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Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes.

That is very much a minority position.

Not among economists. Although the cargo cultists of the neoclassical tradition (including New "Keynesians" like our friend Bofinger) claim that "unfunded" spending will inevitably lead to inflation. But then, they are the same people who think that everybody can be a net exporter.

And please don't make up my position for me: I never said anything about surpluses. I said balance and that was long-term balance.

That comes to the same thing: Long-term balance implies zero nominal long-run growth in the national asset base. This is very likely to prove unstable under current institutional arrangements. In fact, if the economy grows in real terms it will be deflationary, which is proven beyond any sane doubt to be unstable under present institutional arrangements.

Alternatively, one can imagine sustained growth under a balanced budget scenario. Since the only way to create new money (in the sense that most people understand the term, which is to say high-powered money) is to deficit spend, sustained growth under long-run budget balance means that the volume of government-issued money in the economy will approach zero as time goes on.

We tried that in the 19th century. That experiment is the reason we have central banks these days.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 14th, 2011 at 04:26:24 PM EST
[ Parent ]
Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority. Furthermore you seem to confuse the national asset stock with the national debt, a central bank with a fiscal deficit, monetary growth with a deficit, and so on. In this cause a balanced budget over the cycle would indeed be wrong, but I don't share your assumptions
by IM on Sun Aug 14th, 2011 at 04:55:03 PM EST
[ Parent ]
By the way, are your positions representative of the German Social Democrats? If so, there's really no hope for a change in Europe's economic direction.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Aug 14th, 2011 at 05:01:39 PM EST
[ Parent ]
Petty.
But you will  be delighted: Most of them are to my right, think like you in nationalistic term, swallow right-wing myths about the evil seventies and like deregulation and low corporate taxes. And don't think much of Bofinger. Just your sort of people.
by IM on Sun Aug 14th, 2011 at 05:13:44 PM EST
[ Parent ]
Alrighty then.

You're very fond of calling other people "nationalistic". Reading your commentary - and your apparently instinctive bristling whenever "Germany" is criticised - it might seem to a reader that you're projecting a little.

by Colman (colman at eurotrib.com) on Sun Aug 14th, 2011 at 05:19:00 PM EST
[ Parent ]
I give up. But perhaps you should think a bit about the fact that there are no german commenters on ET. Just a coincidence? Can't be the small number.

Look, I don't reduce everybody who dissents to a representative of his country or party.

And I don' think the roots of every economic problem in this world are in just one country. And I would be unhappy with permanent bashing of say the US too.

Do you really think our world can explained or hopefully changed by tracing every problem to a small circle in Frankfurt?

by IM on Sun Aug 14th, 2011 at 06:21:24 PM EST
[ Parent ]
Then we're in even deeper shit than I thought.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Aug 14th, 2011 at 05:19:19 PM EST
[ Parent ]
I think there are three different narratives at play in regards to the current crisis:

The dominant one: The crisis is caused by government deficits and must be solved by reducing government spending and raising taxes on the poor. Main problem is feckless poors and southerners.

IM's alternative: The crisis is caused by government deficits and must be solved by raising taxes on the rich.

Jake's & Mig's alternative: The crisis is caused by EMU rules limiting government deficits and must be solved institutional reform to allow deficit spending.

Please correct me if I am wrong when stating the positions, but if I am right paiting either side as collaborating with the right-wing narrative in one is unhelpful.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Tue Aug 16th, 2011 at 02:14:12 PM EST
[ Parent ]
Close enough for corporate work.

There are two distinct but related problems. The first is that the EU as currently constituted lacks an investor of last resort. The second is that it lacks any means to ensure that internal current accounts imbalances do not become a political problem.

There is a variety of possible reforms that would solve these problems. A European treasury not subject to silly "debt brakes" would solve both problems, but may be politically unpalatable. Repealing the GSP and Art. 123 would solve the investor of last resort problem, but not (necessarily) the current accounts imbalances. A Bancor-type arrangement would solve the internal current accounts problem (or rather, signify political acceptance of the existence of otherwise unsustainable imbalances), but would not solve the problem that the GSP circumscribes the states' ability to perform investor of last resort functions.

Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 02:25:56 PM EST
[ Parent ]
Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.

Bingo.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Aug 16th, 2011 at 02:59:29 PM EST
[ Parent ]
But even if that were not the case, the €-Mark, as currently constituted, would not be viable.

Of course, absent neoliberal brain rot, nobody would have thought that a currency union could work without fiscal integration.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 03:43:10 PM EST
[ Parent ]
Of course:

the €-Mark, as currently constituted, would not be viable.

It doesn't matter if the debts are measured in Euros, DMs, Pesos, or the soon to be offered New Mexico Tamale.  If the people who owe the money can't make money to pay it off, they don't have the money to pay it off, thus, they can't pay it off.  

Maybe I'm the dumbest m/f'er on the planet, but this seems Real Simple.  To me.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Aug 17th, 2011 at 12:51:33 PM EST
[ Parent ]
Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority.

That is a quite apt description of what the neoclassicals have been doing.

Incidentally, I never claimed that I had a majority on the issue of whether subsidising private bondholders reduced inflation. I claimed that I was right as a matter of fact.

Furthermore you seem to confuse the national asset stock with the national debt,

Uh, no. What I said is that the quote-unquote "national debt" is the monetary base. If you eliminate the "national debt," you eliminate all state money in the economy. And that would be bad.

monetary growth with a deficit,

The two are the same.

In this cause a balanced budget over the cycle would indeed be wrong, but I don't share your assumptions

Those are not my assumptions, they are how fiat currencies work. Go check the Bank of International Settlements Working Paper 292, p. 19-21 if you don't want to take my word for it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 14th, 2011 at 05:21:15 PM EST
[ Parent ]
I don't think the debate of bank reserves in the working paper really lends much to your general world view.
by IM on Sun Aug 14th, 2011 at 06:13:36 PM EST
[ Parent ]
Really?

You don't think that the fact that central banks do not create new money - they merely exchange existing money for other forms of money with different term structures - has any bearing on the ability of the central bank to compensate for a total withdrawal of all sovereign money creation?

Did you understand anything in that paper?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 05:27:19 AM EST
[ Parent ]
Since when did Central Banks not create new money?

They may create fiat currency either in paper or virtual (QE) form opaquely as de facto and unacknowledged agents of Treasuries, but they still do so.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Aug 15th, 2011 at 11:04:24 AM EST
[ Parent ]
Since they are not usually supposed to take equity risk onto their books.

Of course they do it anyway, but that's because they're busy usurping Treasury functions.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 12:42:05 PM EST
[ Parent ]
To be honest, I am not sure that you did understand anything in the paper.
by IM on Mon Aug 15th, 2011 at 09:09:12 PM EST
[ Parent ]
Then let me spell it out for you. This paragraph (emphasis mine):

By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of  excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.

This paragraph says two things. The first thing it says is that everything Bofinger thinks he knows about banks, banking and money is wrong.

The second, and for the purposes of our discussion, more important, is that the amount of base money in the system is irrelevant to the amount of bank lending, because the central bank always has the option to remunerate excess reserves at the policy rate, or extend rediscount facilities to banks that fail to meet liquidity requirements.

In other words, bank lending is equity constrained, not liquidity constrained. And since the central bank can not provide new equity (unless it is prepared to take equity risk onto its books, something you generally do not want your central bank to do, for a whole host of excellent reasons), the central bank can not affect the volume of lending, except by tightening and relaxing solvency requirements (something you definitely do not want to do).

Absent cash-for-trash programmes by central banks, private sector equity can come from precisely three places, as a matter of simple accounting identity: Private sector physical investment in excess of physical deterioration of the capital plant. A net foreign surplus. And government deficit spending.

Now, unless you wish to postulate that every country can run a foreign surplus (in which case you may want to look into repealing the rules of addition and subtraction), this means that sustainable private sector equity increases are equal to net expansion of capital plant plus sovereign deficit. Give or take maybe half a percent of the GDP of the countries you trade with, as a maximum sustainable trade imbalance.

Running a balanced budget, a responsible central bank rediscount policy, and balanced foreign accounts means that, asymptotically, the private sector's net financial position is zero. That is, the private sector will be unable to save up any high powered money in excess of whatever debt other parts of the private sector may owe the sovereign at any given time.

Why, precisely, is that a good thing?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 10:05:03 PM EST
[ Parent ]
How exactly does the physical deterioration of the capital plant enter into this? A discount rate? I thought we were talking about nominal values?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Aug 16th, 2011 at 05:05:42 AM EST
[ Parent ]
Physical deterioration enters into it because private sector equity is equal to the total value of the physical plant, minus the net foreign debt, plus the net public debt.

Absent persistent fiscal deficits and unsustainable foreign positions, the private sector will still have equity (Robinson Crusoe can still stockpile coconuts). It just won't have any net financial position (Robinson Crusoe can't stockpile pound sterling).

Since the private sector usually wants to stockpile financial assets (particularly sovereign financial assets), to provide a cushion against future expenses in the only asset class that is guaranteed by law to cover certain types of expenses, not allowing it to obtain a net financial position is usually Bad.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 05:27:39 AM EST
[ Parent ]
Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority.

But Krugman is an orthodox economist ~ the New Keynesians add some wrinkles to allow scope for active intervention "in the short run", but once the short run stickness has worked itself out, its the same basic model.

If that long run model is excluded, then all of its users are excluded in terms of their conclusions drawn from that model, irrespective of how much we may like their political views and their views of things when they do not rely on the falsified mainstream model.

And excluding that single model clearly does not limit the balance to a single model. There are a range of post keynesians, institutionalists, structuralists, a selection among radical political economists, general systems economics, and a number of other approaches not excluded by ruling out the repeatedly falsified long term model of the mainstream as being non-scientific due to its adherence to a repeatedly falsified long run model.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Aug 15th, 2011 at 02:26:15 PM EST
[ Parent ]
Although Krugman is usually quite good about not allowing his education indoctrination to get in the way of making more or less sensible policy recommendations.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 03:56:46 PM EST
[ Parent ]
Keep him in the short run, and he's free to make sensible policy recommendations. Stretch it out to the long run, and his model starts interfering. This is where the absurdity of the "intertemporal government budget constraint" enters in.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Aug 15th, 2011 at 04:04:35 PM EST
[ Parent ]
Fortunately for Krugman's ability to accurately describe the world we live in, "the short run" is likely to keep him preoccupied for much of the rest of his career as a public figure.

The rest of us may not find that fact quite so fortunate, but that's hardly Krugman's fault.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 04:34:13 PM EST
[ Parent ]
Are you guys into that MMT/Chartalism stuff?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Aug 16th, 2011 at 02:29:56 AM EST
[ Parent ]
Yes and no.

The MMT'ers are right when they talk about the financial side of things. But I find that they sometimes get so caught up in debunking financial BS that they pay too little attention to the needs of the physical economy.

In particular, a few of them argue that the US' foreign balance is of no particular concern since its import costs are all denominated in US$. I disagree with that position, because the US' foreign balance position means that if other people start demanding hard currency for their stuff, they risk cutting off the flow of goods and services on which the American society depends to be in a state of not-revolution. Since I rather like my society to be in a state of not-revolution, and since I assume that this disposition is shared by most well-fed, reasonably affluent people, knowing that my society's continued being in a state of not-revolution depended on the largess of foreign powers with possibly divergent geopolitical interests...

... would not improve the quality of my sleep.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 05:35:42 AM EST
[ Parent ]
The phrase that Bill Mitchell uses is, "so long as people accept the US dollar, ...", without delving into how long that might be and under what terms.

Which is true as far as it goes, and that is what you want from a theory on an aspect of the economy. After all, the problem with the underlying theory that Krugman uses is that its a closed model independent of money, and so the premise that money is neutral over the long term is built into the underlying logic of the model, entirely immune to falsification by empirical evidence. Grand Theory of Everything economic models have to date ended up being Grand Theory of Nothing In Particular models, running on false equivalences between the terms of the model and the actual phenomena observed in the real world.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 16th, 2011 at 11:21:06 AM EST
[ Parent ]
I don't quarrel with his modeling approach. I just think that when he is formulating policy proposals, he should pay a little more attention to possible scenarios for other people beginning to not accept dollars than I usually see in them.

Of course, I realise that he's busy debunking sky-is-gonna-fall scaremongering about the dollar collapsing due to the sovereign deficit - which is entirely the wrong sort of deficit to cause a dollar collapse. So perhaps it is simply that he does not want to open himself to "gotcha" games by quote miners.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 11:46:16 AM EST
[ Parent ]
... accepting the US dollar. The terms of trade dropping, sure, but a floating exchange rate most commonly melts down when there is substantial debt denominated in foreign currency, and since the US is not in that position, a slide in the exchange rate without a meltdown would ensure that people keep accepting the US$.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Aug 16th, 2011 at 01:12:52 PM EST
[ Parent ]
A sufficiently substantial (and, more to the point, sufficiently rapid) deterioration of the terms of trade would be quite painful enough that you would want to avoid it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 01:57:13 PM EST
[ Parent ]
How much disruption is caused if the US dollar drops in value, say, by 50% on a trade weighted basis ... and how much disruption is caused if the US$ is not accepted as payment ... are two categorically different questions.

In the latter case, you are talking about 2/3 of US petroleum supply no longer arriving, except on barter terms or by diverting funds from exports that have earned hard currency.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 16th, 2011 at 06:50:26 PM EST
[ Parent ]
Whereas in the former, petroleum prices only go up by something on the order of 100 %.

Which couldn't possibly cause riots.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 04:03:55 AM EST
[ Parent ]
Precisely. We've had gas prices double several time in the past forty years, and it never caused widespread rioting. Recessions, sure, but not riots.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Aug 17th, 2011 at 07:00:22 AM EST
[ Parent ]

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