So far as I can tell, too many media writers, politicians, and even economists do not understand the functional implications between Monetary Sovereignty and monetary non-sovereignty. Yet that ignorance does not stop them from pontificating about economics.
It is as though none of them understood the difference between a noun and a verb, yet insisted on pontificating about linguistics.
Larry Summers is a perfect example.
We’ve written about him before. “OMG! Please Mr. Biden, please: Not Larry Summers”, and “My humble apologies to Larry Summers. Or not”.
His writings truly are not fit for birdcage lining.
And yet, we continue to be punished by them as revealed in Ryan Cooper’s excellent article:
Senate Democrats whisked through a budget resolution Friday morning, clearing the way for the $1.9 trillion coronavirus relief package proposed by President Biden.
Despite some lamentable amendments, retreats, and odd details that will have to be ironed out, overall Biden’s proposal is an excellent and badly-needed bill.
It might just keep America ticking over until everyone can be vaccinated (currently about 10 percent of Americans have gotten at least one shot).
Exactly correct, Mr. Cooper, although the package should be much larger and destined for a longer term, similar to the Ten Steps to Prosperity (below).
So right on cue, in step the savvy journalists at Politico and economist Larry Summers, playing some obnoxious D.C. insider games and doing their best to ruin the country.
Late on Thursday, Summers published a ponderous op-ed in The Washington Post fretting that maybe the COVID relief package is too big.
It might contain so much spending that it will push the economy above its potential full capacity, causing inflation and financial instability, he worried.
Then the jokers at Politico’s Playbook newsletter (your best source for ill-disguised advertorials and tips on hiding political bribes) repeated his argument.
Many “liberal wonks have been whispering about” Summers’ argument “for weeks,” worrying the package “could harm the economy next year, when Democrats will be defending narrow congressional majorities in the midterms,” they write. Politico claimed on Twitter that it was being circulated in the White House as well.
First, a bit of background. Inflations never are caused by federal spending in of itself. Inflations are caused by shortages of goods and services, primarily shortages of food and/or energy. Scarcity makes prices go up.
So the only time federal spending could cause inflation (i.e. a general increase in prices) is if at least one of two things happens:
- The government buys so much stuff, that shortages are caused or
- The government gives people so much money that they go on a buying tear, and cause shortages.
We already know #1 is not part of a package that essentially is comprised of money flowing to people’s pockets. And as the author of the article shows, #2 isn’t going to happen, either:
Let me first talk about the merits of the argument, because they shed light on the motivations here. In brief, these worries about “overshooting” the stimulus are completely ridiculous.
Jobs data released Friday show the economy is basically stalled out — with unemployment at 6.3 percent, and the fraction of prime-age workers who are employed four points below where it was before the pandemic (just barely above the bottom of the Great Recession), the U.S. is something like 10 million jobs in the hole.
Moreover, as economist Paul Krugman points out, the pandemic relief package is mostly not stimulus per se — it is more aimed at keeping the economy on ice until everyone can be vaccinated.
The boost to unemployment insurance and aid to state and local governments, for instance, will partly go unspent if we hit full employment rapidly.
Indeed, we may need another round of real stimulus once the vaccines are out.
And even if we were somehow to hit full capacity and inflation starts to spike, the Federal Reserve can easily raise interest rates to compensate — a fact Summers bizarrely skates over by limply suggesting they might not for some reason.
Right on. Summers, as usual, doesn’t know what he is writing about.
He still is in the camp that claims the Weimar and Zimbabwe hyperinflations were caused by government money-printing. They weren’t.
They were caused by shortages, with the currency-printing being a wrong-headed, government response.
While Zimbabwe never figured this out, Germany did. It cured its hyper-inflation with more spending, not less — spending to build the greatest war machine the world ever had known, which included purchases and distribution, not only of munitions but of food, energy, and salaries to a starving populace.
However, this argument about exceeding potential deserves close scrutiny. Summers bases his case on the recent Congressional Budget Office (CBO) estimate of economic capacity — that is, how much America can produce without causing spiraling inflation.
The only problem with the CBO estimate is that, as J.W. Mason and Mike Konczal argue in detail at the Roosevelt Institute, it is worthless garbage. For one thing, it is impossible to know for sure where full capacity might be when it is far off.
It is much wiser to simply stimulate until we see full capacity.
For another, the CBO estimate of what full employment looks like is based on the labor market in 2005, adjusted for demographic changes. There is no justification whatsoever for using this year, instead of 2000 or 1967 or 1944 or any other year.
Indeed, for the vast economic resources of the United States, only a war of far greater magnitude even than WWII, could cause general shortages leading to general price increases — OR — an oil shortage.
That latter event is not unthinkable, at some future date, but it is not in the foreseeable future, and definitely would have nothing to do with this year’s stimulus spending.
Barring an oil shortage, it is absolutely, positively impossible for the whole, or even a significant part of the American economy to hit full capacity. It cannot happen in the near future, and with advances in alternative energy production, it will not happen in the far future.
It would require that all the factories (or even most of them) run at full capacity, and none able to add capacity.
And this impossible scenario is what Summers says is supposed to keep us from curing the current recession?? Yikes!
Indeed, at a 2013 IMF conference, one famous economist argued convincingly that the mid-2000s was definitely not a full-employment period, despite the huge housing bubble juicing up spending:
If you go back and you study the economy prior to the [2008 financial] crisis, there’s something a little bit odd. Many people believe that monetary policy was too easy. Everybody agrees that there was a vast amount of imprudent lending going on.
Almost everybody believes that wealth as it was experienced by households was in excess of its reality … was there a great boom? Capacity utilization wasn’t under any great pressure. Unemployment wasn’t under any remarkably low level.
Inflation was entirely quiescent. So somehow, even a great bubble wasn’t enough to produce any excess in aggregate demand. [IMF]
That economist was named Larry Summers.
Not only does Summers not know what he is talking about. He doesn’t even know what he has talked about.
In any event, it functionally is not possible for the monster economy of America to have “excess” (i.e. unfulfillable) aggregate demand, at least not for a period extended enough to cause inflation.
Our remarkable ability to “catch up” with needed production, is beyond the imagination of the deficit hand-wringers.
Overall excess demand is classic textbook theory that never happens in real life, barring a giant meteor fall or a pandemic.
Oops, I guess even a pandemic won’t do it, either.
This weak argument and jarring inconsistency shows this discussion has little to do with economics. This is about political jockeying for influence, and the warped culture of D.C. journalism.
Summers has been frozen out of a job in the Biden administration, and so he is characteristically trying to elbow into the conversation by writing articles about how everyone but him is wrong.
In keeping with his prior history as a neoliberal ideologue — Summers was previously best known for bullying a deputy into lowballing the size of Obama’s Recovery Act, and preventing the regulation of dangerous financial derivatives — he’s worrying about inflation at the worst possible time.
Larry Summers is the classic example of the Peter Principle — the guy who gets promoted beyond his abilities, to wit:
Summers resigned as Harvard’s president after a no-confidence vote by the faculty, a financial conflict of interest, and his claim that there are so few women in science and engineering because there aren’t enough smart women.
Summers pressured the Korean government to raise its interest rates and balance its budget in the midst of a recession (!)
He advocated regime change in Indonesia
He opposed tax cuts that were proposed by the Republicans.
He told Governor Gray Davis to relax California’s environmental standards to help California’s economy and lift the stock market.
Summers favored eliminating the Glass-Steagall Act which prevented banks from offering commercial banking, insurance, and investment services. This led to the Great Recession of 2008.
In short, Larry Summers is to economics as Donald Trump is to the Presidency, an incompetent who has but one skill: Being appointed to high office.
Then the Playbook goofballs, who cover life-and-death political questions as amusing palace intrigue, then gleefully stoke the flames by credulously covering his argument — and apparently exaggerating his influence among “liberal wonks,” who dismissed his argument out of hand, and among the Biden team.
At any rate, the stakes for real life here are not small. The single worst thing Biden could do for his party’s prospects in the 2022 midterm elections would be to undershoot the recovery.
But with any luck, this will simply be an annoying footnote to history, and perhaps a lesson not to read Playbook even for insider tips.
The real lesson is not to assign any credibility to anything Larry Summers says or writes, and not to assign any credibility to the people who follow his advice.
As soon as the relief package hits the economy, let us begin with the Ten Steps, #1. Eliminate FICA. That surely will make Larry Summers faint.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all or a reverse income tax
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.