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Archive for May 19th, 2010

Galbraith and MMT

Len Burman of the Tax Policy Center responded yesterday to Jamie Galbraith’s deficit comments that I blogged about last week. Galbraith, in responding, has revealed more of his own views about how government deficits and debt operate. They sound a lot like MMT.

Understanding that the US Federal Government can never be forced to default on bonds issued in US dollars, they will never be in a position to “demand” a hefty risk premium. Efforts to move into other assets — as several commenters on Burman’s own site pointed out — merely move the dollars around. Eventually they will end up in Treasuries, if the US Government makes the Treasuries available.But the US Government doesn’t actually need to make new Treasuries available. It can simply leave the banks with free reserves — in which case, they will bid up the price of the Treasuries that are available in the system…

Next, Burman presents the reductio ad absurdam:

“Taken to its illogical extreme, Galbraith’s argument implies that there is no limit to government’s borrowing capacity (and that the money never really has to be paid back). If that’s the case, why not dispense with the annoyance of taxes altogether?”

It is entirely true that the Federal debt can — and will — go on rising, in dollar terms, year after year. It has done so for several centuries already. But it does not follow that cutting taxes to zero would be wise. Taxes control effective demand, and they are also the main reason why people hold dollars in the first place. We need them.

Burman finally suggests that I believe that “deficit hawks are all anti government kooks who want to dismantle the social safety net.” I deny this.

The part about taxes, in particular, sounds a lot like MMT. There was also some back and forth in there about inflation, which Galbraith said can be avoided by containing health care costs. He could also add that inflation is only a concern when economic resources are fully employed.

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I want to draw attention to three mostly unrelated points. The first (which was in the friday links) is that Ben Bernanke devoted a commencement address to the economics of happiness. Here’s a notable excerpt:

Easterlin’s own view, taking an economic perspective, is that people’s happiness depends less on their absolute wealth than on their wealth compared with others around them…

Human adaptability, which I mentioned earlier, also helps to explain the Easterlin paradox. Rich or poor, you tend to get used to your circumstances. Lottery winners get used to being wealthier, and their psychological state may ultimately be not much different than it was before buying the winning ticket…

life satisfaction requires an ethical framework. Everyone needs such a framework. In the short run, it is possible that doing the ethical thing will make you feel, well, unhappy. In the long run, though, it is essential for a well-balanced and satisfying life.

Second, I thought David Ruccio had a keen response to Akerlof and Kranton’s Identity Economics piece:

I certainly don’t want to argue against the importance of social identities and norms within organizations, large and small…But Akerlof and Kranton’s is an impoverished notion of how social identities and norms work, and how they are reproduced over time.

First, they forget all about notions of fairness and justice, as frames of reference for organizational identities. If the existing norms are considered unfair or unjust, why should they be followed?

Second, they write nothing about power, much less notions of ideology, propaganda, or exploitation. For example, the panopticon works—it keeps people aligned with the correct functioning of the organization—because it induces a sense of permanent visibility that ensures the functioning of power.

Third, from the profile of Cass Sunstein, we see some wrong-headed discount rate thinking. At least the author brings up the ethical point:

In OIRA’s cost-benefit calculations, the government’s willingness to spend depends on…the social cost of carbon…All else being equal, if given a choice between paying $1 million now and $1 million five years from now, economists will choose to pay later…

The problem, Sunstein says, is that we might do irreversible damage to the planet while blithely waiting for the price of action to drop just enough…

The debates over the discount rate are less mathematical than moral. Spending money now to prevent climate damage that won’t appear for decades is a tax on present generations; declining to spend now is a tax on the future. The British government several years ago assigned the economist Nicholas Stern to value the cost of climate change. Stern’s vision was nightmarish…

As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work…

So the strategy is too find a price that sounds right, and back the discount rate out? Seems so unrigorous.

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