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Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off  hand, and I may have forgotten something, I couldn't think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.

So, here's my version, revised, a second time, after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org, a second time. Thanks to Tadit Anderson, Mitch Shapiro, Devin Smith, Dan Kervick, Nihat, James M., MRW, Marvin Sussman, joebhed, Clonal Antibody, Calgacus, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Charles Yaker, Lambert Strether, maltheopia, Ian S., Tyler Healy, PG, for contributing significantly to the critical evaluation of the earlier versions.

More comments, criticisms, recasting in more effective form, are all welcome. But this will be my last round of crowd-sourced revision. I hope all readers will feel free to use this version as they think is best to spread the MMT message about fiscal responsibility. To boil that message down: fiscal responsibility is about the impact of fiscal policy on people; it's not about the old time religion of its impact on a supposedly limited supply of gold standard-based money.

The Narrative

The first four points in the narrative offer some conclusions.

-- Austerity requiring budget surpluses cannot work in the United States economy, because surpluses, defined as tax revenue exceeding spending, destroy money in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss of financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t  Ian S.)

-- It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more money from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, a declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government's ability to sustain greater levels of deficit spending producing outputs of real social value without triggering inflation.

-- REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

-- REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let's put an end to the domination of Washington by that kind of malpractice. Let's put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector money and jobs than would be the case if we either did nothing or increased the deficit and created a full employment budget.

-- Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS's funding guaranteed in perpetuity  by Congress, just the way it guarantees funding for Medicare Parts B and D.

-- The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

-- More generally, there is no entitlement funding crisis in the United States, except a political crisis where US politicians are determined to ignore their constituents and cut back on an already inadequate safety net either because they believe in, or want others to believe in false ideas about fiscal responsibility and nature of the Government as a giant household.

And the rest of it provides the reasoning underlying them.

-- The US Government can't involuntarily run out of its own fiat money (USD), since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

-- Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that's why they can run out of Euros. The US is the issuer of Dollars; so it's supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that's why it can't become Greece, Ireland, or any other Eurozone nation.

-- In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector, and destroys it. When it creates money, it adds it to the private sector. A deficit is the net amount of money creation minus the amount of destruction due to taxation. A surplus is the net amount of money destruction minus the amount of creation due to Government spending. (h/t Golfer1john)

-- Since this is the case, it's clear that present proposals to reduce the deficit by an average of $400 Billion/year over the next 10 years are sure to remove money or Treasury securities (assuming deficit spending is accompanied by issuing debt) from the private sector that otherwise would have been created there in the absence of deficit reduction.

-- The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

-- The Treasury can keep accepting deposits (“borrowing money”) and issuing securities if we want it to. There's no limit on this Government “credit card,” just as there is no limit to the deposits a bank can accept, except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money, due to a failure to raise the debt ceiling between now and March 31, 2013, it will clearly be the fault of the Congress for refusing to grant further authority to the Treasury to elicit and accept further deposits, also known as refusing to raise the debt ceiling!

-- Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on them  by buying securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in the interest-bearing “savings accounts” known as Treasury securities.

-- Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can't control the money supply. But it does control the price of it with its interest rate targeting.

-- The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won't, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.

-- The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt. One way to do this is through Proof Platinum Coin Seigniorage (PPCS). A second way is through subordinating the Fed to Treasury and then using the Fed's ability to create money out of thin air to pay back all debt instruments (“savings account balance”) when they fall due. The first way is legal now. The second is constitutional, but would require politically unlikely action by Congress to authorize it.

-- A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government's capacity to spend Congressional Appropriations at all.  Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It's about its impact on people!

-- The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government's supply is a matter of its decisions alone.

-- However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.

Conclusion

Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation, and smack of a campaign to create hysteria among the public. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crises is one of a failing economy and growing economic inequality in which only the needs of the few are served, and also one of lack of political desire or will to solve these real problems. MMT policies can help to bring an end to the first economic crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to the political action we need to solve the political crisis and eventually toward fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

(Cross-posted from New Economic Perspectives.)

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Comment Preferences

  •  Joe, great article. I found this version easier (1+ / 0-)
    Recommended by:
    psyched

    to read in a couple of places.  Could be that it's the second time I read it, not sure.

    But it's very clear.  Well done.

  •  Question: (1+ / 0-)
    Recommended by:
    BrowniesAreGood

    define debt

    Define deficit

    Please :)

  •  SS (0+ / 0-)

    Actuaries, they are supposed to create a conservative estimate of future finances.

    This does not necessarily mean a realistic estimate. I've tracked the low cost scenario over 7 years, and that is probably the most realistic info on SS. And there is still nothing wrong that a good economy cant fix.

    SO..... a lot of folks bandy about, "lift the cap" and such, based on overly conservative estimates......

    ...... that for instance requires 20 years of economic downturn to be true.

    Requires the lowest estimate of workforce growth. (.2% is an outlier)

    Requires an extraordinary low estimate of GDP growth.

    Requires wage growth to stay below inflation for 20 years.

    Requires a minimum of 25 million/15-17
    % of people to never find full time year round work, going forward over 20 years.

    Yeah I know the SS crisis is phoney, but that section needs some re rod in the concrete.  

    Many sections read well.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Mon Nov 12, 2012 at 08:03:07 PM PST

  •  Great article. (3+ / 0-)
    Recommended by:
    jellyyork, Ian S, tonishiffman

    I like this idea in particular, I think it's an important meme:

    -- The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)
    I have argued repeatedly that the debt/deficit language associated with our currency is misleading. The debt is a choice politicians have made for us. This is made clear by the fact that, prior to a bond auction, the Fed floods the reserves with new cash created to execute repurchase agreements with its primary bond dealers. It is only after they make the new cash available that it is exchanged for debt instruments.

    Newly created dollars appear as a deficit on the government's books, but that is an artifact of accounting. The dollars are the government's IOU's, but they are not a general demand on the government's assets, they are simply a credit against taxes and other liabilities owed to the government. Creation of money to spend in excess of revenues is indeed a deficit, but it need not be synonymous with debt. It is, however, synonymous with increasing private sector wealth.

    •  The idea is (0+ / 0-)

      Warren Mosler's and the phrasing this one was motivated by a comment by PG on an earlier version. Have you read the 7 Deadly Innocent Frauds? If not, it's an indispensable MMT reference.

    •  Again, I gotta disagree (0+ / 0-)

      even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

      This is just wrong. Comparable savings accounts are called bank debts, bank liabilities.

      I have argued repeatedly that the debt/deficit language associated with our currency is misleading.

      Meh, about "deficit", it's not an important, Basic English word. But "debt" is. No, a thousand times no. It is misleading to NOT use the word "debt". It should be used more. I wrote a blogpost some time ago that said "Money is debt" is THE sentence of MMT, that encapsulates the theory in 3 words. I note that subsequently Wray's last MMP emphasizes this exact sentence many times. Old Surgeon, imho the way of talking you are tending to is a step backwards. It's on the way to thinking of money as thing, as a commodity, not as a relationship. It is not MMT.

      Creation of money to spend in excess of revenues is indeed a deficit, but it need not be synonymous with debt.

      Started this conversation before with you, but creation of money is always synonymous with debt, because money is a type of debt.  See my older comment

      Mosler, MMT academics never say things like "artifact of accounting" because that's the focus of the theory - getting the accounting right and understanding what it means, the reality it is describing.  IMHO, such phrases indicate incomplete understanding.

      Government debt is not debt in the conventional sense of the word - it is the governments IOU issued against the aggregate of the government's UOME.

      Absolutely NO to the first clause! Government debt is the most conventional sort of debt. It is absolutely the same type of (not-)thing as private debt.  The second clause description is exactly how private sector debt works too.  It is just that the government is bigger than any private sector entity. That's ALL. There is no formal, theoretical, abstract difference between government and private sector debt. See Mitchell-Innes.   See Wray's last MMP on the nature of money, and his first few ones.

      To make government money or government debt "not debt", you have to redefine the word "debt" from its conventional, primary dictionary meaning, synonymous with liability, obligation, promise etc. This is a pointless and misleading exercise, even if you do it consistently. I know that I'm a broken record about this point. But it is a very dangerous and all too common mistake.

      •  You're right, thank you (0+ / 0-)

        My error is I am making "debt" synonymous with something that bears interest. As you point out, that need not be the case. Nevertheless, I still think the distinction is an important one. I am just at a loss presently to find the appropriate words. A debt that is static, such as cash, vs. a debt that grows, such as bonds and loans. It is a fundamental difference in the nature of the debt relationship.

        When I said

        Creation of money to spend in excess of revenues is indeed a deficit, but it need not be synonymous with debt.
        My point was that it need not be synonymous with interest bearing debt, rather than debt per se. This was to reiterate the fact that the creation of the money preceded the creation of the bond, and encumbering the non-interest bearing relationship of the money with a promise to pay interest is a political choice, not an economic imperative. I believe this is true.
  •  Perhaps some mention . . . (0+ / 0-)
    -- A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government's capacity to spend Congressional Appropriations at all.  Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It's about its impact on people!
    of the following:
    12 USC § 225a - Maintenance of long run growth of monetary and credit aggregates

    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

    (my bold)
      •  Because it is an established public purpose (0+ / 0-)

        enshrined in law, and it furthers our argument. "It's what we're supposed to be doing already!" is a compelling meme, telling us that society has thought about this long and hard, and it has incorporated the goals of maximum employment, stable prices, and moderate long-term interest rates into its policy language. Unfortunately, that incorporation appears more aspirational than real, but that's where the battle line are drawn.

        •  The problem is (0+ / 0-)

          that a mandate was placed on the Fed that it is incapable of achieving. It's really up to fiscal policy and Executive to deliver full employment. So, I don't want to add the myth that the "independent Fed" can help with this.

          •  I see your point. (0+ / 0-)

            Is that the only place the legal framework has made the concession to full employment?

            •  There is also (0+ / 0-)

              the Humphrey-Hawkins Act of 1978 It was a bill that James Galbraith worked on. However, some of its aims were contradictory to one another.

              The Act explicitly instructs the nation to strive toward four ultimate goals: full employment, growth in production, price stability, and balance of trade and budget. By explicitly setting requirements and goals for the federal government to attain, the Act is markedly stronger than its predecessor. (An alternate view is that the 1946 Act concentrated on employment, and Humphrey-Hawkins, by specifying four competing and possibly inconsistent goals, de-emphasized full employment as the sole primary national economic goal.)
              My own view is that the highlighted version is what rally happened. In other words, when you try to please everybody, you please nobody, and get nowhere.

              If the authors of the bill had left out balancing trade and budget out of the act, it would have been an act that worked. However, those two were put in there to please people who viewed Federal Government finances as being equivalent to State Government finances or as household finances.

  •  You have honed (0+ / 0-)

    it down very well.  Thanks for keeping at it and being so inclusive of comments!  It's amazing to me how something so simple in the basics can get so entwined in political manipulation--to the point that a lot of folks aggressively resist how to simply improve their lives.

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