Monday, August 15, 2011

Large government per se should not be the political or economic goal

Paul Krugman lays out a hypothetical scenario, mainly to refute the MMT position that money-financed deficits are not much different from bond-financed deficits. He tries to point out that money-financed deficits will eventually lead to inflation.

Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

Let's question the assumptions here one by one. In this hypothetical scenario where private demand has already revived, why does the government still feel the need to commit to spend equal to 27 percent of GDP? What kind of government spending is so necessary that the government will risk possible hyperinflation or mass aversion to its bonds by insisting on spending 27% of GDP?

Since we're on the realm of FICTION anyway, let's assume that in this full employment scenario (let's dream and pretend this is next year), US GDP goes from 15 trillion to 30 trillion. This means the government commits to spend 8.1 trillion. What's with the 27%?

The point of insisting on government expansion right now is because the private sector is in retreat. But when the private sector gets back in full bloom, we should all be insisting on government scaling back. I don't think anybody's goal, MMT or not, is for government to become permanently big. Large government by itself is not a virtue, but a necessary countervailing mechanism, for when both private demand for funds, and its supply, are anemic. When this has reversed, people should insist that private sector lead the way. If enough new funds are being created and demanded by the private sector, we can have a string of balanced government budgets, and believe it or not, even budget surpluses.

Whether money-financed or bond-financed, adding excess government demand to an already strong private demand will lead to inflation. Why advocate big government spending in such a scenario?

17 comments:

Mario said...

yup.

anti-government types are just scared to death of anything "government"...even in the face of abject poverty and crime, which also funnily enough would likely bring in more government involvement anyway...just in the form of a police and welfare state and/or black market. Nice!!!

Hans said...

I am afraid you described me to a "t" Mario...

Just remember, after nature death and disease government is the third leading killer of humans...

Under a MMT regime, the massive government spending should have by now, gotten the economy in the saddle and the rider out of town...

By the time government spending reaches the end user (non-producers) it is in the form of 30 cents on the dollar...

Oh yes, government the model of true efficiency...

Rogue Economist said...

There are people who want more government, and those who want less. I think MMT has no particular leaning as it is a purely technical description of how the monetary system currently works.

But I believe there's a time and place for more government, but you have to know what the purpose of expansion is. A valid purpose is helping restore full employment and aggregate demand when private sector initiative is lacking. But we should develop more metrics to know when government should start scaling back. For sure, when interest rates are already going through the roof or inflation is rising, government should scale back and not distort market forces. The goal is to make it easier for private sector to start employing again, not to compete with them.

Mario said...

agreed. It is a balance to be sure.

the bigger government people are afraid of corporations taking their future and health away from them while the smaller government people are afraid the government is going take their power and property away.

I for one already feel that all of that has happened, so I'm for changing things up all together and would like to start solving real problems with real solutions and staying flexible and free of party lines and rigidities so that I can follow logic and truth and efficiency/effectiveness as best I can. I don't think falling back into old political trenchlines works for us anymore and frankly (as far as I can see) I don't even think the trenchlines and platforms even apply to today's world very much at all (and I don't think people really get that yet).

more than likely any extreme is not wise to do, and most of the answers and best solutions are actually rather simple, logical, and balanced. I think the same goes for the "size" of government (whatever that means exactly needs to be specified as well of course).

Hans said...

The MMT math equation contain a "G" and it is not the gspot...

They view government as a essential part of the economy, whereas I do not..

Remember the CCCP, they had full employment as well..

Read WH Hutt released book and he raises serious questions about the efficiency of government induced full employment..

It is beyond the ability to control and regulate employment markets because of there massive complexity..

Tell me one government agency that could be held up as a model or compete in the private market..?

Damm it, why can not people accept what the Great Lincoln said: Government should do for the people that people can not do for themselves...

Those that need to substitute the market place with government, have simply run out of ideas..

Remember what your mother always said: wait until your father gets home...

Hans said...

http://mises.org/daily/5477/Hutts-Crushing-Blow-to-Keynes

Mario said...

Hans,

You're misunderstanding MMT.

MMT is not saying that government jobs need to replace private sector jobs. MMT is saying that ultimately it's the government's public purpose responsibility to provide full employment for its citizens if the private sector cannot. That's a far cry from the government hiring everyone. And in fact if MMT policy was utilized more cohesively the likelihood of more private sector jobs increases greatly b/c the private sector would be operating at a greater capacity which would mean that there's less slack for the government to have to pick up and employ and satisfy. Plus it's also possible for the jobs program to actually incorporate and utilize private sector companies sort of like intern work, temp work, and a part of a hiring process for companies that need extra help (all funded by the government's jobs program). This helps to prevent the
jobs program from becoming some type of government recruitment system where duties are just "created" to satisfy unemployed workers. Remember, by definition, there's enough real and valid slack in the economy to employ everyone doing something productive, otherwise there wouldn't be an output gap.

Also remember that in a different economy, MMT could just as easily be suggesting LESS government spending and possibly even a government surplus.

Austrian/Libertarians don't like either option though, b/c a government deficit means (to them at least) that the private sector is being crowded out and creating an inefficient communist-controlled economy while a government surplus means (to them) that the government is extending its powers and taking away personal property and wealth for constitutional reason. You can't have it both ways and still live in a modern society with laws and elections and representatives, etc. It's just not possible.

Better that Austrians/Libertarians resolve their interior conflicts with the existence of a government at all rather than attempt to debunk MMT on false and inaccurate grounds. Government is essential by definition for an economy b/c they set and maintain the monetary medium of exchange not to mention the laws and means for engaging with that exchange. It's just common sense and nothing radical or crazy or communist.

The Arthurian said...

Good post, Rogue. I wanted to comment while I was reading it, but in your conclusion you said what I wanted to say. Nice!

And an interesting exchange. Mario, you say, "And in fact if MMT policy was utilized more cohesively the likelihood of more private sector jobs increases greatly b/c the private sector would be operating at a greater capacity..."

But how does that work, exactly? What makes the economy work better than 'normal'?

Mario said...

@the arthurian

tax cuts primarily like a permanent fica suspension.

No greater involvement by the government PLUS increased nfa in the private sector.

Rogue Economist said...

Hans, during Lincoln's time, a great majority of people still lived off the land. Nobody really died of hunger if he didn't have a regular paying job. Just plant a potato in your backyard, and eat it.

Now it's not the case anymore. Nobody has land large enough to cultivate the basic food he needs to feed his family, so he needs a job to earn the money to buy it. There are no more cases of homestead, everybody has to buy his abode, or otherwise rent it. To be able to do so, he needs to earn income.

There's no way for us to get back to the idyllic past of Lincoln's time, when losing income merely means people go back to bartering what they make, eating what they sow, and living on what they build. Now you have to buy everything.

Nowadays, if a large proportion loses their job during a market correction, they will stop buying goods not immediately needed for basic survival. This causes a cascade of further job losses as companies lay off their employees to cover the lost sales.

Nowadays you need someone all powerful to provide everyone with the job and income to live a basic life - either an all powerful feudal lord - or a government that knows how to strike the right balance between creating income for the people via spending, and ensuring that the money has value enough to purchase an adequate supply of goods.

Hans said...

Mario, no matter to what degree any meddling in the employment market by government units, is bound to lead to failures or utter inefficiencies, whether they are
a principal employer or not...If market force can not or will not hire, there is a sound economic reason for it, something that government pol never factor or comprehend..

I am sorry, Mr Rogue, however I do not find your argument as valid, if so then the Bible is wrong too..

What the Great Lincoln said was sound then, is logical today and will guide future generations...

When government does for other people what they should have done for themselves, it takes the production from others...

Mario said...

well hans we all believe what we want to believe but the numbers don't lie. The private sector is not capable of employing and utilizing all available humans in our economy. You can't get a greater "inefficiency" and unemployed people in poverty can you? What is more inefficient and failed than this? Seriously. A jobs program isn't even a welfare program...it's a JOBS program where people would earn and work for their livelihood for crying out loud. How much can honestly "go wrong" in such a scenario? Seriously...tell me. I want to know what "failures and inefficiencies" will arise out of this according to you.

I guess in your world it just means that there's going to be alot of helpless, unemployed, and beyond destitute people in your society. It's a given and a fact of life. Done!

Never mind the fact that it doesn't have to be that way, it's completely preventable, and it's detrimental to our society to NOT change and work on remedying such a serious issue. It's like being sick and refusing to go the doctor to get better, b/c you think/feel that you need to cure yourself without any aid or intervention from any "outside" entity. What kind of "logic" is that exactly? If science and biology has shown us anything such a "world view" is masachistic, sadistic, illogical, and ultimately unsustainable for any living organism or colony on the planet.

The real question comes down to public purpose and if you think our society is better off with productive people that are able to provide for themselves and their family or if we are better off with unproductive people that are dying and starving and likely entering into black markets and crime just to survive and care for their loved ones. Is this really something to debate over? Seriously wtf?!?!

Personally I know where I stand on the issue. And I frankly find it disgusting to see people rally behind plastic ideals that are not accurate in the face of unnecessary abject poverty and suffering that can be solved in reasonable and sound ways that doesn't harm others or our economy...in fact quite the contrary it puts in a demand floor and output floor to help prevent and backstop further economic downturns.

In fact I've never heard of any respectable economist of any discipline ever debate the value of obtaining full employment in an economy, let alone attempt to argue the need to prevent full employment from occurring and somehow be able to justify that. Seriously wtf?!?!

It is a gross understatement to say that type of economic paradigm you are suggesting is out of touch with intelligent reality. In fact it is quite disruptive, reckless, and almost sabotaging in its effects and ramifications. I can't conceive of the type of mental construct required to support such a premise.

It's always so much easier to conform to plastic ideals from one's "armchair by the fireside" or from the pulpit of a great rhetorical speaker. Masses can follow just about anything...but that doesn't EVER make it valuable or true. History proves this time and again.

Mario said...

"it takes the production from others..."

no it doesn't Hans, b/c your not at full employment. It is mathematically impossible to have a society where an individual part of that society does not have a part or function to play. The very definition and existence of that individual and that society proves this.

Mario said...

"I am sorry, Mr Rogue, however I do not find your argument as valid, if so then the Bible is wrong too.."

sorry Hans that's completely fallacious and not true and actually a totally arbitrarily created correlation that does not exist in reality.

It's like saying, "Well if what YOU say is true then the DMV handbook is wrong too!" huh?!? That's completely illogical, unrelated, and fallacious.

The Arthurian said...

Mario, you say "A jobs program isn't even a welfare program...it's a JOBS program where people would earn and work for their livelihood for crying out loud. How much can honestly "go wrong" in such a scenario?"

I think the economy is a system and, if we want the economy to behave in some particular way, we do have to tweak our policy settings. But to be successful, we have to understand the rules of the system and obey them. This, I think, is where policy has failed for 40 years. Now you would continue that misunderstanding.

A jobs program in my view is a massive, fall-of-Rome style misunderstanding of the rules of the system. It is a direct assault on the unemployment problem. But that problem is not *the* problem. Unemployment is a result. It is a result largely of imbalances created by bad policy and misunderstanding the rules of the system.

Suppose "the jobs program" doesn't do any damage to the economy. Well then, if unemployment was *the* problem, then everything is fine. But if unemployment was a result of some other problem, which it is, then we have failed to fix that other problem, and it will arise again, almost immediately. Which it will.

And if "the jobs program" does do damage, then we are very soon worse off than before.

Mario said...

"But to be successful, we have to understand the rules of the system and obey them."

yes agreed. MMT, sectoral balances, and operational realities in our economy show us these rules and I totally support any and all policies that "obey them." However I get the sense that you aren't talking about these rules. So what "rules" are you talking about and what does it mean to "obey them"?

"This, I think, is where policy has failed for 40 years."

agreed completely. We fail to see MMT principles and proposals only far too often and far too much in our society. I couldn't agree more. We are dying of thirst while we sit in the kitchen right next to the sink and running tap.

"Now you would continue that misunderstanding."

wrong. Do we have a guaranteed jobs program in the US for anyone able and willing to work that pays $10/hr plus health benefits? No we do not. Therefore I am literally NOT continuing in the misunderstanding. By definition I am doing the exact OPPOSITE of what you are saying.

"A jobs program in my view is a massive, fall-of-Rome style misunderstanding of the rules of the system."

And your proof for this is what exactly....?? Did Rome have a jobs program or something? And are our economy's rules the same as Ancient Rome's? Please do tell...

"It is a direct assault on the unemployment problem. But that problem is not *the* problem."

Okay and that *real* problem is what exactly....??

"Unemployment is a result. It is a result largely of imbalances created by bad policy and misunderstanding the rules of the system."

True. And a jobs program is a good policy that would change all of that. So what's your point?

"But if unemployment was a result of some other problem, which it is, then we have failed to fix that other problem, and it will arise again, almost immediately. Which it will."

Okay so what is this other mystery problem?

"And if "the jobs program" does do damage, then we are very soon worse off than before."

Exactly how will a jobs program do damage to our society even if there is another "mystery" problem? How is putting people to work and giving them a means to survive and provide for themselves and their family and then progress from there in their abilities and opportunities "BAD" for an economy exactly? Sorry I just don't see that one.

Rogue Economist said...

Hans, people lived off the land during Biblical times too. Not so now. We live in a capitalist system where people need to earn income first before they can consume.

Arthurian, the jobs program in my opinion would be best instituted if coupled with a bit of industrial policy., i.e., support for local manufacturing, and trade constraints if need be. Much of the labour-intensive processes have already been outsourced away, and there are only so many people you can hire cutting down trees and caring for parks.

But if each country were to have a home-grown manufacturing niche cluster, you will have a labour-intensive employer with many knockon effects for labour in succeeding companies in the supply chain. Think Japan and Sweden. Japan would have an even greater unemployment problem if it did not have local world-beaters in manufacturing, and would have had less unemployment if it wasn't forced by globalization to shift many of its most labour-intensive processes away to China.