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

              Stephanie Kelton
       Associate Professor, Economics
                   UMKC
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
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
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 drain in lost income just
      because it is too stupid it implement sensible job creation strategies." ~Bill Mitchell
What is Sensible Job Creation?
ECON 101
• Sales Create Jobs

• Income Creates Sales

• Spending Creates
  Income

• Cutting the Deficit
  Will:
  • Reduce Income
  • Reduce Sales
  • Destroy Jobs
Every Government Must
Choose 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
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)
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
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
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
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
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
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
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
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
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)
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
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
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
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)
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
A Simple Rule
             
                  $$$$$$         Non-Government
 Government                          Sector
(Public) Sector
                  $$$$$$         (Households, Firms,
                                 International Trade)



Government Surplus = Non-government Deficit

Government Deficit = Non-government Surplus
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?
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 government's budget eases
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
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
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
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
Compare Domestic Public
          and
Domestic 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
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
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
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
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
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
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
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
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
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 government's 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 government's budget moved into surplus
The Next Slide Shows
• That every post-WWII recession (indicated by
  grey bars) was preceded by a sustained
  decline in the private sector's budget position

• Stated differently, every post-WWII recession
  was preceded by a sustained upturn in the
  government sector's budget position

• MMT puts the government's budget balance in
  its proper context
Private Sector Balance with Recessions
www.NewEconomicPerspectives.org

       Twitter @deficitowl

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

  • 1. It's What You Know for Sure That Just Ain't So Stephanie Kelton Associate Professor, Economics UMKC
  • 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. 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
  • 6. The Aggregate Loss of Output
  • 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. What is Sensible Job Creation?
  • 9. ECON 101 • Sales Create Jobs • Income Creates Sales • Spending Creates Income • Cutting the Deficit Will: • Reduce Income • Reduce Sales • Destroy Jobs
  • 10. Every Government Must Choose 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. 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. 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. 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. 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. 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. 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. 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. 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.
  • 20. 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
  • 21. 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)
  • 22. 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
  • 23. 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
  • 24. 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
  • 25. 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)
  • 26. 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
  • 27. A Simple Rule  $$$$$$ Non-Government Government Sector (Public) Sector $$$$$$ (Households, Firms, International Trade) Government Surplus = Non-government Deficit Government Deficit = Non-government Surplus
  • 28. 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?
  • 29. 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 government's budget eases
  • 30. 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
  • 31. 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
  • 32. 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
  • 33. 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
  • 34. Compare Domestic Public and Domestic 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
  • 35. 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
  • 36. 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
  • 37. 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
  • 38. 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
  • 39. 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
  • 40. 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
  • 41. 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
  • 42. 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
  • 43.
  • 44. 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 government's 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 government's budget moved into surplus
  • 45. The Next Slide Shows • That every post-WWII recession (indicated by grey bars) was preceded by a sustained decline in the private sector's budget position • Stated differently, every post-WWII recession was preceded by a sustained upturn in the government sector's budget position • MMT puts the government's budget balance in its proper context
  • 46. Private Sector Balance with Recessions
  • 47. www.NewEconomicPerspectives.org Twitter @deficitowl

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