Politics of PK

Business Insider believes that Goldman embraces PK in their analysis. I don't see it.

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

The DeLong and Summers paper, unsurprising for two Democrats, only talks about higher Government spending (G), not higher deficits (G-T).

The "higher G" argument to "prime the pump" is K, not PK.

It's also fun to see how careful the authors are to remain on the good side of Monetarists, who continue to set the orthodoxy for macro. Does any of this sound like PK to you?

In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds.

The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.

Sovereign debt crises can be triggered by rises in spending due to expansion

All basic gold-standard stuff.

The Myth of High Powered Money

What is G-T?

When the Government spends (credits money in a non-Govt bank account) but doesn't tax it all bank (debiting money in that non-Govt bank account) what do you call the residual left in the non-Govt sector? On the Government side this is called the deficit (flow) or the national debt (stock). But what do you call it on the non-Government side?

I refer to it as "Net Financial Assets (equity)" because 1) we're talking about a financial asset here, not a real asset, and 2) the associated liability is out of sector. Therefore, unlike financial assets created in sector, the liability portion is booked as equity, not non-equity liability.

You cannot right call this savings (or net savings) because this causes all kinds of confusion as documented in the S=I debates rocketing around the internet these days. It does get close to the lay person's intuition about what "savings" are, or even what "nominal savings" are, but I don't think that term has been generally helpful.

You cannot really call it the nominal equity base that the private sector then leverages via the horizontal channel (gross financial assets) because all kinds of other things make up the equity value in non-Govt balance sheets.

You cannot call it "high powered money" or M0 because that actually refers to reserves, and reserves are a reactive function in that G-T generates a bank deposit, which generates a reserve by double entry book keeping. That reserve then either needs to be drained or it doesn't. But the causality is clear: NFA(e) creation causes reserve creation, but reserve creation does not necessarily lead to NFA(e) creation. NFA(e) is the private sector's nominal nest egg.

(Note: I'm ignoring exports etc. as I'm including foreign sectors as "non-Govt", because by Govt I mean the entity that is the currency monopolist).

Confused about MMR

There's a long comment thread I would recommend re: S=I + (I-S).

Honestly, I'm still confused by this distinction they're making, because I'm not sure what difference it makes. At a sector level, I stick with Net Financial Assets (equity) instead of "savings" because there's lot of ambiguity around the word "saving", and at an agent level, it seems that if you spend some of your income on an apple you want to consume next period you are saving, but if you intend to eat that apple sooner you are no longer saving. I'm actually sure that's right from a NIPA perspective, but it obscures for me the key intuitions I found in the Harless post, and when Mosler calls savings the "account of record" for investment. Maybe it was the other way around.

Anyway, I must be stupid.

Moving on, I become even more confused about what MMR's beef is with MMT. I suspect it's because MMR suspects that MMT is really Communist. The irony is unimaginably delicious. But first, this post:

For instance, when the USA runs a current account deficit and a budget deficit that does not offset the leakage in the current account the private sector position has been described as experiencing a “net loss” in some MMT literature. But no clarification as to the specifics of this “net loss” is provided (in terms of real or financial wealth) and the reader is likely to come away from the lesson believing that the private sector position is automatically worse off if the government does not deficit spend at all times. But this is clearly not the case as the majority of private sector real wealth creation occurs through the horizontal banking system through credit creation. This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.

The confusion arises from the difference between real wealth and financial wealth as well as misunderstanding saving. A good way to think about all of this is to understand that the private sector can create real wealth entirely independent of the government. A farmer does not need the government to turn 1 cow into 10. But the farmer has achieved real wealth creation regardless of the government’s spending position. What the government must generally do over time is help to facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth. But it’s important not to put the cart before the horse here. It’s best to think of government as being a facilitator of wealth creation and not the driver. Hence, our focus on S=I+(S-I) with the emphasis on the idea that “the backbone of private sector equity is I, not Net Financial Assets.” The idea is not novel, but simply clarifies the understanding of the private sector component.

Talk about confusing!

1. Whether the private sector is better or worse off if the Government runs deficits or surpluses depends on whether the private sector lacks or has excess net financial equity (assets). Without this context, there is no "better" or "worse".

2. I have no idea if the majority of private sector real wealth creation happens through bank loans. Is raising a child real wealth creation? Do you need a bank loan for that?

3. 1997-2008 is a terrible time period, because of this thing called credit bubbles. If you don't understand how credit bubbles happen, you really don't understand the interplay between vertical and horizontal money creation.

4. The government mustn't "facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth". It must correctly fund the private sector's demand for net financial assets (equity) so as to maintain full voluntary employment, without politically unacceptable levels of inflation.

5. Government can create real wealth too. (Heresy, I know. Please observe, I'm not saying that it does very often, or that it does it well, or that it should do it. I'm merely pointing out that it is, at least, theoretically possible, and there are probably an example or two we can all think of where this has happened if we're being honest with ourselves).

S=I+(I-S)?

Commenter Greg points me to this post: More on Savings and Investment

“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more.

“People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitessimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit.

But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.

It seems similar to this same theme raised in Interfluidity (here and here). At any rate, I think they are all related.

Honestly, I'm having difficulty making head or tail of the discussion. I'm not sure what distinction they are making, and I don't know why the distinction I think they are making is important. It seems to be that, the usual sector de-composition is between the Government and non-Government sector, where Government is the currency issuer (consolidated Treasury and Federal Reserve function) and non-Government is everyone else (all currency users, includes foreign Governments). I think they are saying that within the non-Government sector, distinguishing the household from commercial sector is important, but I don't know why.

Anyone care to enlighten me?

Thanks

To Read:

Scott Fullwiler:Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System

Marc Lavoie:The monetary and fiscal nexus of neo-chartalism: A friendly critical look