Figuring Out Macro Economics, the Dismal Science, for Myself
I became very interested in economics around the time the Great Recession of 2008 hit. I had been paying attention to global economics, but really didn’t know much beyond what I was taught in Macro Economics 301 at U.Va. a long time ago (yes, I took micro too). Unfortunately, it didn’t really equip me to understand all the issues around the Fed, Fannie Mae & Mac, Lehman Brothers, CDOs, derivatives and a fiat money economy since what I was taught was based mostly on Gold Standard economics. I did, however, begin to realize that much of what people were saying was dead wrong because they were talking about it in a micro-economic sense not a macro-economic sense and I did know that the two were quite different. For one thing I knew that we were no longer on the gold-standard, the U.S.A. has guaranteed income in perpetuity from its taxing authority, the Treasury could print or create as much money as is needed by the economy or the government, and I knew the U.S. dollar was the reserve currency of the world. Those three alone made the U.S. economy and the dollar the envy of the world and pretty much guaranteed we were not and could not go bankrupt as people were saying. After all, the U.S. has amazing resources and holdings in addition to its taxing authority so using an analogy is a man who owes $50 million and spends $1 million a year, but owns $250 Million broke or going bankrupt? No, of course not, especially if he is investing in a business that will eventually bring in $2 Million a year. I worked for a company that didn’t make money for over 10 years, but did a successful IPO and was growing by leaps and bounds and it wasn’t bankrupt either. I wondered a great deal about Dick Cheney’s famous statement that, “deficits don’t matter” and how that related to our budget and our national debt. Finally, I had run across the curious fact that every time we run surpluses and try to retire debt we run into a recession or depression. Look it up if you like so here are the years: 1819, 1819, 1837, 1857, 1873, 1893, 1929 and 1999. Here is a particularly cogent explanation of why a sovereign government is absolutely NOT like a household or a business – http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/
The Financial Times, not noted for it’s liberal leanings, put it will in 2010 – Balanced Budget Amendment a ‘Phony’ Deficit Solution
All this and the screams of what have sometimes been called the “deficit terrorists” for their fanaticism about cutting the budget, fiscal austerity and the national debt (not to mention some crazies calling for the abolition of the Fed and a return to the Gold Standard) led me to search out a school of economics that used data from the last forty years (since Nixon took us fully off the gold standard in 1971 by ending gold converibiliyt) to describe what is going on in macro economics and helps recommend policies and proscriptions to remedy our economic ills going forward.
Links:
- http://pragcap.com/resources/understanding-modern-monetary-system
- http://en.wikipedia.org/wiki/Chartalism
- http://wfhummel.cnchost.com/metallismchartalism.html
- http://www.acting-man.com/?p=7693
- http://mises.org/daily/5260/The-UpsideDown-World-of-MMT
- http://moslereconomics.com/
- http://bilbo.economicoutlook.net/blog/
- http://bilbo.economicoutlook.net/blog/?p=9198
- http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
- http://www.angrybearblog.com/2010/05/marshall-auerback-repeat-after-me-usa.html
- http://www.newdeal20.org/2010/05/14/repeat-after-me-the-usa-does-not-have-a-greece-problem-10863/
- http://www.nytimes.com/1988/01/03/business/keynesian-crusader-robert-eisner-why-not-a-bigger-budget-deficit.html?pagewanted=all&src=pm
In reply to a friend who stated, “you said you wanted to understand macro-economics, so you sought to justify your views.” I replied that I wanted to “understand macro-economics” (and still do since it is a life-long pursuit), but NOT, to simply justly my views. I really wanted to know if he and many others might be right and see this more clearly than I or not. I sought and seek to reconcile the facts and history as I know then (but am willing to change and learn) with principles and descriptions of how a fiat monetary system for a sovereign nation and its fiscal system operate in a globalized technological world. After looking at Monetarism, Neo & New Keynesian, the Austrian school (of which Ron Paul is a devotee, misguided as I think he is on this) New Classical school and various other heterodox schools and found that MMT (which is a combination of Chartalism and Functional Finance) was the only one that really wasn’t a “theory” and sought to describe the fiat monetary system as it is rather than as some would like it to be. The big problem for me is that all the other schools seems to be inextricably tied in some for or other to concepts that only apply to monetary systems that are tied to commodities that are constrained in some way or another.
One thing I wanted to start with was the seemingly pervading axioms that “debt is bad” and “we must balance the budget”. I have debt on my house, from some school and revolving on a credit card or two. Having debt at various times has been good for me and debt and finance have driven much of the economic growth in the U.S.A. since WWII. As almost any businessman and if they are honest they will tell you that they always have some debt and credit is absolutely vital to not only the growth of their business, but to its survival. It is disingenuous to say we should have no deficits and debt when many many households and businesses run occasional deficits and almost always have debts. Bottom line too is that households and businesses do not print their own money or have guaranteed income (taxing authority) like a sovereign nation (which is why macro economics is different from micro). With this in mind and the absolute fact that the only 7 times we have balanced the budget and begun to pay down the debt have led to serious depressions and recessions I began to study economics again and choose MMT in particular because it is neither “left” not “right” but more “descriptive” than political. This doesn’t take away the need for fiscal responsibility, but highlights the necessity to talk honestly about it, particularly in light of the recent recession, problems in Europe and our slow economic growth.
Nobel Prize winning economist Paul Samuelson, once explained about the “balanced budget assumption” when he said, “I think there is an element of truth in the . . . superstition that the budget must be balanced at all times. Once it is debunked, [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency.”
One of the things that has gotten this country’s public finances seriously on the wrong track is the idea that there was an implicit limit on deficits imposed by the political system. Hence, tax cuts would necessarily “starve the beast” by forcing spending cuts. The idea was plausible in the 1970s, but unfortunately has been proven beyond doubt by 30 years of experience to be completely wrong. In practice, there is no limit to deficits beyond those imposed by financial markets.
My friend also said he “(has)have serious doubts that our economy will outgrow its debt burden.” which I do too, but it doesn’t really worry me. I have few doubts that we will have another innovation revolution of some sort (green, medical, etc..) which will reduce the “debt burden” significantly. The honest fact is that in a fiat money economy we not only print the money, but we set the interest rates so as long as our “debt burden” is in dollars it doesn’t matter, we can always pay our debts and we don’t need to pay ANY interest on it if we don’t want to do so (look at the bond markets today paying almost nothing in interest). The main thing we have to worry about is inflation and that is not a serious concern at this point. This doesn’t obviate the need for responsible and effective spending, but that cannot be done if you don’t understand and can’t talk about how things actually work. The worst thing IMHO is $1 to $2 Trillion spent on wars which is like rolling the money and burning it rather than spending it on infrastructure and education.