Thursday, May 13, 2010

The Trouble with Austrians

This comment sums up the problem I have with Austrians:
[Topic is unfunded liabilites held by US Govt]As far as I know no economist is saying that the US will run out of money. Every economist I have read understands that in a fiat currency system default is a decision that the state and the monetarty authority take.

What “unfunded obligations” means is unfunded in real terms, not in nominal terms. We all know the state can create as much money as it wants.
What confusion between real and nominal!

All that we have available to consume in a period is 1) what is produced in that period (determined, in part, by capital goods built up in previous periods) and 2) inventory left over from the last period.

That is all. There is nothing else available.

"Funding" a future liability in real terms means stock piling vast amounts of inventory so it will be available for drawdown in that future period. In the case of social security and medicare, it means building lots of stuff old people will buy (walking sticks, false teeth, Depends) and stocking them in massive warehouses, along with huge barrels of medicine, ready for the Boomers.

Or we could just make all that stuff when the need presents itself.

Social Security is a nominal liability. The US Govt will cut a cheque, and that cheque will clear. There is no guarantee about what the cheque will be able to buy. During each period, taxes and transfer payments determine how the period output and inventory stock is distributed amongst the populace. This distribution is a political decision that can be made at any time. Raising taxes to fund higher social security payouts just risks increasing unemployment amongst the (smaller) working population, leaving retirees with even less goods and services to spend their Treasury money on.


Anonymous Anonymous said...

Good post

The longer I look and the deeper I look I realize that the only coherent paradigm is MMT/Chartalism.

Everyone one else reaches a point of discombobulation.

6:57 AM  
Anonymous Anonymous said...

What about funding the future liability in terms of having enough output in the future period to satisfy the demands of pension holders?

The key issue is surely will there be enough real output then, not can we stockpile it now.

8:48 AM  
Blogger winterspeak said...


Yup, the issue is real output then.

Having 10% of the population unemployed now makes that problem worse, not better, as we can never get back the lost output and capital stock we are forgoing.

9:02 AM  
Blogger Andrew Hofer said...

"There is no guarantee about what the cheque will be able to buy"

Well, the payout increases with CPI-W (urban wage earners and clerical employees), so I wouldn't say it is a purely nominal liability.

2:09 PM  
Blogger winterspeak said...


Fair point, and well taken. But I don't love CPI-W, nor do I believe it's terribly accurate as a true COLA or fundamentally protects purchasing power. Ultimately, it's a metric published by the Govt. I believe that recently CPI-W was zero, but retirees got a COLA bump anyway by congressional fiat.

If SSN was paid in chickens and walkers, that would be a very real obligation ; )

3:52 PM  

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