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Open letter to Pelosi on “Pay-go”

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    Honorable Madam Speaker Pelosi,
    The facts have led us to the conclusion that your chamber should target inflation rather than budget balance outcomes. Obama proved that deficits do not cause interest rates to rise or inflation and that the govt cannot run out of US dollars as it is the monopolist supplier of them. Trump has only added confirmation of these facts. There is no intellectual or factual basis for “pay-go” rules, and it is dangerous to operate your chamber’s “power of the purse” based on unfounded fears and myths steeped in ignorance. The times, as you say, have found us and demand the partnership of a progressive citizenry and progressive government to make a new the promise of America as you lead us out of the dark age of Trump. Please reconsider your pledge to knee-cap the next Democratic President with mindless austerity conditions via “pay-go.” Instead, direct your chamber to have legislation scored for inflation and make fiscal adjustments as is appropriate for public purpose.
    MMT Democrats
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    Good letter Carlitos. But isn't it the Fed's control of interest rates that has more of an effect on inflation than anything Pelosi can do? Just asking.
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    Hey Schmidt

    I am trying to be respectful/helpful but I was alarmed by her recent comments.
    To answer your question, the Fed is like the kid in the back seat of a car with a fake steering wheel, while Congress is in the driver’s seat driving the car.
    I like to say that the Fed sets the base inflation rate, which is the fed funds rate which when annualized closely tracks with 1 yr treasuries. This inflation has nothing to do with shortages.
    Now, the Fed has it all backwards because they ignore the interest income channel and forward pricing. So when they lower rates to raise inflation, they are doing the opposite and vice versa.
    But let’s get to my point:

    Congress can tax the wealthy and do big spending programs and the CBO could score it budget neutral. But if they are taxing those with the highest propensity to save, then they are not “freeing up” resources for the “big spending.” If there is a shortage due to govt competing with the private sector for resources, prices go up unless govt cancels the spending.
    If they had scored for inflation, they would know that the taxes need to be different or some other structural/macro prudential policy is in order if the resulting inflation is undesirable/unacceptable.
    Note, scoring for inflation is not my original idea, it’s been heavily promoted by academic MMTers. I’m just regurgitating.

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    Thanks Carlitos,

    First, I admit to being confused. As you know, Pelosi and Democrats reached a 2-year budget deal in July.

    Fortune: Budget Deal Avoids U.S. Government Shutdown Before 2020 Election

    "The agreement is on a broad outline for $1.37 trillion in agency spending next year and slightly more in fiscal 2021." It is, like all budget deals, a compromise between the various factions with opposite ideas of what constitutes fiscal responsibility. I trust Nancy Pelosi to make the "best compromise" possible given that she does not control all the strings.

    From the Fortune article:

    "Pelosi and Schumer said the deal "will enhance our national security and invest in middle class priorities that advance the health, financial security and well-being of the American people." Top congressional GOP leaders issued more restrained statements stressing that the deal is a flawed but achievable outcome of a government in which Pelosi wields considerable power."

    On the other hand a more extreme view comes from fiscal hawks.

    "This agreement is a total abdication of fiscal responsibility by Congress and the president," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington advocacy group. "It may end up being the worst budget agreement in our nation's history, proposed at a time when our fiscal conditions are already precarious."

    So I don't know what Pelosi has said or done recently on "austerity pledges" recently that would prompt the MMT letter to her. The budget is what it is. It speaks for her. Compromise is necessary to get anything done in Washington D.C., particularly budgets.

    I'll comment more on your other points on monetary versus fiscal policies once I have digested them a bit more. I'm slow...

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    She pledged to maintain Pay-go under next Democratic President. Same interview where was talking about financial cost of MFA etc
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    And I’m all in favor of compromise.
    but Congress needs to do inflation analysis of their fiscal policies. They are looking at it 100% from a budget perspective as if they are not the monopolist of the dollar.
    had that view prevailed in WW2 we would be speaking German. Or in Great Depression era the govt would have been overthrown.
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    Another point that might help you understand

    the govt is source of price level and is a price setting monopolist when it spends

    so inflation is a function of govt paying higher prices

    thats not to say that shortages don’t cause inflation but that inflation itself is not evidence of shortages but it is evidence of govt paying higher prices (which can be due to shortages but also other things like contractual indexing, bargaining mistakes, fraud, market power of sellers [who can induce artificial or technical shortages], etc) .