Ireland's Suicide-by-Austerity Continues

This isn't fun to report:

Ireland’s economy contracted faster in the third quarter than at any time over the past two years, calling into question its ability to recover while implementing harsh austerity measures.
Gross domestic product fell by 1.9 per cent from July to September compared with the previous quarter due mainly to falling personal consumption and a steep decline in investment as the eurozone crisis deepened.

Austerity is an auspicious sounding term for paying down government debt by cutting spending and/or raising tax rates.  Considering that Ireland has been doing nothing but austerity plan after austerity plan for the last 3 years,  some neoliberal economists would eventually take a look at the results and realize that they aren't working(even I'm able to do that).

The only way Ireland and other European Zone countries are going to recover is by increasing demand until people are put back to work and people and businesses are more confident about making future investments.

Bill of Rights Day celebrated despite loss of 4th, 5th, and 6th Amendments.

I know this blog is mostly about budgets and economics, but this is so terrible and receiving such little press, I'm going to make an exception.  Today, is "Bill of Rights Day".

In 1941, President Franklin D. Roosevelt declared December 15 to be Bill of Rights Day, commemorating the 150th anniversary of the ratification of the Bill of Rights.

It is ironic that, Bill of Rights day is celebrated the day after the Fourth, Fifth, and Sixth amendments were "lawfully" rescinded.  In case you need a little refresher of which ones those were:

Fourth Amendment – Protection from unreasonable search and seizure.
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
Fifth Amendment – due process, double jeopardy, self-incrimination, eminent domain.
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Sixth Amendment – Trial by jury and rights of the accused; Confrontation Clause, speedy trial, public trial, right to counsel
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

Yesterday, the President announced that he's going to sign a bill that codifies that the those amendments don't count if the government says so.  What does this bill do?

(1) mandates that all accused Terrorists be indefinitely imprisoned by the military rather than in the civilian court system; it also unquestionably permits (but does not mandate) that even U.S. citizens on U.S. soil accused of Terrorism be held by the military rather than charged in the civilian court system (Sec. 1032);
(2) renews the 2001 Authorization to Use Military Force (AUMF) with more expansive language: to allow force (and military detention) against not only those who perpetrated the 9/11 attacks and countries which harbored them, but also anyone who “substantially supports” Al Qaeda, the Taliban or “associated forces” (Sec. 1031); and,
(3) imposes new restrictions on the U.S. Government’s ability to transfer detainees out of Guantanamo (Secs. 1033-35).

Look out if you're accused of terrorism.  You can be whisked away without a trial to Guantanamo, and then, by law, can never leave.  That thunder you hear is Jefferson, Madison, Adams, and Franklin rolling in their graves.  I'll get off my soap box and go back to talking about economics now... as long as the First Amendment hasn't also died...

Still waiting on that hyperinflation.

In 2009, there was a crazy, wild-eyed passion spreading among conservatives and the Teabagger.  Here are some choice quotes from prominent conservatives and teabagger favorites.

Glenn Beck and Ron Paul

Ron Paul:  [snip] So the bailout is a disease, it’s contagious, it’s ongoing, and the result of this will be the destruction of the dollar, which to me means runaway inflation, and political chaos. It’s very, very dangerous.
Glenn Beck: OK, hang on, because you are saying “runaway inflation”. You’re meaning Weimar Republic, wheelbarrow full of money type of stuff to buy a loaf of bread. Is that the kind of inflation you are talking about?

Eric Cantor

Finally, we must ensure that vast government spending doesn't lead to rampant inflation in the future. At $825 billion, this Democrat stimulus proposal causes us great concern. While the Fed remains rightfully concentrated on fighting deflation, uncontrolled spending and borrowing will most ultimately lead to inflation if the spigot is not turned off in time. That could trigger a flight of foreign capital and a steep drop in the purchasing power of the dollar for the American consumer. As interests rates rise to keep foreigners financing our debt, the pain dealt to businesses and families alike promises to be sharp.

Michele Bachman

Make no mistake. This stimulus bill has very little to do with stimulating the economy and helping the average American . This is a bailout for big government. And let's get ready. We are looking at massive tax increases and we are looking at massive inflation or both. In fact, we could be looking at hyperinflation.

Arthur Laffer (The "Father of supply-side economics" or Reaganomics)

With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

We are a couple of months away from the close of the third year of the Obama Administration.  Before that we will mark the 4 year anniversary of the start of the Great Recession(Dec 2007).  And, most importantly we've just finished our third fiscal year in a row of having more than a trillion-dollar budget deficit.

So based on all the hyperbole of conservatives, and the fact we've had such huge budget deficits, one might think we were facing huge bouts of inflation.  So let's take a look at the inflation rate for the last three years.

As you can see, since the stimulus and other government spending brought us out of a recession, month to month changes bounced around between .4 and negative .2 and only briefly went higher than .5 percent.  However, is that a lot?  Let's compare it to the previous years.  Let's take at the data since January 2001.

As you can see, after officially exiting the recession, inflation has actually been consistently lower than in the earlier, non-recession ,years.  The only spike you see was from earlier this year and was almost entirely driven by energy costs.  How do I know?  Let's lay over the cost of energy in general and gasoline into the graphs.

Remember these are month-to-month changes.  As you can see, the energy costs went up so much higher and faster that I had to adjust the scale of the graph to show the increase.  General Prices(blue line) barely looks like a bump while Gas Prices(Red) and general energy costs(Green) went up about 10 times as fast.  So those price increases weren't driven by general inflation, they were driven by an increase in energy costs.

So in spite of these billion and trillion-dollar budget deficits, how has there been such low inflation?  Didn't Weimer Germany prove that always happens?  The assumption that a large budget deficits will automatically lead to high inflation is deeply ingrained in our politics.  Based on the last 3 years, you would think that this belief would be re-examined.   And yet, republicans and conservative allies are still warning that the sky is falling inflation is coming.  The whole theory of oncoming inflation is based on the flawed quantity theory of money.  A theory rendered even less relevant since it was developed when we were still on a gold standard.

So what is an alternative explanation?  Does this mean that government can spend and spend without consequence?  MMT (which evolved from keynesian economics) provides an alternative economic framework for understanding why a government can have a trillion dollar deficit 3 years running and still have inflation that is lower than it was when deficits were less than 400 billion.  First of all, inflation comes from spending money, not creating it.

As long as all spending is matched by an equal increase in the amount of goods and services produced by an economy, that spending won't be inflationary.  Here's the macro economic implications:  During a recession dollar savings tends to increase - i.e. people tend not to spend their money.  People are afraid of losing their job, and businesses are afraid to expand, leading to reinforcing recessionary effects. One thing that doesn't change right away is the capacity in the economy. Therefore, when people save dollars, they open up room for the federal government to deficit spend money that won't be inflationary.  In fact, if the government doesn't spend it'll cause deflation which is really bad for an economy.

To better understand the macro economics, let's take a look at a micro economic example:  Presumably, even during a recession, a factory that produced 100 cars yesterday, can still produce 100 today.  If all the people in the economy bought 100 cars yesterday, but only bought 99 today, then that means that the government can come in and buy an extra car and it won't be inflationary because the factory can produce it.  Now, of course I'm not suggesting that the government start asking factories how much it can produce and directly buy what it doesn't sell.  Instead, I'm just trying to give a micro example of what is happening across an entire economy.  The economy has excess capacity that the people producing the items aren't buying because they are saving their dollars.

The take away is that the federal government has the ability to have deficits until the economy can no longer increase the amount of goods the economy is capable of producing, then inflation happens.  The size the budget deficit can be depends on many things.  One of the things as explained above is the rate of private savings which tends to be higher during recessions.  That is why the federal government can run a trillion dollar plus deficit 3 years running and the economy can still have a lower inflation rate than when it was running sub 400 billion dollar deficit.

Euro and Free Trade

No two countries are exactly the same.  One would think this would be obvious, but to many politicians and economists it is not.  Economists "assume" that they are to simplify certain models where the differences are irrelevant to what they are studying, but then forget to "unassume" for others.  No where was this more obvious than in the design of the Eurozone.

I explained before one of the reasons that the Euro failed was because it failed to take into account recessions.  Sometimes a country needs to run a currency deficit, and there is nothing wrong with that when done for the right reasons and at the needed level.  This is the primary reason the entire region is failing.

A secondary reason that the Euro is failing is because it provides no ability to account for trade deficits between regions.  Trade deficits occur, and there must be a mechanism to correct them when they start occurring.  Think of it as some kind of  regulator gauge.  Let's look at 3 popular ways of balancing out a trade deficit.

1. The first way is my preferred method.  To have a floating currency between the two regions so that as goods and services flow to one region(which means currency flows to the other) the value of the currency in that region goes down.  At that point it is now cheaper to produce in that region and they will start producing and selling more to the other region until the currency is brought back to even. Rinse & repeat.
2. Another way of dealing with a trade imbalance is for the countries to implement protectionist trade policies to encourage exports and encourage imports until the trade deficit disappears.  This runs the risk of a so-called "trade war" erupting.
3. The third method is the most popular method by market fundamentalists:  Wreck the economy through draconian cuts to government and have across-the-board tax increases.

Number 3 is the favored option by members of Europe.  Especially when it's not their own country that must go through with it.

Let us take a look at a hypothetical eurozone country running a trade deficit.  If it is running a trade deficit, then that means Euros are leaving the country.  If the government makes no attempt to accommodate the loss of currency within the country, it can cause local deflation.  As we all know, deflation is bad for an economy and unemployment rises until the economy is so bad, people quit buying items and the trade deficit disappears, but only after rampant unemployment and other recessionary ills.

In a Eurozone country, a country's government might try to accommodate a trade deficit by running a government deficit.  That way the local economy won't deflate by keeping the same amount of currency in the local economy.  This creates an "unfair" condition, because it means the country can continue to import more goods and services than it exports.  The whole reason that Eurozone countries aren't allowed to run perpetually high trade deficits.

Notice though, that the only alternative for a Eurozone country to fix a trade imbalance is through wrecking the economy.  This is what happened in so many of the Eurozone countries.  Greece, Italy, etc...  The other countries made them practice austerity which caused recession and unemployment.  That recession and unemployment causes a spiral because of reasons discussed before.

This is among the reasons why so many MMT economists predicted that the Euro would fail.  Besides having no mechanism to deal with recessions, it has no mechanism for dealing with trade imbalances that doesn't wreck a local economy.

Revisiting the Confidence of our Sophisticated Financial Wizards

I ran across this "old" testimony from a spokesperson for the "American Securitization Forum"(ASF) to congress in 2003(pdf).  The ASF is made up of mostly large financial firms involved in the securities market including the now infamous mortgage backed securities(MBS).  Much of the testimony included is a matter-of-fact history of the development of the secondary market for mortgages.  What made me laugh was reading their conclusion and message for congress.  Their message was basically, we are awesome.  We've 'innovated' this awesome new market to provide credit to everybody.  Anything you do to regulate predatory lending will ruin this awesome thing we created.

Securitization reflects innovation in the financial markets at its best. Pooling assets and using the cash flows to back securities allows originators to unlock the value of illiquid assets and provide consumers lower borrowing costs at the same time. MBS and ABS securities offer investors with an array of high quality fixed-income products with attractive yields. The popularity of this market among issuers and investors has grown dramatically since its inception 30 years ago to $6.6 trillion in outstanding MBS/ABS today.

The success of the securitization industry has helped many individuals with subprime credit histories obtain credit. Securitization allows more subprime loans to be made because it provides lenders an efficient way to manage credit risk. Efforts to curb “predatory” lending that inhibit the legitimate use of securitization by assigning liability to the purchaser of a loan or some other means, threaten the success of the beneficial subprime market. Secondary market purchasers of loans, traders of securitized bonds and investors are not in a position to control origination practices loan-by-loan. Regulation that seeks to place disproportionate responsibilities on the secondary market will only succeed in driving away the capital loan purchasers provide in the subprime market.

I urge Congress to move with great care as it addresses the problem of predatory lending. The secondary markets are a tremendous success story that has helped democratize credit in this country. Well intended, but overly restrictive, regulation in this area could easily do more harm than good. This is particularly the case when state and local governments craft disparate anti-predatory lending statutes that place different compliance burdens on the secondary market. For this reason, the ASF urges this committee to consider legislation to pre-empt the authority of state and local governments in the area of predatory lending and to construct a safe harbor from assignee liability for secondary market participants.

These guys were so high on their own awesomeness that not only did they want congress to leave them alone, they wanted congress to MAKE the states leave them alone too.  The lobbying firm had some success with this.

Then, of course, 2008 rolls around and those financial wizards found out they were full of crap.  The punchline to all of this is that the ASF then lobbied for TARP to bail them out(pdf).

SIFMA and ASF support the use of a Guarantee Program to cover assets with high illiquidity premiums relative to their expected losses. In such instances, the assets are unable to be sold at prices that are reasonable based on the quality of the asset. SIFMA and ASF believe that the Guarantee Program should be considered for use with a full spectrum of financial assets, including both securities and whole loans. Treasury may consider whether identifying frequently referenced assets (such as RMBS referenced in multiple CDO transactions) may present an opportunity to magnify the benefits of any purchase or guarantee program

So the same group that 5 years earlier was telling everyone to leave them alone because if we try to make them stop selling deceptive loans, we'd ruin all their awesomeness, then they get congress to bail them out when their "innovations" blow up in their face.  Then they wonder why everyone is so upset with them.

Euro Zone Debt Crisis Was Going to Happen Eventually

The European Union was set up in a manner that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation does in the Eurozone does not issue it's own money.  It must be borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.

During an economic bust - or recession - people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren't supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back... it's only going to make the recession worse!

Even if Greece perfectly managed their finances and economy, this would've just happened to another euro zone country.  Greece just happened to be first.  MMT economists predicted this would happen several times over the years(See here, here, and here and again here).

Governments must be able to counter act recessions.  The Euro was designed without thinking about recessions.

Dumbest. Anti-Keynesian economics. Article. Ever!

Whoever claimed that there are 3 kinds of lies: Lies, Damn Lies, and statistics really got it.  I ran across a silly blog post over at seeking alpha.  It was old, but it was so stupid it was worth bringing up.  The writer was trying to make an argument against classic keynesian economics.  His principal argument was the government spending causes unemployment.  Since most keynesians advocate fiscal policy to maintain aggregate demand, that would be quite a blow if he could prove it.

Unfortunately for the writer, his entire premise was based on a chart he made that showed the unemployment rate and government spending as a percentage of total GDP, graphed over time.  The result was a  direct correlation between unemployment and increased government spending - as a percentage of GDP.  Both went up and down at roughly the same time.  Game-set-match.  The statistics prove it!  /snark.

A few objections come to mind.  A statistician would jump in and say that "correlation doesn't prove causation".  That is to mean, just because they happen at the same time doesn't mean that one necessarily causes the other.  However, pointing out that logical fallacy isn't even the strongest argument against this guy's point.

The second thing to disprove this non-sense was mentioned in the articles comments.  I'll call it the "aspirin" factor.

The above article is a brilliant piece of false logic. I’m sure there is an equally close relationship between headaches and aspirin consumption. Which proves that aspirin does not ameliorate head aches. In fact, if you want to be totally and completely illogical, you might deduce that aspirin actually CAUSES headaches.

In the past, governments have often responded to recessions with stimulus spending.  What that means is that the unemployment caused the spending, not the other way around.  Thanks to many "automatic stabalizers" like unemployment and such, some of this spending increases now happens without even political intervention, but it's still in response to the unemployment, not the other way around.

So we've had the "lies" and "damn lies" part.  Now time for the "statistics".  For the graphs, the person completely rigged the results by not using total spending and instead he used "spending as percentage of GDP".  Why is that important?  Well, to get the number, you take total spending and divide it by total GDP.  What that means is that if dollar spending stays the same, but GDP gets smaller, that spending number would rise even though the total dollar amount stayed the same.  Well guess what happens during a recession?  By definition, the GDP gets smaller.   Therefore, even if total dollar spending stayed flat, it would appear that government spending increased along with the oncoming recession.  The data tells a lie that you would only believe when looking at a picture graph of the data.

So there you have it.  All in one article, lies, damn lies, and statistics.

Unemployment Vs. Economic Efficiency

Nothing makes an argument more frustrating than when 2 people are using the same words to argue over 2 different things.  When discussing strategies to get out of the recession, market fundamentalists (usually conservatives) argue to let the markets work.  Others, usually liberals who sorta-kinda understand Keynesian economics, argue that we need more stimulus to jump-start the economy.  Then the market fundamentalists respond with "markets are more efficient than government" it is always better.  Then they give some example of the government, in fact, screwing something up.  Then the liberal Keynesian says, free markets got us into this mess, and then gives an example of a corporation, in fact, either screwing something up or doing something evil.  This goes back and forth and is never resolved because they are talking about two different things.

If you're arguing for more stimulus or increased aggregate demand and end up arguing over how much governments and markets do or don't suck, you've lost the argument or - at best - will stalemate.  The reason is that in most cases markets are more efficient than government trying to do it.  Be it selling shoes or setting apartment rent prices.  The liberal position is not to suggest otherwise.  The problem is that it has nothing to do with your argument for demand management.  An economy that is deficient of aggregate demand can not fix itself because it has nothing to do with an individual product or industry.

To understand why these are two different things, let's take a look at a proto-typical private market.  Let's say that you run a company that sells dish soap and one day people  buy less dish soap.  Pretty soon you'll notice you're selling less dish soap and will start making less of it.  You'll now need fewer employees and equipment to make that dish soap.  You can either move those employees and equipment to make other things(like paper plates) or you can lay off your employees and sell the equipment.  In a good economy those employees and equipment would eventually go to a company making other things.  That is economic efficiency that government should stay out of.

What happens when people start buying less of everything?  Those employees that were laid off would have no where to go because all companies are making less things because they are selling fewer things.  That's what happens during a recession.  Now you have high unemployment and nowhere for those employees to go.  It is the difference between micro and macro economics.  If one is thinking "micro" they will think that the economy will simply sort things out - "let the markets work".  However, when one looks at the big picture you'll see that private markets can't sort it out because it has nothing to do with the efficiency that markets are good at.

Additionally, if one takes a micro approach to a recession and sees that workers are being laid off, they might (rightfully, in a "micro" approach) suggest that the workers need to take a pay cut to stay employed.  Take our dish soap example.  If consumers are buying only less dish soap, then workers could take a pay cut to keep everyone employed.  If workers demand less money, then it might be better for the company owner to hire people instead of buying and maintaining expensive machines and computers to do the same work.  If however, the problem is that consumers are buying less of everything, pay cuts for all workers will only make the problem worse.  If all workers in an economy take a pay cut, those workers will then turn around and buy less of everything because they now have less money.  That must then be followed by another pay cut which would then lead to another general drop in people buying stuff which would lead to another pay cut... etc...

To suggest that an economy needs increased demand does not require one to reject free enterprise.  The private market cannot deal with a drop in aggregate demand because no single company or person can control overall demand.  John Maynard Keynes was the first to show this systemic problem.  His recommendation was for the government to be that outside force that adds demand to the economy by doing social investment.  The idea was that government would give more people money to work, and then they would spend that money which would then cause people beyond the government to get jobs.  Doing this restored demand and had the bonus of providing public works that society could benefit from like parks and libraries.  Since his time, economists have come up with further refinements to his original recommendation.

For market fundamentalists of course, this is all heresy.  Instead, the market fundamentalists continue blaming the government for everything.  To any other reasoned person, you see a deep systemic problem that requires outside intervention to balance.  These two concepts don't have to conflict.  You can advocate for private markets and government intervention to restore aggregate demand.  Only dogmatic market fundamentalists can't see the difference between that and eliminating free enterprise.

Job Guarantee: Zero Unemployment Without Causing Inflation

Once when I was explaining Modern Monetary Theory(MMT) to someone in person, she asked me in a very irritated tone, "what is your point?" I realize now that getting too far into the details about government spending, trade deficits, and bond markets can make some people's eyes glaze over without assuring them that the end goal is worth it. So today I'd like to introduce one of the primary policy goals that most economists of the MMT school advocate. You see, once you realize that the federal budget is constrained by inflation, not revenue, that bond vigilantes raising our interest rate isn't a real thing, and there is no such thing as a crowding out effect, new policy options become available in the fights against unemployment and inflation.

One of the primary policy goes of most MMT economists is a Job Guarantee. Sometimes we'll refer to it as a Federal Job Guarantee(FJG), Employer of last resort(ELR), Labor Buffer Stock, etc... It's all basically talking about the same thing, A job guarantee. A job Guarantee would be a permanent job offer from the federal government to all citizens of a certain age for a basic wage to anyone who is ready, willing, and able to work.

The first thing to know is that heading into this discussion you should already understand that the federal government is constrained by inflation, not revenue. The United States, like any country that controls it's own currency cannot be forced into default. Therefore, we can do "radical" things like setting our own price and letting the market decide quantity. As opposed to setting the quantity we want to purchase and letting the market decide price. That is what a job guarantee does. Instead of asking for x number of workers and letting the market determine how much we pay them, the federal government can say we will pay any worker y wages, and let the market decide how many people will take it. The amount of money spent is irrelevant as long as inflation is controlled.

So how will a Job Guarantee achieve both full employment and price stability? Well, first of all, it will, by definition, eliminate unemployment. Everyone who is ready, willing, and able to work will be able to get a job that is funded by the federal government. That pretty much wipes out unemployment as we currently define it. Of course, there will be some people who refuse the job offer because they'd rather spend time looking for higher paying work. There may be others who refuse to work at the set wage. That's fine. The program is meant to be completely voluntary.

Now, why won't something like this be inflationary? Wouldn't the increased expense of the program increase inflation? The answer is no. Because the program would never demand more labor than is available, it would be impossible for it to cause "demand-pull" inflation. In a recession, employment and aggregate demand decrease which has a deflationary effect. However, with this program in place those workers have the ability to get a job from a job guarantee which would counteract the falling demand. Sure, the increased federal spending could be inflationary, but it's more than offset by the falling demand caused by the recession.

What about during economic expansions? As the economy recovers people leave the job guarantee program and enter the private workforce for more money. People leaving the program would cause government spending to go down which would cause deflationary pressure, but would be offset by the potential inflationary pressures of a rapidly expanding economy with rising wages.

*poof!* You now have full employment with non-accelerating inflation. You know, when I first started writing this diary, I thought it was going to be long and complicated, but it's not. It really is so simple that it can be summarized in about 4 paragraphs. Now... time for all the caveats and frequently-asked-questions.

Are you saying there won't be inflation?
No. I'm not saying that inflation can't still occur in the economy. There could still be cost-push inflation(like oil prices). There could still be demand-pull inflation if some commodity other than unskilled labor is in short supply. The point is however, we can give everyone a job, without causing accelerating inflation.

One more caveat about inflation. Depending on what we set the "Basic Wage" to be, it could cause a one time hike in prices. If the basic wage is set to be higher than the current minimum wage, then that could cause a 1 time rise in inflation. That's because whatever the basic wage is will also be the minimum wage. The reason? Most people aren't going to work for less money in the private sector if the federal government is offering them more. While there might be individual cases where a person may choose to work for less(a "fun" job or with the promise of future pay, like an internship), most will choose the better pay. So, while there might be a one-time rise in prices when the program is put into place, it won't last and will eventually lead to stability.

If unpaid for, How can it not be inflationary?
This is the last thing I'll say about inflation. When you add up all the benefits, it's extremely easy to imagine how A "job guarantee" program could actually be less inflationary than what we currently do with our unemployed workers.

First, There's the automatic stabilizing effect that I talked about above so I won't repeat myself.

Second, the unemployed will be working instead of doing nothing. Right now unemployment pays people to not work. The job guarantee puts them to work. Not only them, but the part time "underemployed", the discouraged workers, and maybe even those who have never worked before. With all these people doing something, even semi-useful, it's better than doing nothing.

Third, a lot of the cost of the program will be offset by a reduction in spending on other social programs. As it turns out, when people work, they need less government assistance.

Fourth, there will likely be faster movement of workers from the job guarantee to the private sector than under our currently unemployment regime. Even if you don't believe that SOME(not all, not most, but some) people will take their unemployment until it runs out before getting a new job, you have to recognize that employers are hesitant to hire someone who has been unemployed for a long time. They believe that people lose their "good work habits". In a job guarantee regime that won't happen because people will be working.

What programs could be eliminated?
The program is not meant to replace any existing government assistance such as food stamps or medicaid. While many households could be brought out of poverty if only 1 more adult started working full time, it will not work for all households. So while the program might reduce the size of other programs, it will not completely eliminate their function.

Even the concept of unemployment wouldn't necessarily go away. You would still want people to spend some time looking for a new job before entering the job guarantee program. However, there could be a move to reduce the number of weeks that unemployment is offered. Once anyone can get a job, they won't need to rely on unemployment checks. Plus, depending on what the basic wage is set too, they would benefit overall by being paid more than what unemployment benefits pay them.

What will these people do?
More often, this question usually comes from conservative leaning people. I guess only a conservative could look around this country and say, "eh, there's nothing that needs to be done". However, occasionally a left leaning person will ask the slightly more intelligent question, "with so many unemployed and underemployed are you sure we could find work for everyone? Let me assure you, there is always more work to be done. First, look up everything done by the WPA. If looking at that doesn't convince, let's list a few more jobs that almost any worker would have the basic skills that are required.

• Reading to Children at the library.
• Library assistant. If they know the alphabet and their numbers, they can haul around books and put them away.
• Teacher's assistant: Grading multiple choice tests and making copies
• Low level aid for elected officials. Every office could use an intern
• Neighborhood watch. Bunch people into groups and have them patrol neighborhoods and report to police anything they see.
• Clean and maintain Parks and playgrounds
• Clean graffiti
• Pickup litter from the streets
• Dig trenches to bury electric wires
• Plant trees along major highways

Those are just jobs for low to unskilled workers. The possibilities are endless if someone shows up for a job that has a particular skill. You could pay musicians to give free performances at local venues, a handyman could repair dilapidated public buildings, child care professionals could open a free or low-cost day care. Better yet, You could pay those with skills to teach those skills, and pay the "unskilled" workers to learn them. I'm not saying that these workers would do all, some, or any of these things. The point is, if you spend 10 minutes thinking about it, there are a lot of things that can be done.

What if somebody never leaves the Job Guarantee program?
So? Seriously, so what? If someone wants to work for minimum wage for the rest of their lives, it isn't going to hurt you and I one bit. In fact it just means we'll have a very experienced public worker working for minimum wage, so it would be beneficial to society if this happened. We should thank the individual for not demanding more money and moving to the private sector.

But won't people [insert scheme to cheat the system]?
There is always the possibility for people to 'game' the system. When it happens we'll just have to be nimble enough to recognize it and correct the problem.

You'll be replacing existing jobs
This is a strong concern for many. However, I think it's not a likely scenario. The Job Guarantee "employees" will have a very high turnover rate. Jobs that require a large amount of knowledge and experience could not be replaced by people who may only be there 3 weeks and could quite without a single day's notice.

How would the program be administered?
There is no strong consensus on how to structure the program. Most MMT economists who want to be apolitical just say, "that's a political question". Less cautious individuals give some suggestions. Some advocate it being managed nationally like the WPA. Others think it should be administered by states. Others by non-profits. Those details aren't as important as buying into the idea of a job guarantee. Once we all can agree on the idea, we can start talking specifics - I have my own thoughts on that topic. The only requirement is that no matter how it's administered, it must meet the 2 most important criteria: One, everyone can get a job that is ready, willing, and able. Two, the jobs must be completely federally funded.

What will the "Basic Wage" be?
The basic wage should be what a full time employee needs to live. I don't know what it would be, but I think it should higher than what our current minimum wage is, but that's just my opinion. Also, the basic wage should not be inflation indexed. Otherwise it'll spiral upwards and downwards along with the economy instead of providing an anchor for prices. Of course, congress can change the basic wage at any time, but it should not be automatic.

People will be lazy and not work if the job is guaranteed
This is a very common critique. One that has a simple answer. Give whoever is administrating the program the authority to fire people. We can get into the details of how it would work, but just because you are willing to hire anyone who wants a job, doesn't mean that you can't also have the ability to fire them. If people don't show up, or don't do the work they are assigned - as long as they are capable they can be fired. Depending on how the program is setup you can have other rules like, once fired you can reapply for the job guarantee for a specified amount of time. Other rules would have to be in place to prevent discrimination as well. The point is, there are simple ways to solve the incentive problem without violating the spirit of the job guarantee.

zOMG!  Communism!  USSR!

Communism, you couldn't be fired.
Communism, you can't leave the job and join the private sector for better pay.
Communism, you get paid the same as those in other industries.

None of these things apply to the job guarantee.  You can be fired, you get paid the least(so you have every incentive to leave to work in the private sector), and the work is voluntary.  It is only a last resort for people who can't get work in the private sector.

Finally, I want to say something about the intangible benefits of the program. There will be intangible, nearly impossible to measure benefits to the system as well.
1. Stronger Families. A full time job, even minimum wage job will bring many families out of poverty. Poverty and unemployment has been observed to correlate with kids not doing well in school, and putting strains on marriages.
2. Dignity. Those who depend on the government will have a real chance to have a job and earn the pride that comes with a paycheck.
3. Economic Security. Everyone will know that, worse comes to worse, they can get a government job and at least they can earn enough to feed themselves.

An entire book could be written on a the Job Guarentee so I can't fit everything into one diary. Other aspects to be explored are comparing it to our current inflation fighting techniques, exactly how it can be structured, and other angles. There will be followup posts on the topic.

Micro-Engineering Student Loan Help

President Obama announced yesterday his initiative to reduce student loan debt.   The plan is an admirable one.   Attending a university is expensive, and the cost of which keeps going up.   All these kids who go to school mount up huge amounts of debt while trying to prepare themselves for the future.  Now they're all graduating during the recession only to find no jobs.  It's like a sick joke.  We tell them how important education is, politicians, teachers, parents, guidance counselors, and they do exactly as they're supposed to by finding a way to go to college.  Now conservatives turn on them and blame the students who did what conservatives told them to do.  Either they blame the students for being so stupid to go into so much debt, or they blame them for being so lazy for not finding a job(which is hard when there's more than four workers for every open job).

So on the one hand, I think the President's goal to try and reduce the student debt burden is admirable.  On the other, I think it's solving the wrong problem because he's trying to do government "on the cheap".  The problem is that they can't pay their loans because they can't get a decent job.  If instead of trying to micro-manage student loans, he and congress concentrated on fixing the economy, the student debt burden wouldn't be such a burden because the kids would now have jobs in their chosen fields.  If the President could get congress to institute something like Warren Mosler's 3 point plan to increase Aggregate Demand in the economy, then jobs would appear for those kids.  The problem though, is that plan is fiscally expensive and would add to the debt.  Since he thinks the deficit is a real problem, he tries to "do government on the cheap", by just concentrating on student loans.

There's still the argument about the long term problem of college costing so much now.  I acknowledge that is a problem.  However, this is not the way to deal with it.  Conservatives have a point when they snarl about helping some with loans and not others.  A better long term plan would be to make college cheaper so that people can work their way through college without accumulating very much debt.  That would be a more equatable plan going forward without a moral hazard.

In short, I empathize with students who graduate with thousands of dollars in debt, but then can't find a job in their chosen field.  However, the fair and equitable solution is to get them a job, not the "government on the cheap plan" of reducing student loan debt.  If our politicians understood how the monetary system worked, we could do this.

How The Right and Left Keep Getting it Wrong

Because neither side of the political debates understands how the modern monetary system works, they each make mistakes that harms their arguments, credibility, and the country through their faulty solutions.  Both sides labor under the delusion that the U.S. government can run out of money.  Therefore they make decisions on what government should do based on dollar costs rather than real cost.  In reality the government can afford to do whatever it wants and the only limitation is inflation.  That inflation can then be controlled either by increased taxes or reduced spending.  Here are some of the results of both side's failed thinking.

Conservatives argue that things like Medicare and Social Security need to be slashed because they're in a "dire" financial bind.  They also argue for privatizing other government functions to balance the budget.  All of these things they claim must be done during a recession when inflation is very low.  Of course, they don't realize that inflation is the limit and only look at the fiscal picture which is nearly meaningless when one is the issuer of the currency.

Liberals make a similar mistake.  During a recession they think they can't lower taxes without offsetting them by spending reductions.  They also think they must raise taxes to offset more spending used for "pump priming".

Both groups make another, subtler consequences that has as much to do with political cowardice as it does with ignorance of modern money. Because politicians and their constituients belive that the federal budget is revenue/borrowing constrained, they will often attempt to do government "on the cheap". This can result in half assed initiatives that aren't completed because of lack of funding. It can result in government "partnering" with the private sector to save money, but then the results only favoring the partner and not society as a whole. It can also result in taking shortcuts in public policy that ends up having unintended consequences. All of these things happen because they are trying to "save" money. Because they don't want to be seen as reckless spenders, they make all these decisions that hurt us as a society.

Ignorance of MMT doesn't hurt us only because it means we don't know how to get out of a recession. It hurts in many other ways when politicians try to cut corners. I'll be exploring some examples of the subtler consequences on this blog.

Time to resurrect an old idea: Economic Rent

Have you ever heard of the term “economic rent”?  No?  That’s probably because of the greatest political coup in the history of our republic.  In politics, true power comes – not from your argument – but from the ability to steer the conversation to what you want to talk about and away from what you don’t want to talk about.  The true elites in our society have continued “winning” the political debate by removing a very important concept from the political conversation.

I admit, reading the term,  “economic rent” can cause eyes to glaze over quickly.  A more accurate description is “unearned income”.  It is people and companies who make money by doing zero work and risk little or none of their own assets.

Taking Back Adam Smith and “Classic Liberalism”

Many conservative economists claim to be staunch followers of Adam Smith.  They shout slogans such as “Supply and Demand!”  “Capitalism”! “  “Let the markets work!”  However, for anyone who actually read Adam Smith, you would note that the “invisible hand” was not his only observation of the inner workings of capitalism.  Adam Smith recognized that many in the economy were making gobs of money, but weren’t contributing anything.  He was referring to what was eventually called “economic rent”.

Smith observed that all production required 3 things.  Land, Capital, and Labor.  A very simple example would be a brick factory.  The building and oven needed to create the bricks are the “capital” – the owners are the capitalists.  The people making the bricks is the “labor” – the people doing the actual work.  The Land the factory occupies and the clay used to make the bricks is the “land” – the owners of the land are the “Rentiers”.  Any money made by selling the bricks is then divided up between these three groups: the rentiers, the capitalists, and the workers.

Adam Smith observed that only 2 of the 3 groups made any real contribution to the production process.  The workers contributed their time.  The capitalists contributed their capital that they either bought, but is now used and worth less than before it was used.  The Rentiers contributed their land, but have lost nothing.  Once the manufacturing of the bricks is done, they get their land back and it is still worth the same as it was before.  Any income they made by renting out their land was made without work, and without risk to their assets.  There is a word for someone that only takes, but doesn’t give back: a parasite.  Smith and those who carried on his work used the nicer term, Rentier.  This is where the phrase “economic rent” originates.  It originally described a no value-ad landlord.

Adam Smith and future classical economists existed in a time where the noble families of medieval Europe were still the large landowners.  The nobles had just turned into Rentiers.  Because they owned the land, they were able to rent it out to capitalist and workers and claim a portion of their profits and wages by charging “rent”.  They were able to do this without ever working.  It was unearned income.

Much of the work done by economists from Adam Smith until the late 19th century was all about finding and identifying “rent-seeking”.  These classical economists didn’t want to overthrow capitalism, they wanted to free it from the “rent-seeking” parasites.

The Neoclassical School “loses” rent

Right before the turn of the 20th century a new school of economists appeared.  They were later named the Neoclassical school and it continues today.  When the transition from classical to neoclassical occurred, one of the things that was lost was the concept of “economic rent”.  The Neoclassicals started treating land and capital as the same thing and therefore interchangeable.  In a world without land, economic rent no longer makes sense.  Some would argue(e.g. Gaffney’s Neo-classical Economics as a Stratagem against Henry George – pdf) that this was intentional.  If it was intentional, it was the greatest coup of ideas the elite class came up with to justify their existence since The Divine Right of Kings.  On the other hand, It may have just been a simple intellectual decision based on their new approach to economics.  In any case, the decision to treat land and capital as the same, haunts us to this day.  If land is treated as capital then the concept of “rent” goes away and rentiers can masquerade as capitalists and cloak their unearned “rent” income as justifiable profit.

John Maynard Keynes blew away everybody and what they thought they knew about economics in the 20s and 30s.  In response to Keynesian economics, the neoclassical economists didn’t die, they decided to fight back.    Milton Friedman is the most famous of this group.  To fight against keynesian economics, he and his contemporaries tried to lay claim as resurrecting the classic school of economics that said “less government is good”.  They even called themselves New Classicals.  However, this “revival” of the classical economics was actual a revival of the neoclassical school.  They, like the neoclassicals before, again conflated capital and land.  Therefore, many modern economists no longer make a distinction between land and capital.  They group together income from rent and income from capital and call it profit. This school remains in the mainstream and therefore the concept of economic rent is no longer discussed in our politics.

Rent-Seeking

In the late 60s and early 70s “economic rent” saw a small revival among select economists.  For those select few, “Rent-seeking” was no longer defined as just “ownership of the land”.  It can take several shapes.  Rent-seeking is any income that is unearned. An alternative definition is “profit without a corresponding cost of production”.  “Economic Rent” can come from ownership of land and just “renting” it out for money. It can also come from collecting so much capital that a firm now has a monopoly and can set the price independent of supplydemand considerations, It can be from government monopoly granting, control of other “land” like our rivers, broadband spectrum, or “mineral rights” of land.  It can come from control of financial assets like capital gains, dividends, and interest on loans(especially usury). It can also come from political favors from the government.

Political Implications

Economic rent was something I’d learned about in school several years ago and quickly forgot about it once the class was over.  Now in a post bank-bailout world, I ran across it again one day while researching another article, It was like a light-bulb going off in my head.  (A high-efficiency light bulb).  This is what progressives are currently fighting against.  This is the concept, the vocabulary, the name for the rage I feel in my gut at what’s happened.  The rentiers have taken over our country by masquerading as capitalists.

How did this happen?  It was simple, once the neoclassicals removed the entire concept of “rentier” from the economic, and eventually political, conversation. It was all capitalism and capitalists in their world.  Therefore, now when progressives rail against the unearned income of the rentiers, we lack the vocabulary to properly express what is happening.  Instead, conservatives try to make it look like liberals are railing against capitalism itself or against businesses in general.  In some cases we may even come to believe it ourselves.  Many times when we’re fighting against the “excesses of capitalism”, what we are actually fighting is parasitic rentiers that are hurting the true capitalists as much as the workers.

• When a company has a monopoly and can charge whatever they want, that’s not being a capitalist, that’s being a “Rentier”.
• When oil company’s make “windfall profits” as the price of oil goes up, that’s not profit, that’s “economic rent”.
• When a drug company can keep the government from negotiating lower prices, that isn’t capitalism, that’s classic “rent-seeking” behavior.
• 99% of the money made on wall street is nothing but pure rent-seeking.
• Companies lobbying for tax loop holes is just more unproductive rent-seeking.

Fortunately, some well known economists do talk about The Rentiers.  Unfortunately, not nearly enough are.  I’m guessing it’s because the vast majority of “influential” economists are neoclassicals and don’t believe they exist.  They can try to deny their existence, but when I see the top 1% of the country make more money in one night while they are sleeping then most will make working at their job for 6 months, it’s hard to deny their existence.  It’s unfortunately that our intellectual class “lost” these words and concepts from the mainstream discussion.

So where does that leave us now?  One could argue history is repeating itself.  200 years ago, the conservative vs. liberal mantra was that conservatives were fighting to keep the power of the nobles and large landlords intact.  The liberals were the ones trying to free themselves politically and economically from their control.  Today it’s the same.  Conservatives are fighting to maintain the privilege of the Rentiers by pretending to defend capitalism itself.  And once again, us liberals are fighting to free the market from the parasitical Rentiers.