Where is the money going to come from?

Megan represents responsible economic management, which means that she follows more-or-less textbook micro and macro and has the concerns common amongst DC-centric administrators. It's a mix of Chicago-style modeling with upstate New York pragmatism and the sweep of a DC policy wonk.

Recently she wrote a reasonable piece about why worrying about growth was not enough, you also need to worry about the deficit:

So why are people focusing on the tedious and painful business of austerity, when growth would be so much better?  For the same reason you've probably opted to pay off the Mastercard, rather than waiting until you have time to publish a bestselling novel: it's not so easy to deliver robust economic growth on demand.  Whatever you may have heard, no one has a plan in their pocket to increase the trend rate of economic growth--indeed, so far we've failed to get it back to the levels that preceded this "one time factor".  Telling budget wonks that "we need more growth" is a bit like telling a cancer patient "you need more health".  I mean, yes, Dr. Insight, but can you be more specific?

To be sure, we do know how to boost growth in the short run: borrow a bunch of money and throw it into the economy.  But this is exclusively a short term strategy.  Moreover, stimulus doesn't fix our budget problems; it increases them.  The current federal tax take is somewhere south of 20% of GDP.  That means that for stimulus to pay for itself, budget-wise, it needs to have a multiplier of 5--which is to say that every dollar the government spends must generate $5 worth of GDP growth.  Recent estimators of the multiplier during the Great Recession were more like 1.5, which means that for every dollar we spent on stimulus, we generated an additional 10 cents in tax revenue.  This is not a financing strategy that can be kept up forever.  A lot of liberals seem to be thinking of stimulus the way that some conservatives think of tax cuts: as a sort of perpetual motion free money machine.  There is no such thing.

This is all reasonable and responsible and something that people from both sides of the political aisle would broadly agree with. It is also, however, wrong. Currently, the output gap in the US is not coming because we aren't inventing new iPhones, it's coming because of a lack of aggregate demand. We have a lack of aggregate demand because the private sector's savings desire is not being met. The private sector's savings desire is not being met because the Government is not printing the money people want to put in their bank account, so they are trying to save from each other and, of course, as a sector cannot. The Government is not printing the money people want to put in their bank because it thinks it 1) cannot, 2) if it does, it will inevitably result in inflation, and 3) even if it does, it will need to pay it all down someday and the number is already so big.

None of this is true. Fiat currency is a marker of sovereign power, and a sovereign which chooses to tax needs to supply currency the same way that a sovereign which chooses to imprison needs to issue laws. A failure to print (and unprint) is a failure to rule, and is ultimately the irresponsible position to take.

Today's bad GDP number provoked another article, where Megan sees the aggregate demand problem but does not see the solution which sits between her two pieces.

The good news, such as it is, is that personal consumption spending and investment were humming along, growing 2.2% and 8.4%, respectively.  The boost in personal spending was driven mostly by durable goods, which probably means that people are reaching the limits of hoarding--they've pushed the old car along an extra five years, put up with the oven that doesn't always work, and gone without a dishwasher, but they're now having to replace some stuff.  

In theory, that can touch off recovery, as production eventually ramps back up, and rising confidence ripples through the economy.  (Paul Krugman had a great explanation of this a while back, but I can't find it.  Curse your prolific output, Professor Krugman!)  But in the context of an otherwise lackluster GDP report, this is worrying in the short term: people aren't buying because they have more confidence in their future, but because they feel they have absolutely no choice.  We don't want to be in a place where people reluctantly pry open the piggy bank only because the old clunker is finally lying smoking in the driveway; we want an economy where people feel that it is safe to buy a new car, because they are likely to have a job in three years.

Businesses hire when they have customers. Business have customers when the customers have money they are willing to spend. Customers have money they are willing to spend when their piggy banks are nice and full. Their piggy banks become nice and full when the Government prints money to put in their piggy bank. Cannot come from anywhere else.

(To the pedants out there, and you know who you are, note that I am speaking in the context of the US case, and by "money" I mean net financial assets (equity) denominated in US$, by "Government" I mean the US Government and am assuming that the Treasury and Fed can act in tandem with each other and that Congress will govern, and by "business" and "customers" I mean and non-US Govt sector which would include non-US businesses and individuals who wish to transact in US$ as their specie of choice).

Residential Real Estate is the Credit Cycle

Sankowski finds the Ed Learner paper and says:

I’ve been thinking a lot about this over last few weeks when I have the chance to think. It seems like we are on a real estate monetary standard. Much like how we can use assets like gold to create a commodity money system, it seems like we operate our current monetary system as a real estate standard.

Banks create money against real estate assets. We use this money in our day-to-day transactions, without much thought about what stands behind this money, but most loans are for residential and commercial real estate.

I'm not sure I'd go as far as that, but I do think that the residential real estate market is the primary mechanism through which monetary policy has an effect. When people buy a house, they look at their monthly payments, not the cost of the house or how leveraged they become.

Institutional role of the Federal Reserve

It's been interesting to see people explore the legalities and procedural norms around the $1T coin. SRW has a good round up here and then slips in his editorial:

Kevin Drum and John Carney argue (not persuasively) that courts might find this illegal or even unconstitutional, despite clear textual authorization. For an executive that claims the 2001 “authorization to use military force” permits it to covertly assassinate anyone anywhere and no one has standing to sue, making the case for platinum coins should be easy-peasy...

I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious...

The economics of “coin seigniorage” are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling...

To me, the $1T coin won't fly for the same reason that a Republican Whitehouse, Congress, and Senate won't be able to disband the State Department it upsets the informal governance structures established by the agencies who actually run Washington DC. Presidents, Senators, and Members of Congress come and go, but the career bureaucrats who staff the agencies are forever.

The Federal Reserve is the currency issuer in the current monetary structure. If the Treasury can mint the coin, then they usurp this core function from the Fed and it's not clear to me that either of them want to disrupt the institutional arrangement they have enjoyed for about 80 years. And the debt ceiling is not an institutional quirk, it is a core plank that supports the concept of limited Sovereignty which is at the heart of the Democratic political system. Gulliver binds himself.

Why the Whitehouse was right to reject the platinum coin

Mosler is concerned that the White House rejecting the platinum coin idea will hurt the economy, because it makes it more likely that the debt ceiling will remain in place, and therefore the non-US Govt sector will not be able to accumulate the additional savings it desires.

The economy hitting the debt ceiling and going cold turkey to a balanced budget is a far more catastrophic event than even going over the full cliff would have been, as it disables the ‘automatic fiscal stabilizers’ and instead triggers a pro cyclical downward spiral in output and employment. That is, when the $25 billion/week spending cuts kick in and the economy slows, the falling tax revenues mean spending has to be cut more, nor can total spending on unemployment ‘automatically’ go up, etc. 

Nevertheless, the White House rejected the idea because 1) fundamentally, the world continues to be out-of-paradigm and the Fed, Treasury, Harvard, and Princeton economics departments believe that the Govt needs to be able to tax or borrow in order to spend, and does not understand that spending is what creates the net financial assets which can then be taxed back or spent on bonds in the first place, and 2) the Treasury and Fed are responsible, stable Government entities with well established working relationships and procedures with each other, and will fundamentally not risk this to appease some transient executive. And the executive branch is always very transient (see the Crossman Diaries).

Update: Megan's surprised that it was the agencies which put their foot down on this. I am not.

JP Koning Delivered...

It took a while, but here you go: The final draft on Fed-Treasury overdrafts.

This was in reference to this old thread, if you can believe.

Trillion-Dollar Coin and NGDP targetting

Ever since I was introduced to MMT, I've been surprised by which elements of it have been adopted either into the popular press, or the academic mainstream, and which have not.

On the academic front it's been a non-started. The Sumner NGDP proposal and associated futures market have gained the most traction, despite the fact that any sort of expectations-only manipulation lacks a mechanism and relies on the Tinkerbell effect, and NGDP futures are simply unworkable.But NGDP targetting is a logical extension of the Monetary models that currently defined academic macro.

On the popular front, it's been Beowulf’s $1T coin of all things. Mosler was mentioned, but nothing about MMT, about how fiat currency works, vertical or horizontal money, etc. I think it's caught traction because it's something that, at least in theory, one political party can use to best the other.

All politics are local. All paintings are self portraits.

Social Security is not underfunded

In my last post, I spoke about how the payroll tax holiday was the best part of the stimulus program, and it's a shame that element was not extended. White Collar Investor, a very sensible financially astute individual, lays out the common reasoning for one way in which the tax holiday was not popular:

Social Security Funded Again

The employee portion of the Social Security tax was cut from 6.2% to 4.2% two years ago as an economic stimulus, then extended through 2012.  Now I liked the extra $2K in my pocket as much as the next guy, but the truth is this was a dumb idea.  We took a popular program that was already underfunded and instead of saving it by cutting benefits a little, we cut the existing funding for it.  That was idiotic in my opinion.  This was eliminated in the fiscal cliff deal, restoring funding for a good program.  This will raise everyone’s taxes ($1000 per year for a worker with a taxable income of $50K per year) and will raise taxes on most doctors by $2274 (double that if you’re in a two-doc family) but the truth is this tax increase actually needed to happen.

Social Security is not underfunded, as all it does is have the currency issuer issue currency (which it can do at any time) and transfer that to currency users. It has no obligation as to what the user will be able to do with that currency. By failing to meet the demand that currency users have for currency, we see high unemployment (or labor being saved instead of currency if you prefer) and therefore, there are less goods available for social security recipients to trade their currency units for. Net net, everyone is worse off.

Fiscal Cliff averted!

Happy New Year!

I think Mosler had the best comment on the recent deal which averted the fiscal cliff:

So the main thing that happened was my payroll tax holiday expired (I read that this was the only bipartisan bill passed into law in the last 4 years), which will reduce the average family’s take home pay (both working) by over $200/month.

That’s a lot, and its highly regressive. And about as high multiple as you can get, with a lot of that income is leveraged into car payments and mtgs. and other debt service.

The payroll tax holiday was the most stimulative part of the Obama administration's last fiscal program, and in my opinion, represents the best way to manage the balance sheet recession the US is currently in. However, politically, a payroll tax holiday looks as if it is undermining the Social Security program, which is a problem even though it is not true. In addition, this sort of broad based recapitalization doesn't benefit particular constituencies, and thus loses some of its political sparkle through that channel as well.

$200/month is a lot. It's a car payment.