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How We Think About the Deficit is Mostly Wrong - MMT oped in the NYT


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  • Carlitos
    2017-10-05 11:55:48 PM
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    MMT's Stephanie Kelton wrote an op-ed in the NYT today that should turn heads. "Ho w We Think About the Deficit is Mostly Wrong." - https://www.nytimes.com/2017/10/05/opinion/deficit-tax-cuts-trump.html?module=ArrowsNav&contentCollection=Opinion&action=keypress®ion=FixedLeft&pgtype=article

    This is a Modern Monetary Theory introduction written for lay and mass audiences in language almost anyone can understand.

    Quoting liberally:

    "With their nine-page “framework,” President Trump and congressional Republicans have turned to tax cuts in a bid to get a victory on their policy agenda. Mr. Trump has promised to deliver “the biggest tax cut in the history of our country.”

    It achieved a rare feat of bipartisan agreement in Washington — worry from the left and the right about the plan’s potential to increase the deficit......

    "Are the proposed tax cuts a huge giveaway to the rich? Most definitely. Will they, as advertised, create a booming economy with benefits that trickle down to everyone else? I don’t think so. Mr. Trump’s plan will widen the country’s already dangerous wealth and income gaps, and because the gains go mostly to those at the very top, the tax cuts won’t do much to promote broad-based consumer spending or overall job growth.

    That’s enough to reject the plan. But it would be unwise to oppose tax cuts, or any other federal legislation, simply because they add to the deficit.......

    "To see why, we have to look beyond the government’s balance sheet. Think of it this way. Government spending adds new money to the economy, and taxes take some of that money out again. It’s a constant churning of pluses and minuses, and their minuses become our pluses.

    When the government spends more than it gets in taxes, a “deficit” is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy.........

    "......because there is so much misunderstanding, Americans are vulnerable to nationalist scare tactics that warn of the perils of relying on foreigners to pay our bills. The truth is, there’s no reason to worry about China (or any other entity) refusing to finance our deficits. In fact, we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.

    When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself........

    "Of course, there are real limits to what can be done. No country can commit to large-scale infrastructure investment unless it has the available labor, machinery, concrete and steel. Trying to spend too much will cause an inflation problem. The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have....."

  • Schmidt
    2017-10-06 08:00:22 AM
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    Carlitos -- Thanks for sharing the article. Kelton has explained the debt/deficit situation as well as anyone can. I am glad that she highlighted the potential inflation problem as well (the last paragraph of your post). Putting the politics aside (which is a real problem) and the "Pavlovian thinking" as she called it (but also the reality), and just putting on an MMT hat, it would seem to me that there are real practical limits on any progressive agenda that seeks to throw almost limitless money at every problem.

    Take health care for example. We currently have a doctor shortage and the problem is only going to get worse as more and more of us baby boomer generation advance into our 70s and 80s. Guaranteeing unlimited free health care for everyone essentially on demand for every service in the books from dentist to long term care is going to aggravate the situation. The emphasis needs to be on developing more doctors and allowing more doctors to immigrate.

    But immigration itself could also be a problem under the unfriendly Trump administration, and furthermore if Bernie Sanders is true to his word about making doctors salaries and fees more like those of Medicare, the incentive for doctors to immigrate or young people to enter into the medical field is reduced.

    Rationing of heath care in the future is the new reality, with or without BernieCare.

    Likewise on infrastructure, it's not like a massive amount of money thrown at infrastructure is suddenly going to create a booming economy. Following the Great Recession and the absence of infrastructure spending for so many years, we have lost some of our "know how". There is only so much we can physically do given the constraints of qualified manpower to get the jobs done. Every civil engineer and every blue collar worker with the technical know how is probably already employed, so it would require a massive education and job retraining program from those still seeking employment. Many of these are not your stellar employees.

    Free college education also runs into constraints as university enrollment is largely already maxed out and many classes are being taught by graduate students at piss poor salaries. Not only that, Bernie's free college education requires that states fork out 2/3rds of the costs. State budgets are maxed out and do have real limitations.

    So in the big picture, Kelton lecturing about deficits and debts is okay. But when you get down to the nitty gritty on how the money can be effectively spent to do the most good for society, the liberal progressives need to have a reality check. WE cannot offer free heath care for everyone AND free college education for everyone AND massive spending on infrastructure WHILE also cutting back on immigration...you know those people that come from abroad and take away your jobs.

    My opinion...

  • TJ
    2017-10-06 08:19:46 AM
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    Thanks for sharing this. I hope to catch up

    This weekend.

  • Carlitos
    2017-10-06 12:02:09 PM
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    Govt spending and the fiscal regime should have focus on developing the productive assets of the economy. All the specialized manpower shortages can’t be addressed with a fictional financial constraint in place. Immigration would help with the construction shortage, as would a job guarantee. Need to flip the convention and treat immigrants like the assests they are, and welcome foreign exporters offering items to American consumers at lower prices, while freeing up their labor time for new activities.

    Single payer would free-up labor time for the existing healthcare labor force, but it’s a problem that remains regardless of payment model.

  • Dockadams
    2017-10-06 01:36:56 PM
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    Deficits don't matter:

    youtube.com/watch?v=5D5ruUmFRmo&list=PL...

  • jaredsxtn
    2017-10-06 02:22:50 PM
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    Not surprisingly, I agree with most of what Schmidt points out.

    As Schmidt said, we have a massive doctor shortage and an ever aging population that is requiring more and more time from the dwindling number of doctors available. "Free healthcare for all" will inject steroids into that problem. Instituting pay caps on the limited number of doctors who spent hundreds of thousands of dollars to get their degree will also inject steroids into that problem.

    I'm all for debt forgiveness for doctors in exchange for them agreeing to accept less money, but what are you going to do with the doctors who don't take the government up on that offer and start a private practice that is privately funded? The rich would then continue to get the best care in the world, the poor would continue to see sub optimal care, and the middle will go from receiving decent care to receiving sub optimal care.

    Promising "free healthcare for fall" is a great gimmick that sounds awesome, but peel back a few layers of the onion and anyone can see that it is far more complicated.

    The same goes with infrastructure spending. We can throw 20 trillion dollars at rebuilding our crumbling infrastructure, but what happens when we figure out that there's a finite number of people who know how to design and build bridges, dams, and other major projects?

    Does MMT take those things into account or does it believe that everything will fall into place if you simply rethink how government money is spent? And does MMT factor in inevitable price gauging and other nefarious acts that would undoubtedly arise if the Federal government simply started throwing trillions of dollars around willy-nilly?

    For example - what happens when the finite number of bridge designers band together and agree to dramatically overestimate how much it would cost to build and maintain a new bridge? Does the government submit to their demands or say thanks, but we'll pass? If they pass then who will the government turn to since there are no more bridge engineers and architects?

  • Dockadams
    2017-10-06 02:52:49 PM
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    jaredsxtn Wrote:

    Not surprisingly, I agree with most of what Schmidt points out.

    As Schmidt said, we have a massive doctor shortage and an ever aging population that is requiring more and more time from the dwindling number of doctors available. "Free healthcare for all" will inject steroids into that problem. Instituting pay caps on the limited number of doctors who spent hundreds of thousands of dollars to get their degree will also inject steroids into that problem.

    I'm all for debt forgiveness for doctors in exchange for them agreeing to accept less money, but what are you going to do with the doctors who don't take the government up on that offer and start a private practice that is privately funded? The rich would then continue to get the best care in the world, the poor would continue to see sub optimal care, and the middle will go from receiving decent care to receiving sub optimal care.

    Promising "free healthcare for fall" is a great gimmick that sounds awesome, but peel back a few layers of the onion and anyone can see that it is far more complicated.

    The same goes with infrastructure spending. We can throw 20 trillion dollars at rebuilding our crumbling infrastructure, but what happens when we figure out that there's a finite number of people who know how to design and build bridges, dams, and other major projects?

    Does MMT take those things into account or does it believe that everything will fall into place if you simply rethink how government money is spent? And does MMT factor in inevitable price gauging and other nefarious acts that would undoubtedly arise if the Federal government simply started throwing trillions of dollars around willy nilly?

    Throw in some medical diagnosis equipment and some specialists to read the tests, and the doctoring field will shrink even more because there won't be any profit from it, and the field of medical care will end up with quacks. Medical care, like everything else is profit driven, when profits cannot be realized, companies along with people who run them get out of that business. You wrote it, sub optimal care. Your post makes too much sense.

  • Carlitos
    2017-10-06 04:25:03 PM
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    jaredsxtn Wrote:

    Not surprisingly, I agree with most of what Schmidt points out.

    so you accept that govt can always spend without concern for financial solvency and the real limit is real resources? Welcome to the fold.

    As Schmidt said, we have a massive doctor shortage and an ever aging population that is requiring more and more time from the dwindling number of doctors available. "Free healthcare for all" will inject steroids into that problem. Instituting pay caps on the limited number of doctors who spent hundreds of thousands of dollars to get their degree will also inject steroids into that problem.

    can’t solve the doctor shortage if govt imposes an artificial financial constraint on itself.

    I'm all for debt forgiveness for doctors in exchange for them agreeing to accept less money, but what are you going to do with the doctors who don't take the government up on that offer and start a private practice that is privately funded? The rich would then continue to get the best care in the world, the poor would continue to see sub optimal care, and the middle will go from receiving decent care to receiving sub optimal care.

    Promising "free healthcare for fall" is a great gimmick that sounds awesome, but peel back a few layers of the onion and anyone can see that it is far more complicated.

    The same goes with infrastructure spending. We can throw 20 trillion dollars at rebuilding our crumbling infrastructure, but what happens when we figure out that there's a finite number of people who know how to design and build bridges, dams, and other major projects?

    Does MMT take those things into account or does it believe that everything will fall into place if you simply rethink how government money is spent? And does MMT factor in inevitable price gauging and other nefarious acts that would undoubtedly arise if the Federal government simply started throwing trillions of dollars around willy-nilly?

    see the last bolded paragraph from the article quoted.

    For example - what happens when the finite number of bridge designers band together and agree to dramatically overestimate how much it would cost to build and maintain a new bridge? Does the government submit to their demands or say thanks, but we'll pass? If they pass then who will the government turn to since there are no more bridge engineers and architects?

    Govt is price setter, not a price taker. If all our engineers and bridge builders turn out to be corrupt, we can look overseas for expertise at fairer prices.
  • TJ
    2017-10-06 05:58:54 PM
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    My thoughts as well. Shortage of Doctors

    And/or Bridge designers ? Use this new

    Trendy thing called the internet and get

    What is needed.

    Fair wage and reasonable conditions on

    The attempt would probably fix the problem

    Promptly.

  • Dockadams
    2017-10-07 10:38:44 AM
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    8 year old children built a 6 lane bridge using a 3D printer.
  • jaredsxtn
    2017-10-07 03:18:26 PM
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    Carlitos Wrote:
    jaredsxtn Wrote:

    Not surprisingly, I agree with most of what Schmidt points out.

    so you accept that govt can always spend without concern for financial solvency and the real limit is real resources? Welcome to the fold.

    No, I do not. I also don't see where Schmidt said anything close to that.

    I was more so saying that I agree with Schmidt when he says "it would seem to me that there are real practical limits on any progressive agenda that seeks to throw almost limitless money at every problem."

    Carlitos Wrote:

    As Schmidt said, we have a massive doctor shortage and an ever aging population that is requiring more and more time from the dwindling number of doctors available. "Free healthcare for all" will inject steroids into that problem. Instituting pay caps on the limited number of doctors who spent hundreds of thousands of dollars to get their degree will also inject steroids into that problem.

    can’t solve the doctor shortage if govt imposes an artificial financial constraint on itself.

    Huh? The doctor shortage has nothing to do with artificial financial constraints. It has to do with people choosing to go into different fields while simultaneously having an aging population that will put more and more strain on the dwindling number of doctors available.

    Artificial financial constraints being magically lifted isn't going to make it so thousands of people who would otherwise go into marketing change their mind and decide to get their MD.

    Carlitos Wrote:

    I'm all for debt forgiveness for doctors in exchange for them agreeing to accept less money, but what are you going to do with the doctors who don't take the government up on that offer and start a private practice that is privately funded? The rich would then continue to get the best care in the world, the poor would continue to see sub optimal care, and the middle will go from receiving decent care to receiving sub optimal care.

    Promising "free healthcare for fall" is a great gimmick that sounds awesome, but peel back a few layers of the onion and anyone can see that it is far more complicated.

    The same goes with infrastructure spending. We can throw 20 trillion dollars at rebuilding our crumbling infrastructure, but what happens when we figure out that there's a finite number of people who know how to design and build bridges, dams, and other major projects?

    Does MMT take those things into account or does it believe that everything will fall into place if you simply rethink how government money is spent? And does MMT factor in inevitable price gauging and other nefarious acts that would undoubtedly arise if the Federal government simply started throwing trillions of dollars around willy-nilly?

    see the last bolded paragraph from the article quoted.

    I've read and reread not just the bold paragraph you selectively chose, but the entire article.

    What MMT doesn't take into account is the human side of things. Medicare for all would be awesom. Hell, I wrote my college thesis on it back in 2006, but MMT doesn't take into account the fact that there's a tremendous shortfall of qualified medical professionals in an ever aging population. It doesn't take into account the fact that 330 million people are used to a certain type of health coverage and dramatically changing that over night might cause a bit of a stir. And it doesn't take into account the fact that a significant number of the limited doctors we currently have will very likely just start their own private practice if they were forced to take a drastically reduced pay while simultaneously being forced to accept more patients.

    The same goes with infrastructure. Insisting that everything will just fall into place and if it doesn't then our government can simply ship people over from other countries to do everything is magical thinking. The American people would go ape shit crazy if the government did something like that.

    That's all I'm trying to get across. MMT simply doesn't hold up once you start peeling away at it.

  • Chet Ruminski
    2017-10-07 08:27:07 PM
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    Carlitos Wrote:

    Govt spending and the fiscal regime should have focus on developing the productive assets of the economy. All the specialized manpower shortages can’t be addressed with a fictional financial constraint in place. Immigration would help with the construction shortage, as would a job guarantee. Need to flip the convention and treat immigrants like the assests they are, and welcome foreign exporters offering items to American consumers at lower prices, while freeing up their labor time for new activities.

    Single payer would free-up labor time for the existing healthcare labor force, but it’s a problem that remains regardless of payment model.

    Single payer would facilitate centers that specialize in protocols. Medicare is already advancing in that direction for knee and hip surgeries. I don't see anything preventing national center for all types of procedures. There are multitudes of possibilities.
  • Chet Ruminski
    2017-10-07 08:41:37 PM
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    "leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. "

    I think that glosses over and neglects what I think is a very important potential benefit of money. Job creation. By cutting taxes and then simply immunising the most significant and largest number, that of the upper incomes , leaving it on the books, that money is essentially wasted. They excuse the tax cut as economy boosting, then that money should be earmarked for certain investment programs.

  • Schmidt
    2017-10-08 09:31:21 AM
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    To expand on Jared's post (which I agree with), the topics of debt, debt ceiling and deficit spending have become highly politicized. I used to think of debt in the same manner as household debt until Carlitos straightened out my thinking with MMT. I no longer worry about "passing on the debt" to future generations like I used to. However, I fully understand that perhaps 99 percent of the public thinks the way I used to...that the federal budget is like a household budget. And that invites a highly divisive and emotional political discourse. It's reality.

    During the Great Recession and high unemployment it made perfect sense for the government to run large deficits to get the economy back on track. Even now I'm okay with current deficits with the condition that inflation is kept under control. As a retiree I do not want fiscal or monetary policies that drive high inflation.

    The official unemployment number is now at 4.2 percent. I can appreciate that number is deceiving in that some people are working jobs outside of their areas of training. However, as I read the many ads for job openings, I cannot see how anyone with basic skills and who really wants a job cannot find one in today's environment. People with college degrees and skilled blue collar workers have high employment opportunities.

    What limits people is mobility, skills and health issues, and by health issues I mean substance abuse problems or other issues that make them unsuitable for the job. For example, not everyone can spend long hours in the hot sun picking fruit for farmers. And not everyone is suited to drive heavy equipment at a work site...or work on a roof repairing damage from hurricanes.

    In a sense we are near "maximum employment" when it comes to employing people with the necessary skills. If we want to expand the economy we need to make the "unemployable" employable and that requires an investment in education and training, not to mention getting clean in substance abuse programs. It is easier said than done. The other alternative is immigration of skilled people.

    Economic growth of 4 percent is La la land thinking in today's political and economic environment. It makes for good campaign promises, but is not achievable in the short term without a massive government spending program that will never happen with our Congressional make-up. And when undocumented workers, skilled and semi-skilled, are booted out of the country, the situation will only worsen.

    My opinion...

  • pr
    2017-10-08 05:55:39 PM
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    Your opinion sounds a lot more like Carlitos than Jared’s whom you say you agree with! Perhaps you can expound on the differences you see between them and why?

    Just wondering

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