By now it’s pretty clear that the economy makes the world go round.  If people don’t have jobs they’re not happy.  And people don’t have jobs when the economy stinks.  Politicians know this.  We can bicker about Social Security and wars abroad, but at the end of the day the voters care primarily about one thing – if the economy is prosperous enough to provide them with the ability to create a better life for themselves and their families.  It’s that simple.

Unfortunately, politicians don’t really care about the long-term.  They care about getting elected.  And elections occur only in the short-term (at least when compared to business cycles).  So they tend to implement policy that will help them achieve their short-term goals.  Often times the result is an obvious conflict.  We sacrifice the long-term well-being of the country for the short-term.  We do things like bailout bankers and implement silly stimulus packages that are targeted at short-term fixes (homebuyers tax credits) and not structural problems (infrastructure & jobs).

So, today I am putting my Republican campaign strategist hat on.  What could we do to ensure that President Obama gets kicked out of the White House in 2012?  Well, the obvious answer is that we want to make the economy really stink no matter what.  We want the unemployment rate to remain high so we can run advertisements non-stop that say:

“The unemployment rate is higher today than when President Obama took office!”

That will resonate with people.  Who cares if people are really out of work?  It will help us get elected.  And that’s what matters to politicians.  How can we best achieve this goal though?  How can we keep the economy in a seemingly perpetual decline?  Well, it’s rather simple.   First, we need to understand the basics of the current unusual economic environment.

You see, when an economy has just experienced a massive debt bubble that implodes, you get an imbalance in balance sheets.  We call this a balance sheet recession and its highly unusual (it’s only occurred a handful of times in developed economies over the last 100 years).  The debt levels remain the same as they were when the debt binge began, but the decline in asset prices creates the imbalance.  As the housing bubble grew the US economy experienced an unprecedented growth in debt.  This generated an imbalance as debt levels far outstripped disposable income.  This environment was sustainable as long as asset prices continued to climb, however, once prices deteriorated debtors were left with an imbalance.  As a result, a balance sheet recession ensued as demand collapsed under the weight of households who preferred to pay down debts rather than spend.  The impact is magnified by corporations that cut costs (read, fire workers) as demand collapses and they attempt to protect margins.  Real sustainable recovery cannot ensue until the indebted sector of the economy returns their balance sheet to a state of normalcy.

The problem during a balance sheet recession is that it throws the economy into a tailspin.  The indebted sector of the economy doesn’t enjoy their typical actions.  They don’t spend and take on debt like they would during a normal economic expansion.  And as I’ve explained many times here, that’s what is occurring today.  The household sector cannot bear the weight of the recovery efforts because they are still too highly indebted.  And until they have paid down their debts to a sustainable level they will remain in this funk.  By my estimations that date will not come before 2013.  And that’s perfect timing for our Republican candidates.

The key though, during a balance sheet recession, is understanding where economic growth comes from.  Basic economics tells us that spending must come from somewhere in order to achieve growth.  If everyone just sits on their wallets then there is no spending, no income, no investment and there is no growth.  In the USA, that spending can come from 1 of 3 sources – the private sector, the public sector or the foreign sector.  With a -3.5% current account deficit the foreign sector is out. With a balance sheet recession overhanging the private sector they are out.  So, you guessed it!  Spending can only come from one sector – the US government.  And if they do not spend the economy will do exactly what it is doing in the lands of austerity (Greece, etc).  It will sink into a hole as the private sector is exposed as being bankrupt.

This morning’s 1.8% GDP report was a fine example.  The report said:

“The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a
deceleration in PCE, a larger decrease in federal government spending, and a deceleration in
nonresidential fixed investment that were partly offset by a sharp upturn in private inventory investment.”

You see, what’s happened over the last 2 years is that the government has stepped in and taken the baton from the private sector.  You can best visualize this in the chart below.  That huge decline in the red bars led to a direct surge in the blue bars.  And it’s the surge in the blue bars that added income to the private sector at a time when it was paying down debts and generally misbehaving (in economic terms).  This created what looks like a “recovery”.  In reality, it’s just government spending filling in the gap leftover from the private sector debt debacle.

So the key here is really rather simple.  If we can cut spending we can keep the economy in a hole.  And that means we can keep the unemployment rate high.  We can keep people angry and scared.  I propose that we use the debt ceiling as our primary tool.  Of course, it’s factually impossible for the US government to run out of the money that only it can produce.  And that logically means that the debt ceiling is a silly self imposed constraint to begin with (not to mention the fact that a nation with endless supply of currency in a floating exchange rate system and zero foreign denominated debt never really has an inability to meet its obligations, ie, there is no such thing as becoming “insolvent” in the traditional sense).  But the voters don’t get this.  They think the US government is constrained in its ability to spend.  They think the US government can go bankrupt like a currency user such as you or I or Greece.  If we can use this household analogy to scare people into thinking that the USA is bankrupt then we can scare people into believing that we need to cut spending.  Never mind that inflation is the true constraint and that core inflation is 1.8% and headline is 3.1% (with near record gas prices!).

The bottom line is simple.  We must cut government spending at all costs. We should not reduce taxes.  We should not allow any more stimulus packages.  We need to crash that blue bar in the above chart.  And we need to utilize any and all strategies to do so.  If we can achieve a collapse in government spending we can ensure a weak economy in the coming two years.  And if we can ensure a weak economy we can plug anyone we want into the White House.  Let’s get started.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • SS

    Sounds like a great plan. Keep the economy in a hole all so we can get Sarah Palin in the White House! Could it get any worse?

  • Jo


    The USSA is already bankrupt.

  • Cullen Roche

    Could you pass that message onto the bond market? I’m sure they’d appreciate this news.

  • RB

    Cullen, I’m sorry, but you are wrong here. No one with half a brain thinks we can “go bankrupt”. Everyone knows that we can print as much money as we desire and spend like there is no tomorrow. Backward looking inflation indicators that have been heavily manipulated downward over the years (go look at what inflation would be if we used 1980 metrics or even 1990), do nothing to calm anyone’s real fears. They want to know how we are going to climb out of a debt hole the size of our entire economy, not to mention unfunded future liabilities to the order of untold trillions. Republicans want to provide an answer. While we can agree on the implications of austerity, it is nowhere near as simple as you are making it out to be.

  • Cullen Roche

    I love your optimism with regards to the nation’s understanding of the monetary system, but you’re just not painting an accurate picture. According to a recent poll, 19% of the country wants the debt ceiling raised:

    Forty-seven percent say they don’t want their member of Congress to vote to raise the limit, compared to 19 percent who do.

    So, 80% of the country doesn’t have “half a brain” according to you.

    Backward looking inflation gauges? Oh my. Sounds like you’ve fallen for the Shadow Stats lines….Let me know when John Williams is right about hyperinflation and then we can talk about whether he is a credible source. He’s been warning about hyperinflation and evil govt data for as long as I can remember. And he’s been wrong at every single twist and turn. He said hyperinflation would come this year. He was certain of it. Now he’s pushed that back to 2012. And in 2012 he’ll push that back to 2013. And you’ll buy his monthly subscription every year because he feeds your need to be scared.

    As for inflation gauges. Let’s just use the ECRI’s FORWARD looking gauge. It says inflation is falling from 1.8% yoy levels.

    What debt hole are you referring to? We’ve run budget deficits for our entire existence. There’s no such thing as “unfunded liabilities”. We never “fund” our spending with anything. Not bonds, not taxes. You might want to read this:

  • Peter D

    My suggestion for digging out of the hole. Every US individual – we’ll make the assumption they are all patriotic and care about helping Uncle Sam – burns all their savings of USD. Then every US company and US-based pension fund etc does the same (they’re all patriots too!) Overnight the only debt outstanding will be something like a couple of $T to the foreigners, whom we cannot assume to be loyal to the US. Magically, the debt is almost gone…
    Sound idiotic, right? Well, it is. Because US debt BY DEFINITION is the accumulated savings of non-govt sector. Maybe you need to spend time with some MMT basics?

  • CFS

    I would reiterate to you Cullen’s reply to Jo, seems like the bond market does not get it the same way you do…

    The current republican leadership are using the worst kind of populism with a very serious issue. The worst part is that they actually believe in it and therefore if they actually managed to win the WH in 2012 and gained control over the Senate and Congress, we could see applied in the US austerity measures similar to what has been imposed in Greece. If that happened things would get really really bad.

    On second thought such a catharsis could actually be good in the long term. It would show the American people, the hard way, the truth about the sectorial balance graph that Cullen shows in this article, and maybe this time would stick.

  • LVG

    Well, this is the game plan. But I have to ask – do we really want 4 more years of Obama anyhow? What has he done that’s been so great?

  • Cullen Roche

    Depends on the alternative really. Do we want someone who is going to pile drive us like David Cameron is doing to the UK? I totally agree that Obama has been a disappointment. But at this point, I don’t know if there is a better candidate out there. He’s sort of the nicest house in an ugly neighborhood right now. But heck, if they can come up with a candidate who is reasonable about our current economic environment then I’d be all for it.

  • Peter D

    How about a Mosler/Roche ticket!

  • Cullen Roche

    You literally just made me laugh out loud. Not the Mosler part. The Roche part.

  • RB

    Wanting to see budget cuts rather than continued profligate spending out of Washington, is entirely different than thinking the government can simply run out of money in the same sense that I can fall short of a mortgage payment. Even those who answer “yes we are bankrupt” in a poll are most likely referring to technical solvency and not an ability or inability to print away debt. But out of those people who are too dense to understand that the US government prints US dollars, how many of them do you think will be showing up to their local polling places next November? My guess is very few.

    Now this isn’t even relevant to the discussion, I just made the comment as an aside, but if you are going to sit here and say that the BLS hasn’t made changes to their methodology, resulting in a downward bias to CPI over the years I am going to disagree. Hyperinflation is not what I’m talking about, and I never quoted shadow stats. You did that.

    The debt hole I’m referring to is the total debt subject to limit, as will as social security, medicare and prescription drug liabilities. How will that be made whole? By printing $130 trillion dollars? And you are telling me these are not problems people should concern themselves with, because “we never fund our spending with anything”? What a joke. My suggestion to you would be to tone down the rhetoric. It undermines your argument and makes you sound extremely arrogant.

  • Peter D

    SO, your ideas of wasteful spending are SS, Medicare and prescription drug liabilities?
    SS is about shifting about 1% of GDP to the seniors – simply not an issue. Medicare and Medicate are in trouble only because our healthcare costs rise too fast – in other words, the problem is not the govt spending! If you just slash Medicare and Medicaid you’re not solving any problems, just shifting even more debt to the the private sector, which will lead to less growth, less tax receipts, more deficits in turn. So, to solve the Medicare problem we need to solve our broken healthcare system problem.

  • Somnolento

    Dude, seriously, shut up. You’re such an obvious troll.

  • Cullen Roche

    Please bear in mind that I am trying to help. I do not intend to sound arrogant, pushy or obnoxious. I can see how it might come off as that, however, when someone discusses facts it’s hard to decipher between confidence and arrogance. If you’re really so skeptical about the CPI you might be interested in the following. They debunk many of the myths regarding their methodology. They’re incredibly thorough.

    Also, you might be interested in this:

    I have been a huge critic of much of what our govt has done in recent years, but manipulating data is not high on their list of things to do. This govt is incredibly open with its citizens. If you doubt that you should try to find data from most other developed countries regarding their economies. If you want to be frightened then do the same for emerging markets….You have no idea how good we have it here in terms of access to govt facts and figures…..But the grass is always greener….

  • Peter D
  • RB

    Wow, I preface the comment by saying it isn’t even relevant to the discussion and you proceed to spend the entire time talking about it. I’m guessing it’s a touchy subject for you. So I’m not going to dig up facts about it, you can have that battle. The only thing I’ll say is that while you can deride hyperinflationists all you want (I am not one), you have got to admit their investment thesis has panned out pretty well this last decade.

    Either way I’ll just refer back to my previous question that you left unanswered. How will debt subject to limit, medicare, prescription drug and social security liabilities be made whole? Will we be printing $130 trillion dollars to meet these obligations? And if that is the case, should Republicans ignore it because they don’t want to scare people?

    Don’t get me wrong, your website is very informative and I’ll even still be your friend. I just think it’s a very complex problem that people have every right to be concerned about.

  • Joe

    I’d been struggling to bring all of the concepts of MMT you keep re-iterating, but this article has done the trick – thanks!

    I’m from the UK, will be interesting to see which way things go there…As you say though, if people are worse off after 4 years, regardless of whether it makes sense or not, they’ll forget about Labour bailing out the banks (and building up a massive deficit). At least they did one thing right and said no to the Euro!

  • Cullen Roche

    People who trash the CPI haven’t actually taken the time to understand it. I have and it’s remarkably good data. And the hedonic adjustments make a huge amount of sense. I actually think the CPI could be understating inflation because they have the housing component (43% of the index) RISING right now. That’s simply not an accurate reflection of the current inflation environment….

  • bb


    Its the dems who want to raise taxes.

  • RB

    Social Security is “simply not an issue”. Forgive me if I stopped reading right there.

  • alex

    The entire Republican election campaign is going to be scaremongering. Even though people eventually realized that Trump is just a political clown, he did hit a sensitive nerve for a few weeks. There is a chance the Republican ticket will be a “China is raping this country by taking our money and jobs and then loaning it back to us, our debt will cause an economic catastrophe is we don’t stop spending, lower taxes for the rich because the wealth/income will trickle down, cut entitlements”.

    And as we know, scaremongering sells (recent evidence includes the hyper-inflationists and the end of the world group).

  • Cullen Roche

    Look, if you’re going to make this personal then don’t be shocked when I respond about that specific comment. People do this all the time here. They come here with these ridiculous statements and then when I tar and feather them they claim I am not playing by the rules, or I am being a jerk, or I am being “arrogant”. It only distracts from the actual topic at hand. So yes, when you do it, I am going to call you out on it. I am incredibly reasonable with readers here. I ask for one thing only – don’t make it personal. Make it about the facts. If you can prove me wrong then do it! I love to learn and I know I don’t know everything!

    There’s a big difference between market action and reality. The bottom line is, the USD hasn’t collapsed, the bond market hasn’t collapsed and the US economy hasn’t collapsed. If anything, the inflationists have been right because China has boomed. Not because their thesis panned out as they said.

    How will we meet our obligations when they come due? The same way we always do. We’ll change numbers up and down in accounts. The key though, is not that we have “unfunded” liabilities. The key is understanding the point at which this spending becomes detrimental to our prosperity and standard of living. Has inflation done that to us? Or are we still the wealthiest nation on the face of the earth? We are the wealthiest nation on the face of the earth and the US economy has undergone a totally unprecedented period of human prosperity over the last 100 years. People who like to claim that the USD has lost 90% of its value in the last 100 years fail to understand the very basic of standard of living adjustments and how it plays into inflation. The fact is, real GDP per capita has soared in the last 100 years and Americans are just years removed from their very best of times. Is it a mess now? Yes. And I talk about the reasons for that all the time. But govt spending isn’t the thing that’s ruining us.

    I don’t want you to be my friend (I say that kindly). I want to expose you to a different way of thinking about things. A way that removes the political biases. That’s all. Thanks for the comments. I hope I didn’t insult you….

  • Cullen Roche

    Yes, that’s why I said both sides are full of it :-) The Dems are equally clueless….

  • Cullen Roche

    Hi Joe,

    Glad you finally got it. It’s one of those things that just finally clicks. I know the feeling.

    Yes, the UK was very wise to stay out of the Euro. Unfortunately, you guys aren’t really using your sovereignty to your advantage and it looks like the result is leading to double dip….

  • beowulf

    I was kind of bummed when The Donald dropped out, I do hope he changes his mind.

    Trump was the only candidate who said things like this (to quote a blog that quotes me quoting Trump) :o)
    he’s leading in the GOP polls even as he tells conservative supporters like Sean Hannity what he’d do about entitlement reform;
    “I don’t care what plan the Republicans put, I’m protecting the seniors..”
    And when Hannity asks how he’d balance the budget, Trump changed the subject from deficits to jobs (taking a whack at China along the way),
    “Don’t forget China is taking our jobs…. the best thing for balancing the budget is to have a strong economy. And the economy can never come back if we are going to always have high unemployment.”

  • Peter D

    I have the numbers – you don’t:
    How 1% of GDP is an issue, really?

  • RB

    Ok that sounds good to me. You know what would also be cool, if we colonized Mars. Sounds expensive, but since we can just push numbers up and down in accounts later on its fine. Don’t worry about it.

    I use a ridiculous example but that’s essentially what you are saying about these very real obligations. You say “the key is understanding the point at which this spending becomes detrimental to our prosperity”. Do you know when that point is or how to recognize it? And when it arrives can we just immediately put the kibosh on it, or does it take years of planning ahead? These are questions that a reasonable person should be asking, but the answers become very vague in the context of your analysis.

    I am also amazed that you don’t think inflation hasn’t been detrimental to standard of living yet. Just look at food stamp enrollment. 1 in 7 can’t even afford the cost of food with out relying on government funds. Are we about to become the Weimar Republic? Of course not. And no you did not insult me, but I find it ironic that you’re lecturing me about political bias in a piece that mockingly and inaccurately describes the republican position.

  • beowulf

    Alex, you’re missing Trump’s angle of attack. China bashing was about redirecting public anger from the budget deficit to the trade deficit. Which freed him politically to say things like this–
    “We don’t have to cut Social Security; we don’t have to cut Medicare and Medicaid. We can take care of people that need to be taken care of. And I’ll be able to do that.”

  • Geoff

    Mr. Roche,

    Great post, albeit a depressing one. Allow me to try and inject some optimism. Granted, household balance sheets stink, but corporations currently enjoy very strong balance sheets and profitability. They have plenty of room to spend and create jobs. They also have ample room to lever up, which they are currently in process of doing if the booming corporate bond market is any indication.

    As for the public sector, the fiscal cuts are likely more talk than action, as usual!

  • beowulf

    Agreed! Roche/Mosler

  • Scott Fullwiler

    whatever happened to the days in the mid-to-late 1990s when everyone, Greenspan included, argued that the CPI was inherently OVERSTATED? (Note the word “inherently” there, largely due to quality improvements and substitution effects that could never be integrated as fast as they were actually occurring, so the argument went.) Does anyone remember the Boskin Commission? I’m not being facetious here . . . what changed besides ideology to make everyone believe CPI is now understated? I obviously missed it and would like to know where I should look to see what analysis was done to make this 180 degree turn on how the CPI is viewed.

  • Peter D

    Donald got it right, beo… My new meme is that deficit reduction is the wrong goal but could be the right outcome. A very large deficit most probably means something is wrong with the economy – the real culprits could be large unemployment, low productivity, big spending on nonproductive activities such as wars etc. Solve the real problems of the economy – not the derivative deficit and debt numbers – and those debt and deficit numbers will go down by themselvem.

  • Scott Fullwiler

    And please don’t respond with imputed rents. though it’s true that that is quite perverse, that’s old news as it was well understood that it was perverse back in the 1990s (Randy Wray wrote about it in 1993, I think, for instance).

  • gf

    That is the ticket.

    I will switch parties NOW

  • Peter D

    The problem is, no matter how much cash corporations have, they won’t start hiring before they see an uptick in demand. And this comes from the household sector mostly, which is underwater.
    A lot of our deficit – which could be “healthily” large – is in the wrong bucket of the non-govt sector, unfortunately…

  • Brian

    Cullen the thing that confuses me about MMT is the idea that there are no limits. It would seem that there must be a consistent balance of the triangle for prosperity. Is there no limit to how much money they can print for instance? And if they keep printing it won’t the imbalance overwhelm the economy eventually?

  • Cullen Roche

    The constraint is always inflation.

  • Peter D

    1 in 7 can’t even afford the cost of food with out relying on government funds.

    And this is the fault of govt spending? Are you serious?
    Look, colonizing Mars is not an outrageous example at all. The way to grow is to spend now on productive causes. Don’t be afraid of debt and deficit numbers – these mean almost nothing. They are only a reflection of some underlying economic realities. Targeting a certain deficit number is akin to treating a symptom instead of the underlying disease and is quite likely to be futile or even counterproductive. The deficit should be left alone and, if the right policies are pursued, the improvement of the underlying economy will deliver deficit reduction on its own (the key phrase is “the right policies”, of course.)
    I know that still leaves room for the argument that deficit itself, due to people’s misunderstanding or some sort of Ricardian equivalence, can be a drag on economic activity. In other words, if enough people like you believe deficit to be a problem, then it can become a problem. But then reducing the deficit is still a silly goal, since such reduction would hope for a Placebo effect that would create auspicious economic outcomes in the face of what would most probably be actual strongly contractionary measures.

  • http://None Chi Town Jack

    If I’ve read the articles on this site correctly, there’s a limit on how much money the govt. can add to the system at any given time. Add too much, and it prompts abnormal inflation. Which seems to be why Cullen is always debunking the oft-cited critique of MMT’er that they think “deficits don’t matter.”

  • Geoff

    Where is Henry Ford when you need him? Great point above about the underlying causes of the fiscal deficit, and bringing it down naturally.

  • effem

    I am of the belief that government spending has an inherently low ROI, because it gets splashed about in highly inefficient ways (e.g., useless wars). Growing the low-ROI piece of the economy at the expense of the high-ROI piece of the economy might create some jobs in the short run but I dont see how it could add value in the long run. And no, I have little faith the government could ever become a better investor.

  • LVG

    One thing that always annoys me about these stupid inflation debates is the situation in China. Why does China tolerate 5%+ inflation and we sit around and complain about 2% inflation? Why is China the envy of the world if they have high inflation? Doesn’t this show that higher inflation is one of the results of higher growth?

  • MMTer

    Which is part of the reasons why MMTers have been proponents of lower taxes. Don’t let the government spend it. Let’s just put it right in the hands of the people.

  • Scott Fullwiler

    what’s the roi for unemployment?

  • effem

    Higher than the ROI for getting killed.

  • Peter D

    So, effem, you just reduced your reasoning to the case of war spending only?
    It might also not hurt if you could back up your belief with some substance.
    What is the mechanism by which anything that a govt touches turns to turd?
    For the record, I totally agree with you about wars and I also agree that govt spending can be wasteful. Where I disagree is:
    1) The really wasteful spending – aside from wars – is not where the money is. Conservative foundations like Heritage tried to shut down the entire govt – that is assuming ALL govt spending is totally wasteful! – and came up with some pitiful deficit reductions. In other words, while there is wasteful spending, its share might be too small to really matter.
    2) There is plenty of wasteful spending in the private sector as well.
    3) Some programs are inherently better if run by govt and some if run by private sector.
    4) Most govt spending doesn’t need to have any ROI attached since they serve a useful public purpose. Additionally, attaching ROI might not be even possible.
    Didn’t we have this discussion before? I forget.

  • Scott Fullwiler

    Obviously. The point is, the ROI from a govt deficit has to incorporate the opportunity cost, which is unemployment, which itself brings lower productivity, greater spending on crime prevention, jails, divorces, etc., etc. Virtually every social problem has some statistically signficant relationship to unemployment. So, the suggestion that the ROI of govt spending is low seems to me to be an ideological statement. If one prefaces it by noting that different types of govt spending can have higher ROI’s than others, then fine. Even that doesn’t get to the point, though, which is (a) MMT’ers aren’t talking about govt spending, they’re talking about deficits, and (b) MMT’ers preferred approach to deficits, functional finance, by DEFINITION is concerned with the EFFECTS of spending, so a concern with properly evaluated ROI that incorporated opportunity costs would be baked in.

  • RobertM

    re: “Social Security is “simply not an issue”. Forgive me if I stopped reading right there.”

    Funny, that’s what I did when you said it WAS an issue.

  • effem

    As it pertains to unemployment, I would much rather someone sit home and try to figure out how best to retrain themselves than the government decide that for them. Yes, it may mean unemployment clears more slowly but I think it’s the much better answer in the long-run.

    As for government vs private sector I agree there is waste in both. I wish the private sector were a better jobs engine but I think it has almost become too good at being a “profit engine,” which increasingly means less labor regardless of profit levels. I dont have a good answer for this. However, I trust the market way before I trust government to figure out it. I can’t think of many (if any) countries with high government spending that I would consider dynamic job creation engines – quite the contrary. If the argument is that we should become a welfare state (let the truly gifted make all the money and the government redistribute it) then I might actually agree as I’v seen it work well in practice (Northern Europe). However, that concept is so far from our cutural DNA that I dont think it’s a realistic option.

    So we have a broken government that cares a LOT more about votes than ROI. We have a private sector that increasingly relies on shrinking labor intensity to generate robust profits. We have a cultural bias against redisribution. AND we have rather high inflation in basic necessities (food, energy, healtchare). I wish I had a better answer but I dont – I honestly believe we’re headed for a severe social crisis but that’s another discussion.

  • RobertM

    And we won’t have high inflation until we have full employment.

  • George

    I suppose electing a “live within our means” President is lost in a world that, at times, advocates increasing borrowing/debt into the universe. Trump, the master of living off other-people’s-money, would of course be an excellent candidate. United States currently borrows $4B a day, or $40,000 each second, a policy the Donald surly could embrace.

    Here is the problem as I see it. Republicans will not increase revenue with taxes; Democrats refuse to quit spending money they clearly do not have. This is where the inflationist gets their juice; they see a scenario that has default written all over it. But before that happens, our debt is going to make those who enjoy a good panic, panic first with some form of “lost confidence” in the buck. Money that can’t be paid back won’t be, or something- like-that. This is nuts. In comes the deflationist looking at a CPI less food and energy and asking questions like “how will the Elite benefit from hyper-whatever”.

    We need a leader in this country, one that proposes a National Agenda. I don’t care if that means colonizing Mars or building a coast to coast bullet train; Someone who gets MMT but more importantly, someone who can implement that intelligence into some facsimile of having this bad situation under control.

  • Aaron

    Funny you mention colonizing Mars. If you speak with someone high up in NASA, they will tell you one of the main goals they have in the space program is “we have to get off this planet.” They feel we are doomed to screw it up, as well as the possibility of a meteor or something destroying the planet. So they want to diversify and not put all our eggs in one planet. So yes, there are folks in the government actively trying to colonize Mars!

  • Scott Fullwiler

    I agree with your third paragraph, generally. The first and second, though, seem oddly ideological in nature given that this discussion started with you arguing for a more ROI-based approach to policy (or at least suggesting that was a legitimate criteria). Not that I disagree with all of what you say there, but I would be willing to accept that many of my assumptions about what’s efficient or not may not stand up to well-conceived ROI analysis, and as such in regard to something like ROI I am more careful to separate my assumptions/preferences from what I can demonstrate with analysis or evidence I can cite.

  • Cullen Roche

    Oh no, that evil govt is trying to spend our money on something as useless as space research!

    It’s time that we stop thinking of the govt as this foreign entity. We don’t live in a communist society. They are not the bad guys. I have a friend who works at Nasa. He’s my friend. He’s a great guy. He loves Budweiser and football. He just happens to be 10X smarter than me and works for the government. He’s not going to work every day trying to think of ways to screw me over. He’s not playing for the bad guys. He’s just on the govt payroll.

    Instead, we need to start accepting the fact that the govt is a tool by us and for us. We need to figure out how to take smart guys like my friend and figure out if we can plug them into roles in our govt that can benefit us all. Me personally, I wouldn’t ever think of telling this friend he shouldn’t have a job. Just like my Navy friends here in San Diego (yeah, Seal team 6? Trained in SD about 10 miles from my home. Tell them they are doing bad work!). They are all great people and doing great work. They’re not the bad guys. They’re the good guys. And I appreciate everything all of these people do.

    We created this govt by choice. It didn’t just happen. We created it for us and by us. The key is finding efficient and productive ways to utilize our govt. Particularly if the pvt sector is unable or unwilling to utilize them.

  • SS

    You should write a book about your views of the world. I love reading your unique perspectives.

  • b_b


    Love the site. Best on the web.

    Two quick questions.

    1. How does MMT explain stagflation in the 1970’s? A scenario of high inflation AND excess capacity? Also why did the IMF bail out the UK in 1976 when the UK had a floating exchange rate?

    2. Would you suggest the credit criss of the 1970’s was a balance sheet recession? What lessons were gained from this period?

    I apologize if you may have addressed these questions in earlier posts.

  • Winston

    Very interesting discussion. One point and one question.

    Most government programs involve the private entities producing the goods or services, not the government, as is defense spending on guns, tanks, planes, etc., and in Medicare and Medicaid spending on health care services. So it is not clear that comparing government RO! vs private sector ROI makes any real sense. Plus, the federal government does a lot of vital basic research that the private sector refuses to do because companies cannot capture and monopolize the profits from it.
    So, its just not realistic to simply bash the government. wring our hands and pretend the private sector can and will do everything without any government involvement. The argument has to be how can we make government programs more effective, not how do we get rid of them all.

    But my question has to do with tax cuts in the MMT context. It sounds like the discredited Laffer Curve. If you cut taxes, it will so stimulate the economy that tax revenues will actually increase, rather than decline. How does MMT approach change this argument?

  • José

    @Winston: I can’t speak for CR, but I would think that it would depend on who gets their taxes reduced. Reducing taxes on rich people doesn’t help the economy much because until the economy turns around they’re just going to park it in the least risky savings instrument they can. It doesn’t boost effective aggregate demand like putting money into the hands of people who have little choice but to turn around and spend it. This is why maybe this temporary payroll tax reduction wasn’t such a bad idea–reduces costs of employment AND gives everyone with a job a tax cut.

  • Cullen Roche


    Important questions. Will get to them tonight when I have some more time.



  • JWG

    In a balance sheet recession, deleveraging is necessary. The Fed is trying very hard to avoid or at least delay deleveraging, and is fairly successful so far. Isn’t this a recipe for continuing stagnation given high consumer debt? When will someone write down some underwater assets?

    The 1970’s were an era of demand pull inflation (the new two income couple as boomer women joined the work force, etc.), scarcity and overheating that was worsened by negative real interest rates courtesy of Arthur Burns and William Miller at the Fed and also a growing Fed balance sheet to assist the growth of the welfare-warfare state. Paul Volcker decided to end the party.

    High unemployment and high inflation occurred in the 1970’s. Such outcomes are not impossible by any means, but the 1970’s were an overheating scenario in the macroeconomy worsened by reckless Fed policy and where we are now is a deflationary depression (following a hyperleverage mania and reckless policy) masked by huge federal deficits funding transfer payments and income stabilizers that are sustaining demand.

    I think that TPC is giving the Republicans too much credit in thinking that they are so Machiavellian on economics. In reality, very few politicians know anything about economics and finance; most of them are glad handing empty suits. The Democrats’ love of high taxes on “the rich” (also regressive payroll taxes “fund” Social Security and Medicare and thus are sacred to Democrats) is just as risky right now as the Republican’s love of big spending cuts. These are faith based positions based on ideology, not objective analysis.

    I hope that TPC gives equal time to ridiculing Democratic myth and lore on how 90% marginal rates were the golden age of America, payroll taxes are sacred, FDR ended the Depression with high taxes, increasing the cost of energy will help the economy, etc. ad nauseam.

  • Tom

    Hi Cullen,

    I have spent a portion of my career here in the US and a portion working in Latin America and Ukraine. I would have to agree with you the US is the best place to live, work and raise a family. However, I would also say the total advantage of our lifestyle has slipped relative to the rest of the world in the past 30 years.

    Also, I don’t think the overall impact of longterm general inflation should go underestimated. The malinvestment in housing in the US and around the world is one of the great economic failures of the past one hundred years. There are many millions of oversized homes around the world which are largely unwanted now that people realize they will not go up in value forever. And, in my opinion, this irrational home price belief had it roots squarely planted in a fiat monetary system.


  • Mediocritas

    Humour aside, don’t even THINK about going into politics. I grew up with a politician father, I got to see politics from the inside through an unbiased lens. Many people naively enter politics because they want to make a difference. Either they crash and burn, or they evolve into a party animal; it’s the only way to survive.

    Politicians are little different from junkies in their behaviour, all that’s different is the choice of drug injected to lead to their dopamine fix.

  • Cullen Roche

    I nail the Dems quite often. Just review any of my Krugman posts. Or give this one about the myths of the Clinton surplus a try.

  • Cullen Roche

    Scratch that. I will do a full post on it. :-)

  • Librarian

    The issue of unfunded liabilities brought up earlier in the conversation is something that I have always wondered about. The theory is that there are hundreds of trillions of dollars in future Medicare and Social Security liabilities that need to be paid. The only way to pay them appears to be for the government to print money which would cause high inflation.

    Here’s my problem with all of this. As it pertains to Medicare and Social Security, they are not “unfunded liabilities.” There really is no such thing.

    As for Medicare and Social Security, these are not unfunded future liabilities solely because Congress can change the rules any time it wants. Yes, these are promised future benefits, but they are not guaranteed. Of course all hell would break loose should Congress cut all of this off, but Medicare and Social Security are not legal entitlements. Nobody is guaranteed any of it. If Congress does reduce or eliminate benefits, are people going to sue the government for breach of contract?

    I understand the argument about promises made to future generations, and it is a lot of money, but these so-called “entitlements” are not legally enforceable contracts. They are not liabilities in the sense that they are future debts that must be paid. They should be paid, and Congress intends to pay the benefits, but Congress can cut benefits any time it likes. Congress can also change tax rates any time it likes.

    State government worker pensions may very well be legal contracts protected by state constitutions. This is a different matter of course.

  • beowulf

    Agreed, and I don’t think Republicans realize that pushing working families out of the middle class is tantamount to pushing them into the Democratic party. As Steve Sailer has noted, the GOP wins in states that allow for “Affordable Family Formation” (Where wages are high compared to home prices, people can afford to marry earlier and have more children… and vote Republican).

    The economic solution is obvious, zero out the $1.2 trillion in tax expenditures and replace it with a Negative Income Tax. Rutgers Professor Philip Harvey runs through the math (but comes out in favor of a job guarantee + non-monetary benefits).

    Politically, neither a NIT nor a job guarantee seems likely with DC teeming with deficit zombies (many with their own job guarantee, courtesy of Pete Peterson). A more indirect approach is the diabolically clever plan suggested by the Universal Living Wage Campaign– tying the minimum wage of each metro area to its housing cost. Minimum wage too high? Then amend your zoning code to make housing cheaper.

  • b_b

    Great – I’ll look forward to it.


  • beowulf

    Here’s my problem with all of this. As it pertains to Medicare and Social Security, they are not “unfunded liabilities.” There really is no such thing.

    LOL that’s hilarious. I’ve never heard anyone make that point before but it does raise an interesting legal issue. If they’re not liabilities, then anyone who says they are is lying. If they ARE liabilities, it doesn’t matter if they’re funded or not, they can’t be modified (“Congress has not been vested with authority to alter or destroy those obligations”).

    In fact, the situation is just as you described it, they’re not liabilities. The Supreme Court has held that benefits under the Social Security Act– which includes Medicare– can be modified at any time (“The noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits are based on his contractual premium payments”).

  • Sostegno

    @ RB and Cullens discussion:

    I think what RB is concerned about,
    what if current government knew they would be spending without funding?
    Would we then really colonize Mars, meaning spending would go to the moon,
    or there be some borders. I think no there would be no borders to spend.

    Becuae: Our current money system driven by a positive interest must always be debt based, otherwise there would be no hold in printing in spending.

    Cullen, spending without funding would not work in current monetary order because of the impacts of the compound interest on the system. It would only work in a natural economic order.

    You really oversee compound interst like everyone else. I think MMT is likely dogmatic and cant would not work if everyone knew that we had hat option of unfunded spending, not in this compounding money order.

  • Oliver

    not necessarily. you can have all sorts of inflations well below full employment. the question is, which are the right tools to fight them? target, target, target! but then, if the targets for sensible taxes are the same people making the policies, chances are they’ll try ever so hard to miss – usually by diverting attention to a new ‘enemy’.

  • http://none GLH

    I know that what the Republicans are talking about concerning the deficit is ridiculous, but don’t discount the Democrats responsibility for what might happen to them in 2012. Democrats should admit they dropped the ball by listening to the wrong economist and what happens in 2012 is their own fault. Obummer and the coporate Dems have brought this on the party. I’m just sorry that we as a nation will have to face what will happen when incompent Democrats are replaced by even more pathetically incompetent Republicans.

  • Adam

    “But my question has to do with tax cuts in the MMT context. It sounds like the discredited Laffer Curve. If you cut taxes, it will so stimulate the economy that tax revenues will actually increase, rather than decline. How does MMT approach change this argument?”

    The Laffer Curve or the idea that if you cut taxes the economy grows by more than the decline relies on the neo-liberal belief that increased savings moves through a so called loanable funds market to increase investment which drives economic growth. MMT, which incorporates functional finance, says that there is no loanable funds market. That is not how our banking system operates.

    MMT’ers are about matching aggregate demand to the economy’s ability to product. Targeted tax cuts can expand disposable income of people who are likely to SPEND it. Tax cuts for the rich gives money to people likely to SAVE it, which is a leakage to the economy and not going to generate much aggregate demand.

  • Oliver

    Do you want to stop the rest of the world from catching up? If it’s about keeping a cap on the others, then the good old imperial model is the one to go with… I mean, who needs work when you can make others work for you?

  • Oliver

    Beo, where do you find all this stuff? Seriously, do you own the holy grail of econ links or something? May I call you Jabba (Jesus Abba) Wulf?

  • Adam

    There are no federally UNFUNDED liabilities because the federal government as the monopoly issuer fully soverign in its fiat currency DOES NOT fund its spending. It just spends. The only issue to worry about in the future pertaining to these promised expenditures is will the real economy be sufficently large enough to absorb the aggregate demand created by this spending. If it is not then there will be an issue with inflation without reductions in spending or higher taxes (to reduce private sector spending to make room for the government spending on Medicare, Medicade and Social Security).

  • troll

    Hi, the economical ignoramus is about to put in his two-bits worth [1900 fiat money's worth (the gold equivalent of which is now worth $18.75)]:
    Sorry Cullen, you can talk circles around me in economics, but politically speaking, an absolute miracle has to happen to unseat Obama. The republican party has already split into two major factions (old schoool republicans and tea-partiers). The miracle will be if the party can unite. Unless that happens, say hello to the Obama mama for another 4 years.

  • Peter D

    Billy also thinks that the rich have high propensity to spend on imports that are demand leakages anyway:

    It is highly likely that the higher income groups have a higher propensity to import (per dollar of extra income) than the lower income earners.
    So what does that mean? It means that if you put a dollar of extra disposable income into the hands of the lower paid workers the multiplier effects will be greater than if you put the extra dollar into the hands of high income earner because less will be lost to the rest of the world via imports.
    So not only will the low income earners spend more of every extra dollar on consumption per se than the high income earners less income will be lost to the rest of the world because the import propensities are also different and align with their consumption propensities.

  • Peter D

    Or as Warren put it in

    Let’s look at it this way: 50 years from now when there
    is one person left working and 300 million retired people (I
    exaggerate to make the point), that guy is going to be pretty
    busy since he’ll have to grow all the food, build and maintain
    all the buildings, do the laundry, take care of all medical needs,
    produce the TV shows, etc. etc. etc. What we need to do is
    make sure that those 300 million retired people have the funds
    to pay him??? I don’t think so! This problem obviously isn’t
    about money.

  • Charlie

    I absolutely agree with Troll that an absolute miracle has to happen to unseat Obama. There is no Republican candidate who can unseat Obama at this stage.

  • REN

    Interesting comments. Beowulf touched on a seriously important point when mentioning Sailers affordable family formation. Conservatism and Freedom wins when people are able to be independent. People can be independent when the money system is designed to that end.

    Our current poltico-economic system is evolving to transfer wealth upward, where it is then distrubted back downward based on favors. Witness the many patronage type behaviors in Obamacare, or patronage in any number of Federal Programs.

    This system really codified itself during Wilson’s progressive era. The 16’th ammendment allowed direct taxation, the 17’th was direct election of Senators, and the Federal Reserve act enshrined private banking as dominant in the monetary sphere.

    These reforms work together like a machine, and inform our modern world. Witness TARP where the 16’th was used to fund reserves for private banks. Ultimately money is faith, and faith in private banking relies on taxpayers. Wilson noted that lobbying activity increased markedly after passing of the 17’th. Du-oh. Senators now needed to grease the public in order to get electted, as direct elections made them populists. The founders intended for Senators to sent by their States, that way they could watch our for States rights, and prevent the unrestrained growth of the Federal Government.

    MMT understands that our system can be used to enhance freedom by proper spending. MMT also understands that our money system can be abused to further Statist goals (the centralization of power into Washington).

    Pesonally, I believe that nationalizing the money supply and making all banks private with 100% reserve, solves the bulk of the money power problem. When that happens Freedom wins the battle. This sounds perverse… I know. How can nationalizing the money win for freedom?

    The answer is that the people will then have control over the supply, and it will be controlled by Law. Today we have ignorant politicians and unelected bankers in charge of our money supply. We can also remove the large efficiency drag that is incurred with debt based money.

    Dr. Yamaguchi’s models predict we can pay off the debt and the economy can be roaring within four years. Freedom would be enshrined as people are allowed to keep their wealth, and be independent from government patronage. see page 28

  • Different Chris

    & @Charlie,

    I think it is to early to be making those kinds of calls. This far out from the ’08 election very few thought Obama would get his party’s nomination over Hilary.

    I agree though that with how the field looks right now, there are no serious contenders.

  • beowulf

    You’re serious? You’re bummed that inflation has made a 1900 dollar the equivalent of $18.75 now? Let’s call it even $20. As of last quarter, US GDP is just over $15 trillion. Divide it by 20, so US GDP is $750 billion in 1900 dollars.
    The actual US GDP in 1900 was $21 billion! Our country has grown so absurdly wealthy in the last 111 years- 36 times larger after inflation– so what that you have to pay $4 instead of 20 cents to buy antibiotics at Walmart. Oh wait, they didn’t have Walmart (or antibiotics) in 1900, never mind.

  • beowulf

    Ha ha thanks. I’ve traded emails with Professor Harvey, good guy and well read on MMT (he’s cited Randy Wray in some of his work).
    Two point about our minimum wage ($7.25/hr);
    1. If 1968’s $1.60/hr rate had been adjusted by Average Wage Index, it’d be almost $12/hr, (and of course the low minimum wage itself is an anchor on AWI).

    2. It an enormous drain on Tsy because of the Speenhamland effect (see link below). Most welfare benefits– food stamps, Section 8, Medicaid, EITC– are means-tested. If we had Australia’s minimum wage ($15/hr with, last I checked, unemployment at 4.9%), the working poor would earn too much to qualify for public assistance (though sooner or later, Medicare will be a universal program). Instead, Congress uses public funds to make sure Walmart employees have enough to eat, so Walmart doesn’t have to.

    The Poor Law Commissioners’ Report of 1834, summarizing the failed program, called Speenhamland a “universal system of pauperism.”
    “In the long run, the result was ghastly,” wrote economic historian Karl Polanyi in his 1944 classic The Great Transformation . “Wages which were subsidized from public funds were bound eventually to be bottomless.” The result was that, as Notre Dame University Teresa Ghilorducci puts it, “The government subsidized wages so much they went broke.”

  • krb


    In the interest of disclosure…..while I like to claim independence, and I don’t believe our economic condition is a democratic or republican problem…. both are polluted, I tend to be conservative in my thinking.

    That said, your piece doesn’t break any new ground in my view, so your sarcasm is a little offensive. For my entire adult life the economic thinking of the two parties is that…

    republicans always feel we’re taxed to much and govt spends to much (said sympathetically) or provides too much help (same thing said critically)

    democrats always feel we are taxed too little and govt doesn’t spend enough (said critically) or should be providing more help (same thing said sympathetically). I don’t even define it as the “rich” are not taxed enough anymore…..with almost 60% of the public now paying no income taxes, if you pay any tax at all you must now be in the top 40% of wage earners and are rich.

    To suggest historically anti-govt republicans now want to reduce spending to specifically keep the economy in the toilet and our citizens oppressed for election gain is a bit of hyperbole. I’m assuming the counterpoint argument for re-electing OBama, with equal amounts of sarcasm, is coming from you shortly?

    Alternatively, I’ve offered strategies to some followers for either republicans or democrats to win the white house in landslides. See what you think of the below. To make long stories short…..

    If OBama dismisses his economic team including Geithner and confesses to some poor adviser choices, then replaces them with a new team of “main street centric” economic advisers, and states that he additionally plans to review the mandates of the federal reserve to insure they have main street’s interests at heart and not wall street’s…..if OBama does these things soon so there is enough time for the public to be confident he is now sincere, he gets re-elected in a landslide.

    If, on the other hand, the republicans put up an economically literate candidate, and expose for the public to see all the official AND unofficial steps taken by the federal reserve and treasury, with OBama’s blessing, that went to support the TBTFs instead of main street, with the fallout being high living expenses for main street, no interest income for retirees and elderly, ongoing high unemployment and economic stagnation because all efforts are focused on levitating wall street instead of reviving a starving main street……the republican candidate wins in a landslide.

    Both strategies are challenges because they will both have to overcome the billions that will flow from wall street into the campaign to keep the status quo. But the facts will support the claims, and both strategies will resonate with the 90% of the public on main street not benefiting from the economic recovery strategy that has been chosen so far. krb

  • Different Chris

    MMMMMMM, these facts are delicious, I’ll take more whenever they’re available.

  • Peter D

    I don’t even define it as the “rich” are not taxed enough anymore…..with almost 60% of the public now paying no income taxes, if you pay any tax at all you must now be in the top 40% of wage earners and are rich.

    First, care to provide a source for this astonishing assertion? I found this
    which claims the opposite (for 2009) – 43% not paying income tax, not 60%.
    Also, care to explain the logic of “if you pay any tax at all you must now be in the top 40% of wage earners and are rich” – I just don’t see how you reach this conclusion. Even if 60% of the population is too poor to pay income taxes, it doesn’t mean that the remaining 40% are rich.

  • Cullen Roche

    Well, I’m about as politically agnostic as they come and any regular reader has seen me bash dems and reps. So, if you take these articles personally then sorry, but don’t attribute it to my political bias.

    This isn’t personal or political to me. It’s about good economics. That’s all.

  • Adam

    I’m not attacking, but do want to point out that Mr Yamaguchi incorrectly describes the operations of fractional reserves banking as well as the entire operation of our monetary system. I would be caustious of anything he predicts until he can correctly describe what currently exists.

  • Peter D

    And even that 43% was “about federal income taxes, not other taxes like Social Security, Medicare, state income taxes, sales taxes, or car registration taxes, some of which are extracted through payroll deductions. The owe-no-money crowd tends to get hit by at least some of those.”

  • Joe USA

    After all is said and done; isn’t the answer to our balance sheet recession to have the FDIC ‘cleanse’ the banks with mortgage debt issues a la the 1980’s S&L procedure? And isn’t the real, deadly threat to our own economy/currency come from outside the US if/when the dollar loses its status as the world’s reserve currency? Take the time and pain to do it right with the banks and other problems will self correct. Stability is what’s been missing in our thought processes for too long.

  • beowulf

    Peter D,
    What a bizarre metric (percentage of Americans who pay income tax)–
    In 1927, only 2% of the population paid income taxes.

    Was Coolidge’s Secretary of the Treasury, Andrew Mellon, some kind of Kenyan socialist? Hmm, maybe he was:
    The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mettle and physical energy and the people whose income is derived from investments.

  • nottpc

    I bet he has a cushy pension and retirement healthcare as well to compensate for his govt work. Oh wait that is just capitalism creating winners and losers.

  • nottpc

    You are living in an idealistic world if you believe everyone having a true understanding of MMT would not lead to a spen ding orgy. You outlined exactly correct how politicians act. They would act no different in an environment where there is no theoretical cap to spending ex inflation prssure. Every man woman and child would demand free healthcare and education and food an d whatever else. Housing? Why not…there is no limit to govt spending outside of inflation and do we really think our politicians will care about long term inflationary concerns? Only a dreamer would think so. They would give away everything just to keep gettinh elected. You’d have hyper inflation in no time if everyone understood MMT because greed would over run the syste, to deny that is to deny how actors act in the current system.

  • Cullen Roche

    Why don’t we just agree to let me run the world. Deal?

  • Nick

    It would appear from the PSNBR number the other day that the Uk govt is saying one thing but actually doing what is required. No?

  • krb

    47% is two year old information. Current figure is 57%, and rising. I will go back to find where I read it……recent, within last couple weeks.

    Federal spending is not covered by car registration fees, sales tax, etc.

    This is a diversion……neither you or Cullen responded to my main point…..the parties’ positions on govt taxing and spending are not fundamentally different now from what they’ve been for at least a generation. To claim one party or the other is now motivated to drive the economy over the cliff to win the next election is a stretch, or about as credible as saying that Frank, Dodd and company avoided all attempts at Fannie and Freddie reform in 2005 so a bubble would grow and burst in order to win the white house in 2008. In either case, we give these “people” a lot more credit than they deserve. These politicians really believe in the pathetic economic theories they (both parties) pursue. krb

  • Ryan

    Sometimes I feel like the discussions mutate from practical to theoretical too quickly and consequently miss the forest for the trees. While I enjoy the theoretical, sometimes I don’t think enough time is spent on the practical.

    For instance, we can argue about inflation and hedonics, but would anyone really argue that the basic necessities have not been rising in cost significantly? The cost to educate your children, buy healthcare, buy insurance, and in many places buy a home, have increased significantly in the past 15 years. Could anyone pay their own way through college anymore? Of course not. A summer job ain’t gonna cover it like it did for my parents.

    We can argue about hyperinflation vs inflation, but practically speaking, its much more expensive for the average middle class person to provide for a family and that is why we work longer hours and have two-income families. Whether that is manipulated by CPI is not especially relevant to the facts on the ground. And I am not sure about the importance of MMT in this debate either. Certainly technology and discretionary items have fallen drastically in price over the years and that has led to a higher quality of life. But does that really help the average person provide the basics for their family and save money for the future?

    So I think that arguing that there isn’t really inflation misses the point. Whatever the CPI says, the general cost of living is rising. While quality of life has also improved, the core necessities tend NOT to be the items falling in price each year. What are the big ticket items in your monthly bills? Mortgage, education for kids, utilities, health insurance, food, cable, phone. Not one of those items is trending downward. In fact, most are rising quite substantially and have been for a long time. Arguing about monetary theory sometimes obscures this basic fact.

  • Roger Ingalls


    Inflation and monetary policy is only one aspect of rising costs.

    We’ve probably covered the why’s of housing’s increase and subsequent crash (easy credit, lax underwriting, “innovative” loan products, then reverse all 3…).

    I haven’t seen a good posting here about education or health care costs (both which have risen faster than inflation), but I suppose we should be grateful that Cullen sticks to what he knows well.

    I did some independent reading on the cost of education, and recommend this book;

    “Higher Education?”

    I don’t agree with everything, but they do a pretty good job of busting out why college education costs so much more for this generation than for the previous one.

    Here’s a web site for the short version.

  • krb

    R Ingalls,

    Thanks for the book referral…with high school and college age kids this looks interesting. Does the book focus solely on the broadening scope of higher education as the driver of higher cost? A brief review of the short version makes no mention of low loan interest rates and low underwriting standards to get student loans…..when money is cheap and easy to get, the cost of goods will rise disproportionately…..I’ve read elsewhere this is the primary driver of ed costs rising faster than inflation. Does this author view it differently? Thanks again, krb

  • Roger Ingalls


    It’s been a while since we’ve heard from Chris Whalen…here’s an article, worthy of a post I believe, on whether TARP benefitted US public.

  • Roger Ingalls


    My primary takeaway was the greatly expanded “non-teaching” aspects of colleges: improved living /eating facilities, sports, research, non teaching professors and admin fluff. That and rich people wanting a “brand-name” experience.

    Can’t afford to send my kid to a 4 yr resort experience, I’m thinking monastery :)

    Worth reading, regardless.

  • William Merrick

    A middle ground is available here; the principles of limited government and monetary reality are not mutually exclusive.

    There isn’t an easy answer in practice, but to the extent we understand that government supplies money through fiscal policy, we can understand the necessity for a balance sheet that accommodates private sector growth.

    On the other hand, there is a value in minimizing the amount of coercive interference in the structure of production. In form, this is government, in function its people and legitimacy.

    When it comes to the chant of “smaller government”, people are not talking about finance, they are talking about control . Taxes ought to be between states and the federal government instead of the people and the federals, no need for an IRS, they just print their tax bonds or “dollars”.

    Cullen, you could offer middle ground by seeing a government structured to have a lower baseline- spend a lot less and tax even less still.

  • Scott Fullwiler

    “the parties’ positions on govt taxing and spending are not fundamentally different now from what they’ve been for at least a generation. To claim one party or the other is now motivated to drive the economy over the cliff to win the next election is a stretch, or about as credible as saying that Frank, Dodd and company avoided all attempts at Fannie and Freddie reform in 2005 so a bubble would grow and burst in order to win the white house in 2008. In either case, we give these “people” a lot more credit than they deserve. These politicians really believe in the pathetic economic theories they (both parties) pursue. krb”

    I would say that’s generally true except for following caveats, that don’t really contradict overall:

    1. Democrats during 1998-2008 and Reagan years were very anti-deficit. And the Rubinite wing of the Democratic party is definitely a bit of a more hawkish (though not as much as Republicans) portion of the party.

    2. Republicans during Reagan and Bush years weren’t really anti-deficit as much as anti-spending (rhetorically, at least).

    3. As I’ve been teaching MMT the past 10 years, until a few years ago my students though I was a Republican given my position on deficits. Since then, current students think I’m a Democrat. What’s changed is the party in power, not how I teach deficits.

    Again, though, I agree with the general thrust, but I would say that the crisis has also moved the rhetoric of both Democrats and Republicans closer to traditional ideological positions than we had seen the previous, say , 10+ years.

  • Sostegno

    “more targeted spending”

    but who is controlling this. this would mean at least governemnt would spend optimally. its all dependent on Moral wether it works or not. Though Silvio Gesle has
    worked out that our monetary order dictates market behaviour/ moral behaviour.

    We have bad banks not because they are managed through psychopath. The monetary order dictates that only psychopath will be successfull in this market environment.

    and then you rely on rational behavior of politicians, that when they would comprehend the monetary tools, including possible spending without borders they would behave rational and honest, though their only aim is to get reelected as you stated?!


  • Cullen Roche

    You act as if they’re constrained now….

  • Sostegno

    @ Culln:
    “You act as if they’re constrained now….”

    I talked about perception. to me thats different

    One question, have you ever dealt with Gesell, your are not bringing the respect he deserves. And you did not answer my concerns about wether MMt would ever work in a compound driven monetary order.

  • José

    That’s a great quote. Of course, Mellon probably believed in such old-fashioned ideas as noblesse oblige, and not the “screw all y’all, I got mine” attitude of so many of today’s prosperous and wealthy.

  • José

    Problem is, most Americans _say_ they want smaller government, but then are dismayed when told they won’t have OSHA trying to keep them safe at work, or the FDA keeping the food and medicine safe, or the Interstate Highway System, or the CDC researching diseases, or the Feds helping when a tornado wipes a town out, or food stamps, or Medicare or Social Security retirement or disabilty, or right now, the extensions of unemployment benefits, without which a lot of people would be well and truly screwed. On the whole, we Americans don’t want to go back to the situation that existed pre-WW2, where 90% scraped by (especially urban-dwellers), about 9.8 percent were “the middle class” of professors, doctors, lawyers, small businesspeople, engineers and such, and the rest were the haute bourgeousie–the Morgans, the Carnegies, the Rockefellers etc. Yet that is precisely the direction that we’re moving in with this “gov’t spending is bad per se” mentality.

  • George H

    Wrong. Try this.

    Have the COB spend 1 billion dollars to print a pamphlet call “Understand MMT and why government debt is good for you” and mail it to every house:

    1. You miserables, you know, your debt is bad. Your poor math skills simply aren’t enough to make your a good living and help you get out of it. Your doomed
    2. But government debt is good. Don’t try it. Again your poor math skills won’t help you comprehend a thing
    3. Government debt is your only solution. You see, government debt is not debt at all. It is simply the offset of your wealth. It gets this bad name because some people are just ignorant. The more debt the government has, the wealthier you will be
    4. Just keep in mind: government debt is not debt and is good
    5. Pick up your phone and call your congressman, congresswoman and senator and tell them that government debt is not debt and you support more it

  • Andrew P

    What all this discussion of money is ignoring is the biggest constraint that our economy has. That constraint is energy. Global oil supply has peaked, and a little bit of economic growth is enough to make oil prices soar. This means that a rip roarin’ economy is impossible now unless oil demand in the foreign sector collapses completely.

  • Peter D

    krb, check this out:

    The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. Together, these developments removed millions of Americans from the federal income tax rolls. Both of these temporary tax measures have since expired.

    In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent. [2]
    The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay . As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.[3]


  • Peter D

    This is a diversion……neither you or Cullen responded to my main point…..the parties’ positions on govt taxing and spending are not fundamentally different now from what they’ve been for at least a generation.

    Yeah? Cheney did not use to say “deficits don’t matter”? Bush did not expand govt spending? Medicare Plan D? Wars in Iraq and Afghanistan with endless corruption and waste? The amazing expansion of Top-Secret America? The Repubs may talk the talk but they don’t walk the walk, sorry. Never did.

    And you ignored my question:

    Also, care to explain the logic of “if you pay any tax at all you must now be in the top 40% of wage earners and are rich” – I just don’t see how you reach this conclusion. Even if 60% of the population is too poor to pay income taxes, it doesn’t mean that the remaining 40% are rich.