Thursday, November 29, 2012

Ed Dolan — What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives


I'm a bit tardy putting this up. Here it is, if you haven't seen it yet.

Economonitor | Ed Dolan's Econ Blog
What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives
Ed Dolan

16 comments:

geerussell said...

There's quite a bit of convergence with MMT between this and Dolan's last fiscal piece. He mentions in the comments that he's been corresponding with Wray and it shows.

It looks like he's one step shy on sectoral balances (doesn't take foreign into account when talking about countries that are tighter fiscally) and a good explanation of endogenous money away from really getting where MMT is coming from.

Jonf said...

Help, please. If we have continual deficits each year, won't that add up to greater debt in the future? It seems the higher the deficit, the faster the total debt accumulates. I mean if you start with one hundred and a deficit of five and you do that for ten years isn't the end result a debt of 50? (actually 50 plus interest plus growth of the first one hundred.) I suppose I am missing some math here, which is always a mystery to me.

Jonf said...

So what happens to all this debt business if we mint a platinum coin to pay it all off? How does that affect sustainability?

Ralph Musgrave said...

Jonf,

It is complete myth that deficits necessarily result in more debt. A deficit can perfectly well accumulate as more money (monetary base to be exact). Indeed, in that various countries have run deficits matched by QE, the net result is as above, i.e. deficits accumulating as extra money.
Of course the latter QE option does leave debt in place in that the central bank still holds that debt. But that’s essentially meaningless: the government owing its central bank money is a nonsense. It’s just one arm of the state owing another arm of the state some money. That debt might as well be torn up.

Milton Friedman actually advocated a system under which government issues no debt – just money. I agree with him. Warren Mosler advocates the same. For Friedman, see para staring “under the proposal.. (p.250), here:

http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

Dan Kervick said...

Jonf,

The debt would grow (assuming the annual deficit triggers an equal amount of annual borrowing, and is not financed in the way Ralph describes), but as Dolan points out, if the interest rate remains lower than the growth rate of GDP, then the ratio of debt to GDP will stabilize. So even from a completely mainstream perspective, a permanent deficit is sustainable. Even if we are making all of our debt payments by taxing, so long as national income (the tax base) grows at least as fast as the debt, then the burden on taxpayers (the percentage of their income spent on taxes) doesn't increase.

Jonf said...

Thanks for your input Ralph. If the government were a corporation the debt held by the fed would not be considered outstanding. So why in the world we do it is something of a mystery. Best way would be, as you suggested, is not to issue any debt.

Dan, I don't really get what you are saying. As I said if you keep on running a deficit at a constant pct of gdp it would seem it will accumulate and the pct of gdp would go up. I have an intuitive notion that under some constraints it would stabilize, if we assume the growth of gdp is used to pay down debt and interest is lower than gdp. But I can't prove that. And it seems like a special case.

I still like the idea of issuing a coin. Then it doesn't really matter what interest or growth rate is?

Anyhow, thanks for your input guys.

BTW this whole discussion strikes me as being angels on a pin. In any near to intermediate term the debt to gdp is not likely to go crazy in any case, if for no other reason than the political class will get the vapors. Look at what's going on now for instance.

Tom Hickey said...

What Dolan does say and maybe doesn't realize is that the interest rate is set by the CB and the rate on tsys by the Treasury. See Scott Fullwiler, Interest Rates and Fiscal Sustainability.

What Dolan also doesn't seem to realize is that with a balanced budget amendment the consolidated domestic private sector in aggregate cannot save NFA without net exports.

Tom Hickey said...

Best way would be, as you suggested, is not to issue any debt.

Agree, but banking, the financial industry, business, and the ROW are major users of tys. This would require a resetting of that relationship, and I'm not sure exactly how that would be handled. This needs some clarification.

paul said...

"What Dolan also doesn't seem to realize is that with a balanced budget amendment the consolidated domestic private sector in aggregate cannot save NFA without net exports."

…which depends on prior net money creation or new net money creation by the government unless we are willing to accept foreign currency.

Dan Kervick said...

Jonf, I don't see the issue. GDP represents national income. If tax rates on income stay constant, then as GDP increases, tax revenues increase automatically. If spending increases at the same percentage as GDP each year, then the deficit will also increase at the same percentage. If we think of the debt as the accumulated deficit, then the debt will then grow each year as will, but it will also remain at the same percentage of GDP. And if the interest rate stays constant, then interest on the debt will also be the same percentage of GDP each year. No?

paul said...

The interest paid on the National Debt does not come from the non-government, so I don't see that the interest matters one way or the other.

frlbane said...

The interest paid on the National Debt does not come from the non-government, so I don't see that the interest matters one way or the other. paul

The interest paid is a waste of the monetary sovereign's ability to create new money without price inflation and is a form of "corporate welfare" according to Professor Bill Mitchell.

paul said...

"The interest paid is a waste of the monetary sovereign's ability to create new money without price inflation and is a form of "corporate welfare" according to Professor Bill Mitchell."

That too.

Jonf said...

Dan, I am still having a hard time with that. If you assume the deficit is a constant percent of GDP, then debt will continue to increase and will also increase as a percent of gdp bc it is cumulative. It seems you would have to find a mechanism for the deficit as a percent to be reduced to also reduce the debt as a percent of gdp. I could see that happening if the increase in GDP resulted in increased taxes.

If the increase in gdp went to pay off debt (ie more taxes) and if interest were lower than that increase then the percent would likely stabilize or even be reduced.

I wish we had an example to work through. This whole thing gives me a headache. Dolan is a pain in the ass. Geez what the hell is Randy telling him?

Best case, pay the damn stuff off. It is not like a household. Our political class would then have nothing to fight about.

Jonf said...

We don't pay much interest on short term tsy anymore. I wonder why anyone would want it. It is little more than stuffing it in your mattress. OTOH longer maturites are good investments for pension funds and a good place to park funds, like the Chinese and Japanese do. If we eliminated the debt they would have to park it in savings accounts or spend it.

frlbane said...

If we eliminated the debt they would have to park it in savings accounts or spend it. Jonf

If pensioners end up needing welfare we should just give it to them openly and not disguise it as interest payments.