built hospitals, schools, parks, bridges, roadways, airports, stadiums, etc.• Employed millions in productive and socially useful jobs (roughly 4.3 million per month or 8-9% of the labor force)• Hired builders, architects, engineers, painters, poets, actors
    14. 14. A Deficit Hawk• Opposes deficit spending on principle• Often favors “sound money” (e.g. Gold Standard or 100% reserve backing)• Would legislate rules to mandate balanced budgets at all times• Believes that there is no such thing as a “good deficit”• Supports immediate austerity to sharply reduce budget deficits
    15. 15. A Deficit Dove• Supports limited deficit spending in tough economic times• Wants government budget balanced over the business cycle• Supports rules to limit the size of the deficit (e.g. Stability and Growth Pact)• Prefers to wait until after the economy recovers to impose austerity
    16. 16. Why Do They Worry?• The hawks and the doves both worry about the negative consequences of running a deficit• They are convinced that at some point markets will refuse to lend at reasonable rates• They think governments will face a rising debt burden• And they believe that spending financed by issuing money will lead to inflation
    17. 17. MMT Knows Better• If the government takes advantage of its status as the issuer of the currency, the government can finance its deficit without borrowing at all• This means no discipline from bond markets• No solvency problem to deal with• Interest rates will be lower, not higher• What about inflation?• MMT advocates deficits only when there is slack in the economy• As long as resources are available, demand-pull inflation should not become a serious problem
    18. 18. The MMT Deficit Owl• Would allow the deficit to expand as needed to maintain full employment• Assigns no arbitrary limit to the size or duration of the deficit• Accepts that it is the government’s responsibility (as monopoly issuer of the currency) to offset a rise in unemployment
    19. 19. Stadium Analogy• Suppose you’re watching a football match• Think of the government as the scorekeeper• Question: Where does the scorekeeper get the points he gives out when one team scores?• Answer: The points don’t come from anywhere• Spreadsheet entries created by fiat
    20. 20. How Does a Government with a Sovereign Currency Spend?• By directing its bank (usually the central bank) to credit someone’s account• This frequently happens without even a writing a check• In the Modern Money era, government spending is accomplished through keystrokes (Bernanke)• The monopoly issuer of the currency can never run out of money (Greenspan)
    21. 21. Becoming an Owl• You cannot examine the government’s budget in isolation• The government is only one sector• It’s useless to focus on a single sector when the economy is multi-sectoral• We need to understand how the government’s budget is related to the rest of the economy• A basic understanding of sectoral balances is all we need
    22. 22. What They Show• In any given period, sectoral balances show whether a particular part of the economy is: • Spending more than its income • Running a Deficit • Spending less than its income • Running a Surplus • Spending just equal to its income • Balancing its Budget
    23. 23. Three Sectors• Internal Sectors • Domestic Private • households and businesses • Domestic Public • local, state or province, and national governments• External Sector • Foreign • foreign governments, foreign households and foreign businesses
    24. 24. Two Rules• Three Sectors • Domestic Private • Domestic Public • Foreign (Rest of the World)• Two Rules • They can’t all be in surplus • They can’t all be in deficit • Cannot have 3 “Heads” (Surpluses) or 3 “Tails” (Deficits)
    25. 25. The Laws of Accounting• Instinctively, we probably tend to think it’s “better” to be in surplus• But there is no way to put all three sectors in surplus at the same time• It defies the laws of accounting!• At least one of them must be in deficit
    26. 26. A Simple Rule  $$$$$$ Non-Government Government Sector(Public) Sector $$$$$$ (Households, Firms, International Trade)Government Surplus = Non-government DeficitGovernment Deficit = Non-government Surplus
    27. 27. Two Options• Two Heads, One Tail • Two Sectors in Surplus, One in Deficit• Two Tails, One Head • Two Sectors in Deficit, One in Surplus• Which is better?
    28. 28. The Private Sector Needs to Be in Surplus• As a general rule, the private sector needs to be in surplus• Households and firms cannot continually borrow more than their income• At some point lenders will run out of creditworthy borrowers who are willing to spend• Private debt levels may become unsustainable (Minsky)• When an expansion driven by private sector debt reaches an end, sales soften, jobless claims trend higher, and economic activity falters• Government revenues soon fall short of expenditures and the governments budget eases
    29. 29. The Private Sector Cannot Put Itself in Surplus• If we just take households and businesses – what we call the ‘private sector’ -- it is clear that one persons’ asset is another person’s liability• Assets and liabilities cancel each other out• For example, my bank loan is cancelled by a bank asset• The private sector cannot create its own net financial assets• Net financial wealth must come from outside the private sector
    30. 30. Where do Surpluses Come From?• Private Sector = Public Sector + Current Account Surplus Deficit Surplus (S – I) (G – T) (X – M)• If the Government (Public) sector is running a deficit, and the current account is in surplus, the private sector will be adding (net) financial assets to its balance sheet• The private sector’s net holding of financial assets will increase
    31. 31. Possible Outcomes• We have three sectors • Domestic Private, Domestic Public and Foreign• We can look at the income flows and spending flows of each sector• No reason for any individual sector to balance its income and spending flows each year• Three Possible Outcomes • Surplus: Income > Spending • Deficit: Income < Spending • Balanced Budget: Income = Spending
    32. 32. Deriving the Sectoral Balance Identity • Y = National Income • Sources of Income Y=C+I+G+X • Uses of Income Y=C+S+T+M Sources = Uses • C+S+T+M=Y=C+I+G+X • S+T+M=I+G+X • (S – I) = (G – T) + (X – M) • Private Surplus = Gov’t Deficit + Current Account Surplus
    33. 33. Compare Domestic Public andDomestic Private Balances Notice how increases in the government’s deficit Help the private sector accumulate a surplus And notice what happens to the private sector’s surplus When the government shrinks the size of its deficit
    34. 34. Italy 15% 11% 8%Percent of GDP 4% Government Balance Private Balance 0% -4% -8% -11% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
    35. 35. Ireland 40% 30% 20% 10%Percent of GDP Government Balance Private Balance 0% -10% -20% -30% -40% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
    36. 36. Greece 10% 5% 0%Percent of GDP Government Balance Private Balance -5% -10% -15% -20% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
    37. 37. Spain 8% 4% 0%Percent of GDP Government Balance Private Balance -4% -8% -11% -15% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
    38. 38. Germany 10% 8% 5%Percent of GDP 3% Government Balance Private Balance 0% -3% -5% -8% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
    39. 39. United Kingdom 11% 8% 4%Percent of GDP 0% Government Balance Private Sector Balance -4% -8% -11% -15% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
    40. 40. Japan 15% 11% 8% 4%Percent of GDP Government Balance Private Balance 0% -4% -8% -11% -15% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
    41. 41. United States 11% 8% 4%Percent of GDP 0% Government Balance Private Balance -4% -8% -11% -15% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
    42. 42. The Previous Slide Shows • That the private sector (blue) is almost always in surplus • That the US has been running current account deficits (green) for the last three decades as the rest of the world ran trade surpluses against us • That the governments deficits (red) have usually been big enough to keep the private sector in surplus, despite our negative trade position • That the private sector went into deficit in the late 90s, when the governments budget moved into surplus
    43. 43. The Next Slide Shows• That every post-WWII recession (indicated by grey bars) was preceded by a sustained decline in the private sectors budget position• Stated differently, every post-WWII recession was preceded by a sustained upturn in the government sectors budget position• MMT puts the governments budget balance in its proper context
    44. 44. Private Sector Balance with Recessions
    45. 45. www.NewEconomicPerspectives.org Twitter @deficitowl
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