Tuesday, July 19, 2011

It's the jobs, stupid. (Not the debt or deficit)

In Washington, talks center around whether and under what conditions lawmakers should raise the nation's debt ceiling. Elsewhere, though, Americans find themselves more preoccupied with the state of the broader economy and, more specifically, jobs.

According to a late-June poll by CBS/New York Times, 53 percent of those surveyed said that the economy or jobs was the most important problem facing America today. Only 7 percent said the budget deficit.

The results reinforce sentiments shared elsewhere, specifically that Americans consider jobs a more immediate priority when compared to deficit reduction. Take another recent poll by Bloomberg that found 42 percent of Americans said they are most worried about job creation. Just 13 percent of respondents said federal deficit.

The focus on deficit reduction was a brilliantly conceived and executed plan by the GOP to distract the president from doing what is necessary to create jobs and get the country out of recession. The president walked right into the trap by trying to triangulate through the appointment of a "bipartisa" deficit commission composed of Very Serious People, most of whom know nothing about macroeconomics and are mistaken about what they think they know as well.

As also Edward Harrison of Credit Writedown's throught-provoking post, Is the deficit ceiling debate a Smoot-Hawley moment?

Ed concludes:
So, if the US defaults, who gets the blame? Recent polls show 71% shun GOP handling of the debt crisis. Default will be blamed on Republicans. No default and a weak economy will be blamed on Obama and the Democrats. Either way, the risk of a serous fall in output from overly large cuts is there. If I had to make parallels, I still say this is Hoover’s time, not Roosevelt’s and certainly not Clinton’s.





18 comments:

beowulf said...

President Obama heaped praise on a deficit-reduction proposal produced by bipartisan group of senators known as the "Gang of Six," calling it a "significant step" and arguing that members on both side of the aisle are beginning to coalesce around a balanced approach involving cuts to entitlements and tax increases.
http://tpmdc.talkingpointsmemo.com/2011/07/obama-embraces-gang-of-six-deficit-plan.php?ref=fpa

The President needs to let go of the anchor chain, it doesn't float.

GLH said...

"Default will be blamed on Republicans. No default and a weak economy will be blamed on Obama and the Democrats."
Republicans get blamed for default.
Republicans lose face with tea party if no default.
Democrats lose if no default and poor economy.
The people lose if there is a default.
The people lose if any of the proposals are agreed to.
Who can win here?

Chewitup said...

GLH,
You're right. No regular everyday folks win here. But those in the power elite oligarchy are doing just fine, thank you. But I think they feel our pain when they stand behind a dais and look all sincere and stuff. We've got that going for us.

(Keep up the good work Mike and Tom et. al. I'm trying to spread the word from my little corner.)

Shaun said...

Hi I have a question, perhaps someone more educated can answer for me.


Assume the government does what the people want. Then isn't tax good for the economy?

Taxation guarantees a base-level of consumption. As long as the money collected from tax reflects the economic preferences of the community then this will lead to economic growth.

Tom Hickey said...

1. Taxation serves to give the currency value because non-government must obtain it to satisfy its obligations to the state, which only accepts its own liabilities in payment.

2. This creation of value for the currency allows the government to provision itself from non-government by allocating private resources to public use.

3. Fiscally, taxation withdraws net financial assets from non-government, allowing government to adjust effective demand and avoid inflation.

4. Taxation does not fund anything because government funds itself through currency issuance.

5. Taxation acts as a negative reinforcement to discourage behavior that is taxed.

6. Progressive taxation and taxation of economic rent adjusts wealth and income distribution, which tends to concentration at the top in a capitalistic system, resulting in economic, political and social imbalance that is not in the public interest in that it weakens the system in a variety of ways.

wilwon32 said...

In the context of the current debt limit debates, the AMI is attempting to get some attention as they sent out a notice today:
'Dennis Kucinich will host Dr. Kaoru Yamaguchi to give a presentation of hispaper that concludes how HR 6550 will solve the national debt problem and function far better than our current debt-based money system.'
The paper is titled:
'Workings of a Public Money System of Open Macroeconomies
Modeling of the American Monetary Act Completed'
by Kaoru Yamaguchi

http://www.monetary.org/yamaguchipaper.pdf

I would be interested in comments regarding the features of Yamaguchi's proposal which your readers find interesting (i.e., which might be 'in/out of paradigm' in the context of MMT.

Shaun said...

Thanks Tom for your reply.


With point 4. this implies that the government creates the currency. How does it do this ? Does this happen when the budget goes into deficit, therefore creating 'government debt' ?

I think I understand points 1 and 2. In a way Point 2 means the state needs to give the currency value. So this entitles the state to perform actions that achieve this. Then by point 2, point 1 is needed, as point 1 is the right to reallocate resources from the private sector to the state. Hence giving the currency value.

Point 3 implies that assets have a 'demand creating' property. Consequently affecting inflation.

Point 4 is reallocation of resources from undesirable activities to more desirable as supposedly defined by the community.

Let suggest a hypothetical, your response or anyone else s would be much appreciated.


The amount of currency created is finite.

Every unit of currency is traceable by the public, but it is infeasible to assign ownership of the currency.

Periodically all currency is taxed. The tax is collected into a pool and reallocated according to some community based institution.

Assuming that the community institution perfectly represents the community's interests, how would the economy evolve under such a situation ?

Shaun said...

Thanks Tom for your reply.


With point 4. this implies that the government creates the currency. How does it do this ? Does this happen when the budget goes into deficit, therefore creating 'government debt' ?

I think I understand points 1 and 2. In a way Point 2 means the state needs to give the currency value. So this entitles the state to perform actions that achieve this. Then by point 2, point 1 is needed, as point 1 is the right to reallocate resources from the private sector to the state. Hence giving the currency value.

Point 3 implies that assets have a 'demand creating' property. Consequently affecting inflation.

Point 4 is reallocation of resources from undesirable activities to more desirable as supposedly defined by the community.

Let suggest a hypothetical, your response or anyone else s would be much appreciated.


The amount of currency created is finite.

Every unit of currency is traceable by the public, but it is infeasible to assign ownership of the currency.

Periodically all currency is taxed. The tax is collected into a pool and reallocated according to some community based institution.

Tom Hickey said...

With point 4. this implies that the government creates the currency. How does it do this ? Does this happen when the budget goes into deficit, therefore creating 'government debt' ?

Currency is created through federal expenditure. Currency is destroyed through taxation. Net currency creation in any period is the deficit. To get the reserves for settlement of it checks the tsys has to issue tsys, which are auctioned by the Fed for reserves for the Tsy account. The tsys that are auctioned are paid for by reserves, in the amount that the Fed credits to the Treasury account. In this way, the tsys issued to cover the deficit just save the reserves that issuance creates. It's a wash. But a wash that creates an interest obligation that is unnecessary operationally.

Point 3 implies that assets have a 'demand creating' property. Consequently affecting inflation.

Only creates inflation if issuance results in a level of demand that supply cannot meet through economic expansion. When there is more demand, businesses will expand to meet it but they cannot expand beyond full employment in the economy.


Periodically all currency is taxed. The tax is collected into a pool and reallocated according to some community based institution.

Taxes do not fund anything. They destroy currency in the hands of non-government, thereby reducing spending power (effective demand).

Shaun said...

Once again I appreciate your reply Tom.

After reading content on the web, I think I'm starting to understand the MMT perspective.

So the state, which means the central bank and government work towards creating financial assets and maintaining their 'useability' in the community.

Currently the currency is created by the government in the form of expenditures. The government obtains the currency via some mechanism from the central bank. The central bank records this on its balance sheet.

A simple example is if the government has some amount of expenditures (e), then the government will ask the central bank for the (e) amount of currency in exchange for some symbol representing the same amount (e), i.e proof platinum coin. This causes an expansion in the central bank's balance sheet.

Another mechanism is if the government issues debt in exchange for already issued currency. Therefore the government exchanges a bond for currency. However this has no effect upon inflation, so the central bank steps in and expands its balance sheet. It purchases the same bond issued by the government from the private entity.
The private entity exchanges the bond for reserves from the central bank.

Both scenarios cause the balance sheet of the central bank to expand and an increase in currency.

To remove currency the central bank must make its balance sheet smaller. This can only be achieved via taxes or more precisely a government surplus.

Upon the bond expiring the government is obligated to pay the central bank the value of the bond. It could achieve this via two ways. Create more currency as outlined above, both of which have no net negative effect upon the central bank's balance sheet. Therefore the government must achieve surplus to reduce the balance sheet size.


So it appears that fiscal policy has the largest effect upon the amount of monetary base in circulation.


Monetary policy is a more fine grain method of control. But monetary policy doesn't change the net financial assets in circulation. It only changes the composition of them.


Regarding credit money

So in effect the private banks issue their own private pseudo currency in the form of credit. But the amount of credit that they issue is a function of the reserve requirement and the amount needed to settle.

Is this correct ?

Tom Hickey said...

It's not exactly right but close.

Congress appropriates funding for various projects. The Executive branch executes these "orders" it receives from Congress. For example, Congress appropriates a certain amount for some F-16's and the DoD takes care of dealing with the contracts. When payments are due, the Treasury is instructed to credit the bank account of the contractor. This used to be by check but now it is electronically. In order to settle this with the bank, the Treasury instructs the Fed to transfer the requisite reserves to the contractor's bank's reserve account at the Fed. The Treasury obtains the reserves for its account from issuing bonds, which the Fed auctions to the PD, who pay in reserves, which go into the Treasury account. This is how the government issues currency into non-government. (This simplifies the mechanics but it all you need to know now.)

Taxation withdraws currency when taxpayers either send checks or electronic payment to Treasury. Their accounts are marked down by the their banks, and the banks transfer the reserves to clear to the Treasury account at the Fed, which gets marked up.

Expenditure and taxation are fiscal operations, which are conducted through Treasury pursuant the direction it gets from Congress through appropriations. No government agency can spend on its own.

Similarly, the Fed has its own operations called monetary operatons, which involves chiefly setting and maintaining the overnight interest rate (Fed Fund Rate or FFR) and the discount rate, setting reserve requirements and the like. The Fed also exchanges bank reserves for cash when banks wish to replenish their vault cash. The Fed is also responsible for settlement, which takes place in the interbank market using reserves. The Fed is the lender of last resort, ensuing that there is always enough liquidity (reserves) for settlement.

Monetarists hold that interest rate management is the preferred way to address inflation. MMT holds that it is fiscal, using fiscal policy to adjust nongovernment net financial assets to changes in demand leakage from saving by expenditure (injection) and taxation (withdrawal). As you note, monetary policy does not affect the amount of net financial assets, only the composition and term (maturity, duration).

Shaun said...

the Treasury instructs the Fed to transfer the requisite reserves to the contractor's bank's reserve account at the Fed. The Treasury obtains the reserves for its account from issuing bonds, which the Fed auctions to the PD, who pay in reserves, which go into the Treasury account. This is how the government issues currency into non-government.

Am I missing something. Won't this result in a reallocation of currency from one private firm to another. Therefore no net change in currency circulation ?

The only way increase the amount of currency in circulation is for the private bond holder to trade the bond with the central bank ?

Shaun said...

Or should I think of the bond as something like money. Because the bond is a promise by the government to pay money in the future. Since the government is unlikely to fail, this implies that the value of the bond is unlikely to change. Hence the bond can be thought of as money.

If for some reason the central bank doesn't like the composition of assets it can change the number of assets in circulation.

What is the point of bonds ? They appear to not serve any purpose for the community.

Tom Hickey said...

"Am I missing something. Won't this result in a reallocation of currency from one private firm to another. Therefore no net change in currency circulation ?

The only way increase the amount of currency in circulation is for the private bond holder to trade the bond with the central bank ?"


Yes, it is transferred from one private account to another, that is from the one receiving the government's check to the one using the funds to purchase a bond. This is formally the same as the contractor taking the money received from the government and buying a bond with it. What this is, in effect, is a transfer from the contractor's deposit account to his savings account. That is what happens at the macrolevel, although the funds flow through many hands in the process. It is this flow that turns the wheels of commerce.

Notice also that a savings account is just as much spendable money as a deposit account. Just the composition and term changes, with interest added for slightly less liquidity. A tsys works like this.

Tom Hickey said...

Or should I think of the bond as something like money.

Yes. There is money, usually associated with cash and deposit accounts, and money things, that is, financial instruments of high liquidity that can be converted to cash or deposit account credits quickly. Tsys are the most cash-like money things, and MMT treats them as money (cash) equivalents, especially in the digital age when they can be switched to another from virtually instantaneously.


If for some reason the central bank doesn't like the composition of assets it can change the number of assets in circulation.


Yes, it does this routinely as OMO (open market operatons) that allow it to adjust reserve quantity to manage the overnight interest rate so it can hit its target rate.

What is the point of bonds ? They appear to not serve any purpose for the community.

Being operationally unnecessary under the present monetary system, they are a subsidy for bondholders. MMT founder Warren Mosler recommends going to no bonds and issuing no more than 3 mo T-bills in order to eliminate the subsidy. This would require the Fed to pay a support rate on excess reserves in order to hit its target rate, or else to set the target rate to zero and let excess reserves accumulate. Warren Mosler recommends setting it zero.

Shaun said...

Thankyou Tom, with a few nights rest I think that I will grasp these concepts. I appreciate you taking the time to help me understand some of the mysteries of the financial system.

So given that bonds are operationally unnecessary why did the government issue them in the first place ?

Tom Hickey said...

"So given that bonds are operationally unnecessary why did the government issue them in the first place ?"

This was decided at the beginning of the republic when Alexander Hamilton, representing banker Rober Morris, prevailed over the direct issuance faction. President Lincoln was able to reverse this to fight the Civil War without interest payments by issuing "greenbacks." But that ended after a few years and the present system has been in place since.

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