What You Know for Sure That Just Ain't So

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Transcript

  • 1. Its What You Know for Sure That Just Aint So Stephanie Kelton Associate Professor, Economics UMKC Washington, D.C. 2012
  • 2. A New Brand of Macro• The Washington Post, The Financial Times, The Economist, CNBC and many more• Discovering an emerging school of economic theory• Modern Money Theory (MMT)• Exposes the fallacies embraced by mainstream economists, the media, and most of all, politicians• Debunks myths by explaining the actual workings of our monetary system
  • 3. What Factors Led to the Financial Crisis?• Driven by the combination of the powerfully perverse incentives produced by modern executive and professional compensation, combined with the three Des• Produced the criminogenic environment that drove the crisis (Black)• Theoclassical Economics• $11 Trillion is losses to the household sector (FCIC Report)• Should have been far less (FBI warning)
  • 4. What Caused the Economic Crisis?• The economic crisis could have been largely contained with a more effective macro policy response• Did not have to become the GFC• Belief that saving the banks was paramount and would have positive spill-over effects• Pump-priming and ZIRP would be enough
  • 5. How Would MMT Have Helped?• Called for a three-pronged policy response to restore full full employment• A full payroll tax holiday• $500 per capita revenue sharing to the state governments (no strings)• Federally-funded $8/hr transition job for anyone willing and able to work
  • 6. But How Are You Going to Pay for It? "Were Already Broke"
  • 7. The Strength of MMT• Returns the study of economics to the operational realities of our monetary system• It will sound counter-intuitive -- perhaps even crazy -- but I ask you to follow the logic with an open mind to where it leads• A proper understanding of the monetary system is the first step toward developing a stronger economy
  • 8. What is Money? • All money exists as an IOU • The “I” is the debtor • The “U” is the creditor• IOUs are recorded in a money of account • The Australian dollar • The US dollar • Japanese Yen • The British pound • The Euro
  • 9. The Money of Account • The money of account is abstract • Like an “inch,” a “meter” or a “mile”• It cannot be seen or felt• It is representational, a name assigned by humans• In any modern nation, the money of account is chosen by the national government
  • 10. A Sovereign Government • Defines the money of account• Imposes taxes, fees and other obligations• Decides what it will accept in payment to itself• Chooses how it will make its own payments
  • 11. Sovereign Money • Most governments choose their own unique money of account and issue their own unique currency• One Nation, One Money • US dollar bills and coins • Mexican peso bills and coins • British pound notes and coins• Most governments also require that taxes be paid in a currency that the state has the exclusive power to issue• These currencies are “sovereign money”
  • 12. Taxes Drive Money • As long as the state has the power to enforce its tax laws, the people will need the government’s money• The currency will have value, and people will sell things (goods and services) to the government in order to get government’s money• Whatever the government accepts in payment to itself will become the “definitive” money in the system• It becomes the only final means of settlement
  • 13. The Hierarchy of Money • The private sector “leverages” the government’s money Govt• Banks, business firms and households all issue their own money IOUs Bank• Results in a debt pyramid Businesse• Where some IOUs are better than others• As the only means of final Households payment, the Government’s money sits at the top
  • 14. The US Hierarchy  Operates with its $Collects taxes in dollars Issues the Not a convertible United States Government
  • 15. The Benefits of Sovereignty • The government can never “go broke” or “run out” of money• It can afford anything that is for sale in the domestic unit of account• It does not need to borrow its own currency in order to spend• It can set the policy interest rate at any level• It has an expanded policy space
  • 16. Under a Gold Standard U.S. 1870-1914  Spending had to be Promised to convert US dollars into US Dollar $ wasgold at a fixed United States Government
  • 17. Fixed Exchange Rates  Vulnerable to speculative Spending had toSacrificed US$control of Ruble or Peso Could Could Both heavily dependent on Russian and Argentina
  • 18. What About the Euro? • EMU is an exceptional case• Where the currency is divorced from the nation• The Euro is effectively a “foreign” currency from the perspective of the individual nations• The EUR-17 are users of the currency• They lack the powers of a sovereign issuer
  • 19. The Euro is NOT a Sovereign Currency  • EUR-17 must borrow the currency € • Must pay market interest rates Does not • Can “run out” of Euros • Lacks the policy space of a sovereign issuer Italy
  • 20. Money Matters • A sovereign government should be in control of the currency that sits at the top of its pyramid• Otherwise, it lacks the power to keep its domestic economy on track• “By virtue of its power to create or destroy money by fiat and its power to take money away from people by taxation, [the State] is in a position to keep the rate of spending in the economy at the level required to [maintain full employment]” ~Abba P. Lerner, 1947
  • 21. Education and Employment • The unemployment rate for 16-24 cohort is more than 18% • 30% among African Americans and 20% among Hispanics • And while employment has become more difficult to find, the costs post-secondary education are spiraling out of reach • Research shows that people with significant gaps in the education-work sequence suffer a pay and employment handicap later in life
  • 22. Why the Goal of Full Employment?• 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
  • 23. The Annual Social Costs
  • 24. The Lifetime Social Burden
  • 25. The Aggregate Loss of Output
  • 26. 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
  • 27. What is Sensible Job Creation?
  • 28. ECON 101• Sales Create Jobs• Income Creates Sales• Spending Creates Income• Cutting the Deficit Will: • Reduce Income • Reduce Sales • Destroy Jobs
  • 29. 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
  • 30. 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)
  • 31. 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
  • 32. 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
  • 33. 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
  • 34. 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
  • 35. 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 (Greece!)• They think governments will face a rising debt burden• And they believe that spending financed by issuing money will lead to inflation
  • 36. The Deficit Owl 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
  • 37. 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 fall in aggregate demand
  • 38. 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
  • 39. 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)• It results in the creation of new government money (HPM)• The monopoly issuer of the currency can never run out of money (Greenspan)
  • 40. What Happens When We Pay Taxes?• The numbers in our account go down, and the numbers in the governments account go up• But the government doesnt get anything real from us• Just retiring their own IOU• Taxes are money "down the drain"• Paying taxes destroys/eliminates government money• Just another spreadsheet entry
  • 41. 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
  • 42. 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
  • 43. 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
  • 44. 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)
  • 45. 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
  • 46. A Simple Rule  $$$$$$ Non-Government Government Sector(Public) Sector $$$$$$ (Households, Firms, International Trade)Government Surplus = Non-government DeficitGovernment Deficit = Non-government Surplus
  • 47. 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?
  • 48. 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
  • 49. 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
  • 50. 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
  • 51. 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
  • 52. 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
  • 53. 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
  • 54. 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
  • 55. 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
  • 56. 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
  • 57. 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
  • 58. 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
  • 59. 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
  • 60. 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
  • 61. 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
  • 62. Private Sector Balance with Recessions
  • 63. Implications for Higher Education and Beyond• Fixing the economy will go a long way toward improving access and affordability• State budgets will return to normal, and funding can be restored• But more can be done at the federal level• Over the full lifetime of a cohort of 6.7 million opportunity youth, society loses to the tune of $6.31 trillion• The question is not whether the federal government can afford to reverse these dangerous trends• The question is: Can We Afford Not To?
  • 64. www.NewEconomicPerspectives.org Twitter @deficitowl