Allan Sloan is a conscientious columnist with whom I occasionally have serious disagreements. The finances of Social Security is one of those occasions.
Sloan’s Fortune column this week provides one of those occasions. The focus is the deterioration in the near-term projections for Social Security. Sloan compares the 2011 Social Security Trustees report with the 2012 projections from the Congressional Budget Office (CBO) and finds a worsening of $300 billion in the projected cash flow of the trust fund over the next five years. He argues that this strengthens the case for measures to shore up the program’s finances. There are three slightly technical points on Sloan’s analysis that are worth making and then one substantive point.
First, Sloan compares sources that use somewhat different assumptions when comparing the Trustees numbers with the CBO numbers. The 2011 CBO numbers would have shown a somewhat worse picture than the 2011 Trustees numbers. If we compare the 2012 CBO numbers with the 2011 CBO numbers we can see the extent to which the situation has deteriorated due to a worsening economic outlook.
This doesn’t change the picture hugely, but it does make the deterioration somewhat less severe. The difference in the projected shortfall for the years 2012-2016 is $240 billion rather than the $300 billion using the 2011 Trustees numbers as the basis for comparison. (The Disability Trust Fund is projected to be depleted in 2016, so CBO does not project revenue and spending in that year. I have imputed a shortfall of $45 billion, the same as the prior two years.)
A second item worth noting is that the deterioration is mostly on the revenue side. Sloan attributes the problem to higher-than-projected cost-of-living adjustments that resulted from the jump in oil prices. While this is a factor, most of the story is on the revenue side.
Source: CBO 2011 and 2012.
This matters because the main reason that revenue is projected to be lower in 2012 than in 2011 is that unemployment is now projected to be higher and wage growth is projected to be lower. This once again shows the importance for Social Security of having adults in charge of managing the economy. When the economy does badly, Social Security’s finances do badly (repeat 256,000 times).
The third point worth noting in this story is the extent to which the deterioration in the projections from 2011 to 2012 is due to the disability portion of the program. With my imputation for 2016, the worsening finances of disability accounted for $49 billion of the $240 billion deterioration in the program’s projections from 2011 to 2012. This means that a program that receives just 14.5 percent of the program’s revenue accounted for 20.4 percent of the deterioration in finances.
This is not a new story. The cost of the disability program has been rising considerably more rapidly than had previously been projected throughout this downturn. There are not conclusive answers as to why this is the case, but it seems pretty clear that a prolonged period of high unemployment is a big part of the story. In a strong economy, people who have various physical and psychological problems may be able to hold onto their jobs until retirement. (Most of the disabled are older workers.) In a weak economy many of these people may lose their jobs and be unable to find new ones. The moral of the story is again the need to have adults running the economy.
Finally there is the substantive issue about the urgency of a Social Security fix. I see little urgency for two reasons. The first reason is that at a time when we are still down close to 10 million jobs from where the economy should be, the first, second, and third priority of policymakers should be job creation. In principle, Congress and the president can do more than one thing at a time, but this is Washington that we are talking about.
The second reason why I see no urgency for a Social Security fix is that the program is still fundamentally sound. According to the latest projections from CBO we still have more than a quarter-century before the fund will first face a shortfall. Even after that date the program would still be able to pay more than 80 percent of projected benefits, which would be more than current beneficiaries receive.
The eventual fix for Social Security will inevitably involve some mix of revenue increases and benefit cuts. There has been a well-financed campaign over the last few decades to convince the public that the program’s finances are far worse than is in fact the case. (A payroll tax increase equal to one-twentieth of projected wage growth over the next four decades would be more than enough to keep the program fully solvent past the end of the century.)
The lack of confidence in Social Security’s finances created by this misinformation campaign may cause the public to accept much larger cuts than if they realized the program’s true financial state. Therefore it makes sense to delay any major changes in the hope that the public will be better informed about the program in the future. (Peter Peterson will eventually run out of money.)
So the word for the day is “relax” – Social Security is fine for long into the future. Folks should instead spend their time yelling about the lack of adequate stimulus, insufficient measures from the Fed, and an over-valued dollar.
Allan Sloan is a conscientious columnist with whom I occasionally have serious disagreements. The finances of Social Security is one of those occasions.
Sloan’s Fortune column this week provides one of those occasions. The focus is the deterioration in the near-term projections for Social Security. Sloan compares the 2011 Social Security Trustees report with the 2012 projections from the Congressional Budget Office (CBO) and finds a worsening of $300 billion in the projected cash flow of the trust fund over the next five years. He argues that this strengthens the case for measures to shore up the program’s finances. There are three slightly technical points on Sloan’s analysis that are worth making and then one substantive point.
First, Sloan compares sources that use somewhat different assumptions when comparing the Trustees numbers with the CBO numbers. The 2011 CBO numbers would have shown a somewhat worse picture than the 2011 Trustees numbers. If we compare the 2012 CBO numbers with the 2011 CBO numbers we can see the extent to which the situation has deteriorated due to a worsening economic outlook.
This doesn’t change the picture hugely, but it does make the deterioration somewhat less severe. The difference in the projected shortfall for the years 2012-2016 is $240 billion rather than the $300 billion using the 2011 Trustees numbers as the basis for comparison. (The Disability Trust Fund is projected to be depleted in 2016, so CBO does not project revenue and spending in that year. I have imputed a shortfall of $45 billion, the same as the prior two years.)
A second item worth noting is that the deterioration is mostly on the revenue side. Sloan attributes the problem to higher-than-projected cost-of-living adjustments that resulted from the jump in oil prices. While this is a factor, most of the story is on the revenue side.
Source: CBO 2011 and 2012.
This matters because the main reason that revenue is projected to be lower in 2012 than in 2011 is that unemployment is now projected to be higher and wage growth is projected to be lower. This once again shows the importance for Social Security of having adults in charge of managing the economy. When the economy does badly, Social Security’s finances do badly (repeat 256,000 times).
The third point worth noting in this story is the extent to which the deterioration in the projections from 2011 to 2012 is due to the disability portion of the program. With my imputation for 2016, the worsening finances of disability accounted for $49 billion of the $240 billion deterioration in the program’s projections from 2011 to 2012. This means that a program that receives just 14.5 percent of the program’s revenue accounted for 20.4 percent of the deterioration in finances.
This is not a new story. The cost of the disability program has been rising considerably more rapidly than had previously been projected throughout this downturn. There are not conclusive answers as to why this is the case, but it seems pretty clear that a prolonged period of high unemployment is a big part of the story. In a strong economy, people who have various physical and psychological problems may be able to hold onto their jobs until retirement. (Most of the disabled are older workers.) In a weak economy many of these people may lose their jobs and be unable to find new ones. The moral of the story is again the need to have adults running the economy.
Finally there is the substantive issue about the urgency of a Social Security fix. I see little urgency for two reasons. The first reason is that at a time when we are still down close to 10 million jobs from where the economy should be, the first, second, and third priority of policymakers should be job creation. In principle, Congress and the president can do more than one thing at a time, but this is Washington that we are talking about.
The second reason why I see no urgency for a Social Security fix is that the program is still fundamentally sound. According to the latest projections from CBO we still have more than a quarter-century before the fund will first face a shortfall. Even after that date the program would still be able to pay more than 80 percent of projected benefits, which would be more than current beneficiaries receive.
The eventual fix for Social Security will inevitably involve some mix of revenue increases and benefit cuts. There has been a well-financed campaign over the last few decades to convince the public that the program’s finances are far worse than is in fact the case. (A payroll tax increase equal to one-twentieth of projected wage growth over the next four decades would be more than enough to keep the program fully solvent past the end of the century.)
The lack of confidence in Social Security’s finances created by this misinformation campaign may cause the public to accept much larger cuts than if they realized the program’s true financial state. Therefore it makes sense to delay any major changes in the hope that the public will be better informed about the program in the future. (Peter Peterson will eventually run out of money.)
So the word for the day is “relax” – Social Security is fine for long into the future. Folks should instead spend their time yelling about the lack of adequate stimulus, insufficient measures from the Fed, and an over-valued dollar.
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That is what readers of a piece on the Fed’s recommendations for housing policy are likely to take away. At one point the article comments:
“More than perhaps any other federal agency, the Fed was established to operate independently of both the president and Congress so that it would be free of political pressures when judging what’s best for the economy.”
What is most extraordinary about the Fed is the fact that it includes the industry it oversees, the banking industry, with the ability to appoint members of its governing buddy. While other regulatory bodies, like the Federal Trade Commission and the Federal Communications Commission, are subject to influence by industry lobbyists, the 12 heads of the Federal Reserve Board’s district banks are essentially appointed by the banks.
These bank heads in turn play a direct role in setting monetary policy, with 5 of the 12 sitting as voting members of the Open Market Committee, the body that sets monetary policy. The other 7 also take part in meetings, but do not have a vote. The influence of the banking industry on the Fed’s conduct does make it more independent of democratic control, but it does not follow that it leads it to do what is “best for the economy.”
Also, those reading this article may conclude that the Post still has not heard about the housing bubble. At one point it told readers:
“These policies [the Fed’s low interest rate policy, coupled with its quantitative easing] should be making it easier for people to buy homes, launching a virtuous cycle of rising housing prices and fewer foreclosures.”
The housing bubble has been in a process of deflating for the last 5 and a half years. Nationwide, house prices are just now returning to their trend levels. No one has presented any research that suggests that house prices should return to their bubble-inflated levels as the Post’s comments seem to imply. In reality, we should expect house prices to stabilize near their current level and then roughly rise in step with inflation, as they have done for more than 100 years.
That is what readers of a piece on the Fed’s recommendations for housing policy are likely to take away. At one point the article comments:
“More than perhaps any other federal agency, the Fed was established to operate independently of both the president and Congress so that it would be free of political pressures when judging what’s best for the economy.”
What is most extraordinary about the Fed is the fact that it includes the industry it oversees, the banking industry, with the ability to appoint members of its governing buddy. While other regulatory bodies, like the Federal Trade Commission and the Federal Communications Commission, are subject to influence by industry lobbyists, the 12 heads of the Federal Reserve Board’s district banks are essentially appointed by the banks.
These bank heads in turn play a direct role in setting monetary policy, with 5 of the 12 sitting as voting members of the Open Market Committee, the body that sets monetary policy. The other 7 also take part in meetings, but do not have a vote. The influence of the banking industry on the Fed’s conduct does make it more independent of democratic control, but it does not follow that it leads it to do what is “best for the economy.”
Also, those reading this article may conclude that the Post still has not heard about the housing bubble. At one point it told readers:
“These policies [the Fed’s low interest rate policy, coupled with its quantitative easing] should be making it easier for people to buy homes, launching a virtuous cycle of rising housing prices and fewer foreclosures.”
The housing bubble has been in a process of deflating for the last 5 and a half years. Nationwide, house prices are just now returning to their trend levels. No one has presented any research that suggests that house prices should return to their bubble-inflated levels as the Post’s comments seem to imply. In reality, we should expect house prices to stabilize near their current level and then roughly rise in step with inflation, as they have done for more than 100 years.
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In his Economix piece this week, Casey Mulligan picks up on his theme from last week that unemployment insurance (UI) benefits may not boost spending in aggregate, since the money needed to pay benefits is withdrawn from other spending. He agrees with my earlier point that the money is not coming from current tax revenue, but rather from deficit financing, then says that:
“But that ‘financing channel’ still does not make the payments free from the perspective of today’s economy.
“Suppose the government has been borrowing the money to pay for unemployment benefits. It borrows money by selling bonds. The purchasers of those bonds have less to spend on something else.”
Actually, most or all of the money that would be used to buy the bonds is a reallocation from other savings, at least at a time like the present when the economy is in a serious downturn. In effect, bond buyers will use either deposits or sales of other assets (e.g. stocks or bonds of private companies) to buy up government bonds. This has no direct effect on their consumption.
In other times this could lead to an increase in interest rates, which would discourage other spending to some extent, however this effect is likely to be trivial or altogether non-existent in the current environment. Banks have vast amounts of excess reserves sitting idle. The government’s sale of bonds will likely pull in some of these excess reserves. If UI benefits are associated with a boost to growth, and therefore more total deposits, then the net amount of excess reserves in the system may decline slightly, but as long as we still have vast amounts excess reserves, the impact on the interest rate will be trivial, as will the impact on spending.
The extreme case can be seen when the Fed is the buyer of the bonds. In that case, there would actually be an increase in the excess reserves of the system as a result of the government’s sale of bonds, and therefore no increase, and possibly even a decrease, in interest rates. In that case, the government spending is a pure gain to demand and to the economy.
In this scenario, safety net spending boosts growth and employment. It does not impose a cost on the rest of us. More generally, it makes sense to think of UI benefits and other safety net programs as being like other forms of insurance. We pay some price for it in the good times — output is somewhat lower than it otherwise would be — so that we can be protected in the bad times.
This means that in the bad times (e.g. your house burns down) insurance is unambiguously beneficial. Whether it is providing good value over the good and bad times taken together depends on the exact conditions of the policy.
In his Economix piece this week, Casey Mulligan picks up on his theme from last week that unemployment insurance (UI) benefits may not boost spending in aggregate, since the money needed to pay benefits is withdrawn from other spending. He agrees with my earlier point that the money is not coming from current tax revenue, but rather from deficit financing, then says that:
“But that ‘financing channel’ still does not make the payments free from the perspective of today’s economy.
“Suppose the government has been borrowing the money to pay for unemployment benefits. It borrows money by selling bonds. The purchasers of those bonds have less to spend on something else.”
Actually, most or all of the money that would be used to buy the bonds is a reallocation from other savings, at least at a time like the present when the economy is in a serious downturn. In effect, bond buyers will use either deposits or sales of other assets (e.g. stocks or bonds of private companies) to buy up government bonds. This has no direct effect on their consumption.
In other times this could lead to an increase in interest rates, which would discourage other spending to some extent, however this effect is likely to be trivial or altogether non-existent in the current environment. Banks have vast amounts of excess reserves sitting idle. The government’s sale of bonds will likely pull in some of these excess reserves. If UI benefits are associated with a boost to growth, and therefore more total deposits, then the net amount of excess reserves in the system may decline slightly, but as long as we still have vast amounts excess reserves, the impact on the interest rate will be trivial, as will the impact on spending.
The extreme case can be seen when the Fed is the buyer of the bonds. In that case, there would actually be an increase in the excess reserves of the system as a result of the government’s sale of bonds, and therefore no increase, and possibly even a decrease, in interest rates. In that case, the government spending is a pure gain to demand and to the economy.
In this scenario, safety net spending boosts growth and employment. It does not impose a cost on the rest of us. More generally, it makes sense to think of UI benefits and other safety net programs as being like other forms of insurance. We pay some price for it in the good times — output is somewhat lower than it otherwise would be — so that we can be protected in the bad times.
This means that in the bad times (e.g. your house burns down) insurance is unambiguously beneficial. Whether it is providing good value over the good and bad times taken together depends on the exact conditions of the policy.
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In his column on the mortgage settlement last weekend Joe Nocera praised the fact that it would mean that more people would be able to stay in their homes and that some compensation will be paid to foreclosed homeowners in situations where the banks did not follow the rules. He also criticized those on the left who criticized the deal “before the ink was dry.”
Of course there was a reason to criticize the deal before the ink was dry. The settlement was announced before it was actually finalized. That meant that if the critics wanted to get their views into the same news cycle they had no choice except to criticize a settlement before the ink was even wet. Nocera’s criticism would be better directed at the attorneys general’s effort to manipulate the news coverage of the settlement.
There are many issues that can be debated about the settlement, but there are three big ones that stand out:
1) It is not clear what baseline is being used to determine how much is being paid. The banks are already doing some amount of modifications, principal reductions, and short sales. It is not clear how it will be determined that they are going beyond what they would have done anyhow as a result of the settlement. This means that it will be difficult to determine that the $17 billion in write-downs stipulated in the settlement have actually taken place.
2) The banks will be able to count write-downs of loans that they are servicing against this sum. These losses will come out of the pockets of the investors in mortgage backed securities, not the banks’ pockets. This means that the defendant in a civil case is effectively being allowed to pay its penalty with someone else’s money. This is at the least unusual.
3) It is far from clear that the foreclosure abuses that are the basis for the case have been put to an end. An audit of 400 recent foreclosures conducted in San Francisco County indicates that abuses are still pervasive. It is unclear that the servicers are prepared to change their practices and that the attorneys general will take further steps if they do not.
There are many other reasons for criticizing the settlement, but those are my big three. These points were not acknowledged in Nocera’s column praising the settlement.
In his column on the mortgage settlement last weekend Joe Nocera praised the fact that it would mean that more people would be able to stay in their homes and that some compensation will be paid to foreclosed homeowners in situations where the banks did not follow the rules. He also criticized those on the left who criticized the deal “before the ink was dry.”
Of course there was a reason to criticize the deal before the ink was dry. The settlement was announced before it was actually finalized. That meant that if the critics wanted to get their views into the same news cycle they had no choice except to criticize a settlement before the ink was even wet. Nocera’s criticism would be better directed at the attorneys general’s effort to manipulate the news coverage of the settlement.
There are many issues that can be debated about the settlement, but there are three big ones that stand out:
1) It is not clear what baseline is being used to determine how much is being paid. The banks are already doing some amount of modifications, principal reductions, and short sales. It is not clear how it will be determined that they are going beyond what they would have done anyhow as a result of the settlement. This means that it will be difficult to determine that the $17 billion in write-downs stipulated in the settlement have actually taken place.
2) The banks will be able to count write-downs of loans that they are servicing against this sum. These losses will come out of the pockets of the investors in mortgage backed securities, not the banks’ pockets. This means that the defendant in a civil case is effectively being allowed to pay its penalty with someone else’s money. This is at the least unusual.
3) It is far from clear that the foreclosure abuses that are the basis for the case have been put to an end. An audit of 400 recent foreclosures conducted in San Francisco County indicates that abuses are still pervasive. It is unclear that the servicers are prepared to change their practices and that the attorneys general will take further steps if they do not.
There are many other reasons for criticizing the settlement, but those are my big three. These points were not acknowledged in Nocera’s column praising the settlement.
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That’s the headline of a Washington Post piece that told readers that more than one quarter of the workers who have found new jobs in the recovery are working in temporary positions according to government data. (It also refers to private surveys that show a higher percentage.)
The only problem with this story is that employment in the temporary help sector is still down by almost 20 percent from its pre-recession level, as can be seen in the chart accompanying the piece. As Texas Governor Rick Perry says, “oops.”
That’s the headline of a Washington Post piece that told readers that more than one quarter of the workers who have found new jobs in the recovery are working in temporary positions according to government data. (It also refers to private surveys that show a higher percentage.)
The only problem with this story is that employment in the temporary help sector is still down by almost 20 percent from its pre-recession level, as can be seen in the chart accompanying the piece. As Texas Governor Rick Perry says, “oops.”
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The Washington Post told readers that the manufacturing industry is suffering from incompetent managers and therefore is not hiring as many workers as it should. According to the Post, managers don’t realize that it is necessary to raise wages to attract more workers and instead are whining that they can’t get the workers they need to fill vacancies.
While the Post describes the situation as a being a “shortage,” the data make it clear that the problem is simply incompetent managers. As managers should know, the way to get more workers is to offer higher wages, however this clearly is not happening in the manufacturing sector. The wages of production workers in durable goods sector has been trailing the rate of inflation for several years.
Change in Average Hourly Wage of Production Non-Supervisory Workers, Durable Goods Manufacturing
Source: Bureau of Labor Statistics.
The article reports that a skilled operator-programmer in one of the manufacturing sectors profiled in the article earns just $18-$28 an hour ($36,000-$56,000 annually). By contrast, last week the Post reported that even family practitioners earned almost $210,000 a year, while the median annual earnings for doctors in other specializations could be more than twice as high. If the managers of manufacturing companies do not understand how markets work, as the Post claims, then it is likely to seriously damage the future prospects for manufacturing in the United States.
The Washington Post told readers that the manufacturing industry is suffering from incompetent managers and therefore is not hiring as many workers as it should. According to the Post, managers don’t realize that it is necessary to raise wages to attract more workers and instead are whining that they can’t get the workers they need to fill vacancies.
While the Post describes the situation as a being a “shortage,” the data make it clear that the problem is simply incompetent managers. As managers should know, the way to get more workers is to offer higher wages, however this clearly is not happening in the manufacturing sector. The wages of production workers in durable goods sector has been trailing the rate of inflation for several years.
Change in Average Hourly Wage of Production Non-Supervisory Workers, Durable Goods Manufacturing
Source: Bureau of Labor Statistics.
The article reports that a skilled operator-programmer in one of the manufacturing sectors profiled in the article earns just $18-$28 an hour ($36,000-$56,000 annually). By contrast, last week the Post reported that even family practitioners earned almost $210,000 a year, while the median annual earnings for doctors in other specializations could be more than twice as high. If the managers of manufacturing companies do not understand how markets work, as the Post claims, then it is likely to seriously damage the future prospects for manufacturing in the United States.
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The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.
The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal.
The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.
The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal.
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Thomas Friedman gave readers his pseudo endorsement of a candidate for president today. The person is David Walker, who headed up the Government Accountability Office from 1998 to 2008 before leaving to take the helm as president of the Peter G. Peterson Foundation. He later left that organization to head up another Peter Peterson funded venture.
Walker has been in the public over for more than a decade as a result of his crusade against the government budget deficit. In fact, he led a “fiscal wake-up tour” around the country in the years 2004-2008 to try to call attention to the problem of the budget deficit.
The great irony of this tour is that the deficit was not actually a big problem at the time, falling to just over 1.0 percent of GDP by 2007. The real problem facing the country was the housing bubble, which was growing ever larger. Unfortunately, people like David Walker and his merry band of deficit hawks, financed by the likes of Peter Peterson, sucked up much of the oxygen for coverage of economic issues. There were many news shows and stories devoted to their apocalyptic warnings of budget doom. There was no time to waste talking to people yelling about things like an $8 trillion housing bubble.
Of course one of the ironies of this story is that the bursting of the housing bubble led to an economic collapse which resulted in much bigger deficits than anything that Walker and his crew ever warned about. One of the other ironies is that being completely wrong about the nature of the problems facing the economy does not seem to have affected Walker’s standing in public debates one iota, at least it sure hasn’t in Thomas Friedman’s world.
Thomas Friedman gave readers his pseudo endorsement of a candidate for president today. The person is David Walker, who headed up the Government Accountability Office from 1998 to 2008 before leaving to take the helm as president of the Peter G. Peterson Foundation. He later left that organization to head up another Peter Peterson funded venture.
Walker has been in the public over for more than a decade as a result of his crusade against the government budget deficit. In fact, he led a “fiscal wake-up tour” around the country in the years 2004-2008 to try to call attention to the problem of the budget deficit.
The great irony of this tour is that the deficit was not actually a big problem at the time, falling to just over 1.0 percent of GDP by 2007. The real problem facing the country was the housing bubble, which was growing ever larger. Unfortunately, people like David Walker and his merry band of deficit hawks, financed by the likes of Peter Peterson, sucked up much of the oxygen for coverage of economic issues. There were many news shows and stories devoted to their apocalyptic warnings of budget doom. There was no time to waste talking to people yelling about things like an $8 trillion housing bubble.
Of course one of the ironies of this story is that the bursting of the housing bubble led to an economic collapse which resulted in much bigger deficits than anything that Walker and his crew ever warned about. One of the other ironies is that being completely wrong about the nature of the problems facing the economy does not seem to have affected Walker’s standing in public debates one iota, at least it sure hasn’t in Thomas Friedman’s world.
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In a newspaper that relies on the same old crew of reliably wrong experts for the vast majority of its economic reporting, it’s good to see this piece by Dylan Matthews on Modern Monetary Theory (MMT). I’ve had many people ask me my assessment of MMT.
I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.
I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.
I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.
I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.
Addendum:
There a lot of good comments here. I don’t have time to respond to all of them, but I will just grab a couple.
Paul,
You’re not disputing that Keynes thought we could affect aggregate demand by the lowering the value of the currency, you seem to be arguing that he didn’t think it was appropriate to do so. I would certainly agree that under some circumstances it would be inappropriate, but the idea that it would be at all times inappropriate seems absurd.
If a slow growing country had a current account deficit equal to 20 percent of GDP, should it do nothing to try to correct it by lowering the value of the currency? I have not read everything that Keynes wrote, so maybe somewhere he says that, but if he did, then I would have to disagree.
There is a clear logic to try to keeping trade imbalances in check. Resources will be very poorly used if they are diverted from countries where investment gives high returns to countries where investment gives low returns. Also, paths of growth are not easily reversed. If the U.S. has a path of growth that is based on other countries giving us 20 percent of what we consume and then for whatever they opt to change this practice (e.g. they start using this money domestically) then it can lead to very serious disruptions to the U.S. economy.
So, I don’t think Keynes had the view that any level of current account deficit/surplus was just fine, but if he did, then he was mistaken.
There is no disagreement on the point on the monetary channel:
“If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case.”
Of course, I was not advocating using the monetary channel alone, so I’m in complete agreement with Keynes here.
Peter,
I’ve read both Godley and Lerner’s work (not all of it). I like much of what I’ve read, but i’m afraid that I don’t really see where it differs from Keynes.
Eric,
Good meeting you also. Channel 2 is indirect, but can be strong and certainly has been a help in this downturn. Channel 3 only in a vague sense requires the rest of the world to go along. The Fed can buy vast quantities of foreign currencies (e.g. trillions of dollars) just as they buy vast quantities of dollars. This can force them to hold enormous of dollars purchased at an over-valued price in order to maintain the value of their own currency. They might opt to keep buying dollars, but they could at the end of the day pay an enormous price for doing so.
In a newspaper that relies on the same old crew of reliably wrong experts for the vast majority of its economic reporting, it’s good to see this piece by Dylan Matthews on Modern Monetary Theory (MMT). I’ve had many people ask me my assessment of MMT.
I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.
I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.
I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.
I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.
Addendum:
There a lot of good comments here. I don’t have time to respond to all of them, but I will just grab a couple.
Paul,
You’re not disputing that Keynes thought we could affect aggregate demand by the lowering the value of the currency, you seem to be arguing that he didn’t think it was appropriate to do so. I would certainly agree that under some circumstances it would be inappropriate, but the idea that it would be at all times inappropriate seems absurd.
If a slow growing country had a current account deficit equal to 20 percent of GDP, should it do nothing to try to correct it by lowering the value of the currency? I have not read everything that Keynes wrote, so maybe somewhere he says that, but if he did, then I would have to disagree.
There is a clear logic to try to keeping trade imbalances in check. Resources will be very poorly used if they are diverted from countries where investment gives high returns to countries where investment gives low returns. Also, paths of growth are not easily reversed. If the U.S. has a path of growth that is based on other countries giving us 20 percent of what we consume and then for whatever they opt to change this practice (e.g. they start using this money domestically) then it can lead to very serious disruptions to the U.S. economy.
So, I don’t think Keynes had the view that any level of current account deficit/surplus was just fine, but if he did, then he was mistaken.
There is no disagreement on the point on the monetary channel:
“If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case.”
Of course, I was not advocating using the monetary channel alone, so I’m in complete agreement with Keynes here.
Peter,
I’ve read both Godley and Lerner’s work (not all of it). I like much of what I’ve read, but i’m afraid that I don’t really see where it differs from Keynes.
Eric,
Good meeting you also. Channel 2 is indirect, but can be strong and certainly has been a help in this downturn. Channel 3 only in a vague sense requires the rest of the world to go along. The Fed can buy vast quantities of foreign currencies (e.g. trillions of dollars) just as they buy vast quantities of dollars. This can force them to hold enormous of dollars purchased at an over-valued price in order to maintain the value of their own currency. They might opt to keep buying dollars, but they could at the end of the day pay an enormous price for doing so.
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It doesn’t seem so from an article that it ran on export subsidies offered in the form of loan guarantees from the export-import bank. The article highlights the purchase of Boeing plans with government subsidized loans by an Indian airline. The Indian airline then drove Delta out of a key route.
While the article talked to several economists on the wisdom of using loans guarantees to subsidize exports, it never once mentioned reducing the value of the dollar as an alternative. In fact, a decline in currency values is supposed to be the mechanism through which countries adjust to trade deficits in a system of floating exchange rates. For this reason, it is bizarre that the issue was never raised as an alternative route toward increasing net exports.
The article also implied that these loans are somehow a unique way in which the government picks winners and losers. The government has a wide range of policies (e.g. patent protection, too big to fail bank subsidies, protection for highly paid professionals) that put in a situation of picking winners and losers. This is a standard practice in the U.S. economy, not an exception as the Post article implies.
[Thanks to Joseph Seydl for the tip.]
It doesn’t seem so from an article that it ran on export subsidies offered in the form of loan guarantees from the export-import bank. The article highlights the purchase of Boeing plans with government subsidized loans by an Indian airline. The Indian airline then drove Delta out of a key route.
While the article talked to several economists on the wisdom of using loans guarantees to subsidize exports, it never once mentioned reducing the value of the dollar as an alternative. In fact, a decline in currency values is supposed to be the mechanism through which countries adjust to trade deficits in a system of floating exchange rates. For this reason, it is bizarre that the issue was never raised as an alternative route toward increasing net exports.
The article also implied that these loans are somehow a unique way in which the government picks winners and losers. The government has a wide range of policies (e.g. patent protection, too big to fail bank subsidies, protection for highly paid professionals) that put in a situation of picking winners and losers. This is a standard practice in the U.S. economy, not an exception as the Post article implies.
[Thanks to Joseph Seydl for the tip.]
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