If you make decisions based on false assumptions, you are destined to be wrong.
And if you make decisions based on mythical numbers, you also are destined to be wrong.
But if you make decisions based on false assumptions about mythical numbers, you will be wrong, squared.
Let’s say you assume that you can ride on a tortoise faster than on a horse, and you assume tortoises live on the moon.
So you search the moon for tortoises because you want to ride fast.
That essentially is what the Committee for a Responsible Federal Budget (CRFB) does. It makes a false assumption about a false assumption, and comes to a wrong conclusion, squared.
How Much Would the American Rescue Plan Overshoot the Output Gap? CRFB, Feb 3, 2021 The Congressional Budget Office (CBO) projected on Monday that the nation’s output gap – the difference between actual economic activity and potential output in a normal economy – would be $380 billion for the rest of 2021.
Here is the Wikipedia definition of “output gap“:
“The output gap is the difference between actual GDP and potential GDP, in an attempt to identify the current economic position over the business cycle. The measure of output gap is largely used in macroeconomic policy.
“The output gap is a highly criticized notion, because the potential output is not an observable variable. It is instead often derived from past GDP data, which could lead to systemic biases.
The “output gap” is a guess based on something called “potential GDP” which is merely a prediction of GDP based on infinite variables.
If, for instance, you believe someone can predict the Standard & Poors 500 stock index level of a year in the future, then you believe someone can determine the “output gap.” (And I would like to sell you some swampland in the Himalayas.)
Returning to the CRFB article:
This (output) gap will total roughly $300 billion in the last three quarters of 2021 and nearly $700 billion through 2023, the period over which most future relief would take place.
Assuming CBO’s estimates are correct, President Biden’s $1.9 trillion American Rescue Plan would likely be enough to close the output gap two to three times over.
This overshoot could be beneficial, but could also pose risks to the economy and the fiscal outlook.
Why would any thinking person assume the CBO’s estimates are correct? Aside from being a coin-flip guess, the prediction would largely have to be based on what the government spends. So it’s circular thinking.
What the government spends affects the output, and that spending affects the output gap, which means:
Realistically, there is no output gap. There only is output (i.e. GDP).
The so-called “output gap” simply shows how wrong the predictions turn out to be. It’s not a real thing. It’s a critique.
The theoretical effect of the American Rescue Plan on the economy depends on the economic multiplier associated with the new programs, but in almost any circumstance it would substantially overshoot the output gap as estimated by CBO.
With a multiplier of 0.5x, for example, the plan would close 135 percent of the output gap. With a 1.5x multiplier, it would close the output gap 4 times over.
So now, we have a guess (the “output gap” multiplied by another guess (the “multiplier”) and the resultant WAG (Wild Ass Guess) is what supposedly warns us about “excessive stimulus.”
Based on a recent analysis of the plan from Wendy Edelberg and Louise Sheiner of the Brookings Institution, the American Rescue Plan would theoretically boost output by about $1.5 trillion starting in the second quarter of this year, closing about 225 percent of the output gap through 2023.
This estimate appears to be reduced by the fact that the economy would be performing in excess of its capacity, leading to some additional savings and inflation.
Multipliers from their October 2020 analysis suggest that if the output gap were large enough, the plan could produce closer to $1.9 trillion of additional output and thus close about 275 percent of the output gap.
And theoretically, if the moon were made of spreadable cheese, it appearswe could fly there with a load of bagels and that suggests we could have an endless breakfast.
I’m not sure how an economy can perform in excess of its capacity, but it would be exciting to see. Sort of like putting 2 gallons of milk in a one-gallon jug.
The output gap could differ from CBO’s projections.
Many forecasts and experts suggest the economy will grow faster this year than CBO estimates.
A one percentage point increase in Gross Domestic Product (GDP) growth would reduce the output gap to less than $200 billion, in which case the American Rescue Plan would be large enough to close eight to ten times the output gap based on the Edelberg and Sheiner numbers.
On the other hand, many have argued that CBO is underestimating full employment and potential GDP. If potential GDP were 1 percent larger than CBO’s estimate, the output gap would total $1.3 trillion through 2023 and the America Rescue Plan would close 115 to 145 percent of the output gap.
Here are some definitions from the above:
“Could differ” really means “certainly will differ”
“Many forecasts and experts” really means “Many also have argued the opposite,” so what does that tell you?
“Based on the Edelberg and Sheiner numbers” really means “based on the Edelberg and Sheiner WAGs.”
“Many have argued” is a version of Donald Trump’s “many people say,” meaning, many people also don’t say.
What Happens if We Overshoot?
Though many economists and experts such as Federal Reserve Chairman Jerome Powell have argued it would be better to overshoot with fiscal and monetary support than undershoot, that does not mean an overshoot of any magnitude is desirable.
While the economy can operate above its long-term potential for periods of time, it cannot do so indefinitely or sustainably. It is therefore important to understand what might happen if policymakers spend substantially more than what is necessary to close the output gap.
Think of the reality. How is it possible for an economy to operate “above its long-term potential” unless the guy who figured the “long-term potential” was wrong.
Nothing can operate above its own potential unless the potential is calculated too low. The problem is not in the potential; the problem is in the calculation.
And now we come to some real mathematical magic.
One possibility is that the excess funds are economically ineffective, adding to the debt without improving the economy. Thought of another way, overfilling the fiscal gap could substantially reduce economic multipliers.
The more you add, the bigger it gets
Based on estimates from CBO, adding nearly $2 trillion to the debt would shrink the size of the economy by about 0.3 percent ($100 billion) by the end of the decade while increasing annual debt service payments by roughly $40 billion in that year (and more in future years).
The size of the economy is measured by GDP. And the formula for GDP is:
GDP = Federal Spending + Non-federal Spending + Net Exports
So the CRFB makes the mathematically astounding claim that adding $2 trillion in Federal Spending somehow would reduce GDP.
Have these people flunked high-school algebra? Or do they think you have?
These costs are probably a worthwhile consequence of addressing an economic crisis and restoring the economy to full employment but harder to justify for spending that has little or no economic impact.
It mathematically is impossible to add $2 trillion to the economy and have “little or no economic impact.” And if it would “address and economic crisis and restore the economy to full employment, how could it have “little or no economic impact”?
A second possibility is that excess funds could lead to higher inflation, with producers responding to higher demand by increasing prices once it is no longer possible to easily increase production.
In some ways, higher inflation could be helpful – it could erode outstanding household and business debt (including pandemic-related debt), lower real interest rates set by the Federal Reserve, and help the Fed to reset expectations toward its new flexible inflation targeting regime.
On the other hand, higher inflation could also diminish the effectiveness of the fiscal stimulus, erode the value of savings (including the over $2 trillion of personal savings accumulated because of the pandemic), increase the cost of living for many households who could not easily afford it, or, in the worst case, lead to persistently high inflation and all the consequences that come with it.
Inflations, which are general increases in prices, are caused by shortages, most often by shortages of food and/or energy.
The proof is staring us in our faces, right here in the U.S., where massive increases in federal debt have not caused inflation.
Further, inflation does not lower real interest rates. The Fed raises nominal rates in response to inflation, so whether real rates would go down is questionable.
A third possibility is that excessive stimulus could cause misallocations in the economy. Higher demand amidst a pandemic could lead to increased consumption and production of goods and services that are of less value in normal times.
To the extent that firms and households make long-term investments in response to near-term demand, this could cause modest macroeconomic damage in the long term as well as diminishing welfare gains in the near term.
There are no “normal times.”
Is the Internet “normal”? Is the smartphone “normal?” Is the Tesla normal”? Is a pandemic “normal”? Is walking on the moon “normal”? Is global warming “normal”?
Today’s “times” are not like yesterday’s times, nor are they like tomorrow’s “times.”
The economy always has and always will react to change That reaction is the only “normal.”Products go in and out of favor. Movie film replaced by movie cassettes, which in turn are replaced by online viewing. What next, direct intracranial stimulation?
The auto industry soon will be all-electric, and current batteries soon will be obsolete. Flexibility is mandatory in business.
That is the fundamental nature of an economy. To speak of “normal” times is to spout ignorance.
A fourth possibility is that excessive stimulus could temporarily boost economic activity far above its sustainable potential, leading to an economic cliff or crash as the stimulus fades.
In their estimates, Edelberg and Sheiner explicitly assume what they describe as a “soft landing” for the economy; even in this scenario, there appears to be virtually no economic growth in 2022, which suggests unemployment would rise over that period.
The authors warn of the possibility of a sharper and more painful contraction (a “hard landing”) when stimulus funds run out.
Suddenly, the stimulus could move from “shrink the size of the economy,” to “little or no economic impact,” to “boost economic activity far above its sustainable potential.” Well, I guess that covers all bases: Shrink, no effect, or boost. Well, that was informative.
In short, the CRFB and the CBO are completely clueless, but having predicted all possible outcomes, they later will be able to look back and crow about how prescient they were.
To prevent this cliff, lawmakers may have to enact more and more stimulus. In that case, the economy may become dependent on ever-rising deficits just to maintain sufficient demand.
Yes, a growing economy, by mathematical certainty, requires a growing supply of money, i.e. ever-rising deficits. This growing supply will come from the federal government, which has an infinite supply.
The CRFB makes this sound like some sort of frightening event, when in fact, increased deficit spending always has been necessary for growth. That’s called “economics.”
Aside from any inflationary pressures they might cause, these large deficits would put debt on an even more unsustainable path, substantially boost interest payments, and impose substantial damage on the broader economy.
Even as ongoing stimulus might continue to keep the output gap at bay, it would increasingly weaken potential GDP. In an extreme case, an additional $2 trillion per year of borrowing could lift debt to 175 percent of GDP within a decade, boost interest payments by up to $500 billion per year by decade’s end, and slow economic growth by 0.3 percent per year.
Federal debt has been growing for at least 80 years, during which time the debt hand-wringers consistently have called it “unsustainable.” There is no level of federal debt (i.e. deposits into T-security accounts) is unsustainable.
We already have discussed why the “output gap” is nothing more than a wrong prediction.
And we have discussed why an additional $2 trillion per year added to the economy cannot slow GDP growth. Simple algebra.
For a Monetarily Sovereign nation, the debt/GDP ratio, is completely meaningless. Debt means the total of deposits in T-security accounts. GDP means total spending. Whether deposits in T-security accounts are less than, equal to, or more than GDP has no economic meaning.
Japan, for instance, is a Monetarily Sovereign nation whose debt/GDP ratio is 253%. The next highest ratio is monetarily non-sovereign Greece’s, at 181.1%. The ratios are economically meaningless.
Boosting federal interest payments would add stimulus dollars to the U.S. economy, helping to grow the economy. The federal government, being Monetarily Sovereign creates infinite interest dollars at the touch of a computer key.
And finally, it is mathematically impossible to add $2 trillion to the economy plus another $500 billion, and still slow economic growth.
To be sure, there are also potential benefits to overshooting. Providing more stimulus than needed can insure against the risk that multipliers are lower than expected, underlying economic conditions are worse than expected, or potential GDP is higher than believed.
Excessive fiscal stimulus in the near term could also prevent long-term economic damage from the recession, for example, by preventing viable business closures or stopping long-term unemployed workers from dropping out of the labor market (known as hysteresis). Since it is impossible to perfectly target spending toward the precise needs of society, it may also take more funds to address the specific “bottom-up” weaknesses in the economy than to close the top-down output gap.
Still, with $4 trillion of fiscal support already enacted, it is not clear whether another $1.9 trillion is needed from a bottom-up or top-down approach. While recent data suggest further fiscal support is needed, the package currently under discussion would likely be an overshoot.
Actually, it should be perfectly clear that adding dollars to the private sector will enrich the economy.
However, exactly where the dollars are spent is important.
We suggest spending them on the Ten Steps to Prosperity (below).
In summary, the above article attempts to refute the need for deficit spending, but succeeds only in demonstrating the abject ignorance of the position.
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:
And just when I began to feel so good about Congress and the President at long last beginning to understand and tell the truth about economics, then I am splashed by ice water coming from the Committee for a Responsible Federal Budget.
You know the CRFB.
They are the ones who run interference for those in Congress who want you to believe the common myth that federal finances are just like your finances.
Democratic lawmakers are planning to unveil legislation to substantially boost the child tax credit from $2,000 to $3,000, providing monthly payments to households and higher payments for younger children.
While this thoughtful proposal to expand support for children deserves consideration, it cannot legitimately be classified as COVID relief and should be fully paid for under the House PAYGO rules and normal principles of budgeting.
Briefly, “PAYGO” is an ill-considered concept that requires federal spending to be matched by taxes or T-security deposits.
It’s part of the myth that federal finances are like personal finances (and state/local government finances), where outgo must be funded by income. That’s why CRFB speaks of “normal principles of budgeting.”
Those “normal principles” are normal for you, normal for your state, county, and city, and normal for businesses. But they are not normal for the federal government, and this is what CRFB does not want you to understand.
When you pay for your spending, you must have a money source.
You must have a paying job, or you must borrow, or you must have savings. That’s because youare monetarily non-sovereign.
State and local governments, and businesses operate the same way. They too are monetarily non-sovereign.
The federal government is different. It is Monetarily Sovereign. It uses neither income nor borrowing. It creates, ad hoc, every dollar it spends,, each time it pays a creditor.
The federal government does not borrow and the taxes it collects are destroyed upon receipt.
The federal government does not have money; it creates money. Last year, it was able to spend trillions of dollars it did not have, and yet never ran short, and never bounced a check.
You can’t do that, nor can any other monetarily non-sovereign entity.
Soon, the Biden administration will spend another $2 trillion the government doesn’t have, and still no checks will bounce. That is Monetary Sovereignty.
The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:
We are still in the midst of a pandemic and economic crisis, and more borrowing will be needed to provide necessary relief and support the economic recovery.
However, emergency borrowing authority must be reservedfor pandemic-related needs, not for enacting long-sought-after policy priorities.
It’s amazing how many misstatements the CRFB can pack into three short sentences:
What they call “borrowing” (T-bills, T-notes, T-bonds) merely consists of accepting deposits into T-security accounts. The government does not use those deposits. They remain in the accounts, accumulating interest, until maturity, at which time they are returned. You do not lend to the federal government. You make deposits into your own T-security account.
There is no need to “reserve emergency borrowing authority.” The government can accept as many dollars into T-securities accounts as it wishes, any time it wishes (though again, it doesn’t use the dollarsin those accounts. That’s why it isn’t “borrowing.)
I’m not sure why the CRFB tries to differentiate between “pandemic-related needs” and “long-sought-after policy priorities.” Spending is spending. All federal spending is funded exactly the same way: Via money creation.
House PAYGO rules make clear that new spending increases and tax cuts not related to the COVID response or climate change must be paid for.
Expanding the child tax credit clearly doesn’t qualify under either of these exemptions, as it is clearly meant as a permanent policy and is in many ways duplicative with the proposed $2,000 per child recovery rebates.
All federal spending is “paid for.” Apparently, the CRFB falsely means, “paid for via borrowing or taxing.” This demonstrably false statement has been disproven every year. In 2020 alone, trillions of dollars of federal spending easily were “paid for” without the need for tax increases or borrowing.
Replacing the current $2,000 child tax credit with a more broadly available $3,000 to $3,600 credit would help address the disadvantages that kids face in the federal budget.
But we shouldn’t borrow from our kids in order to pay for their care when there are plenty of offsets available.
This mixed-up sentence speaks of “borrowing from our kids,” which probably means future (totally unnecessary) tax increases. But then it talks about “offsets.” And what are those so-called “offsets” that don’t “borrow from our kids?
Overall, this policy will cost over $100 billion per year and more than $1 trillion over a decade if made permanent. Reducing child poverty is a worthy policy priority and one worth paying for.
Senator Mitt Romney’s recent proposal to consolidate existing support for children and workers and repeal regressive tax breaks represents one possible package of offsets.
The $5.8 trillion of tax increases and budget savings proposed by President Biden during the campaign also offers many alternatives.
Offsets could also be phased in to avoid imposing tax increases during a pandemic or disrupting a fragile recovery.
So, to help reduce child poverty, we should “consolidate existing support for children and workers”?? Ah, that lovely little word “consolidate” which in CRFB language means an even smaller word: “Cut.”
And, of course, “repealing tax breaks” is a synonym for “increasing taxes.” (Historically, the breaks the CRFB has seemed to favor eliminating are those that benefit the poor and middle classes.)
It is the “children and workers” who would have to pay the increased taxes and suffer the reduced support.
Offsets could also be phased in to avoid imposing tax increases during a pandemic or disrupting a fragile recovery.
This is a worthy policy aimed at achieving a worthy goal. That’s no reason to throw budget discipline out the window. Borrowing for the pandemic isn’t an excuse for unrelated tax cuts, nor is it a reason to enact permanent policies that aren’t properly financed.
So let’s see. The recovery is “fragile,” but we should have “budget discipline,” which means increasing taxes during this fragile recovery. How wise.
So the government should do something temporary — cut taxes and increase spending — and when we recover the government can increase taxes and cut spending.
“But we shouldn’t borrow from our kids.” Except that “borrowing from our kids” is exactly what future tax increases and spending cuts would do.
If empty-headed claims were dollars, the CRFB would be the wealthiest organization in the world.
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:
The legislation, spearheaded by House Ways and Means Committee Chairman Richard Neal (D-Mass.), will likely be added to President Biden’s $1.9 trillion COVID-19 stimulus package.
Biden wants his American Rescue Plan to use an expanded child tax credit to cut the child poverty rate in half. Under the plan, the IRS would send $250-300 monthly payments to households for a year, starting in July.
The White House and Senate Democrats have reviewed Neal’s proposal and support it, The Washington Post reports.
After trillions of dollars in stimulus, the Democrats already are on board with an additional $1.9 trillion — and no one is asking, “Who will pay for it?”
Why? Because apparently they must realize that our Monetarily Sovereign federal government pays for everything simply by creating new dollars, ad hoc. Always has, always will.
“The exact details of how it should be targeted are to be determined, but struggling middle class families need help,” Yellen said on CNN’s State of the Union.
The White House has said that Biden won’t budge on sending families another round of stimulus checks, but he is willing to negotiate on where the income cutoff should be to determine who’s eligible.
“He wouldn’t want to see a household making over $300,000 receive these payments,” Yellen said. She added that if Congress approves Biden’s plan the U.S. will return to full employment in 2022.
How much more than $1.9 trillion will those checks cost? No one seems to be asking, because it doesn’t matter. A Monetarily Sovereign government can afford anything.
And no, taxpayers will not pay for it. While state and local taxpayers do pay for state and local government spending, federal taxpayers do not pay for federal government spending.
State and local governments are monetarily non-sovereign, while the federal government is Monetarily Sovereign. There is a vast difference between the two. Those who do not understand that difference, do not understand economics.
“But,” cry the deficit hand-wringers, “this will cause inflation.”
WRONG,
Inflation never is caused by government spending. Inflation is caused by shortages, usually shortages of food and/or energy. In fact, inflations can be cured by additional government spending to obtain and distribute the scarce goods.
“But,” cry the Republicans and Libertarians, “this will cause excessive demand, which will cause inflation.”
WRONG.
Inflation is a general increase in prices, but putting money in the pockets of the middle- and lower-income groups never has caused a general increase in prices.
The cost of certain, specific products could rise temporarily, but there will not be price increases for products and services overall.
The primary effect will be for people to be able to afford life’s basics — food, housing, clothing, education — and additionally pay off debts will being able to save for a “rainy day.”
“But,” cry the rich, who because of Gap Psychology, (the desire to distance oneself from those below and to come closer to those above, on any social scale) do not want the middle- and lower-income groups to narrow the Gap between them and the rich, claim: “The people will simply use the money to pay off loans and add to savings, which will do nothing to stimulate the economy.”
WRONG.
Paying off loans and adding to savings not only will encourage spending on things the impoverishment has forced people to do without, but it will help prevent future recessions. The populace will have the resources to continue spending during otherwise lean times.
“But,” cry the most selfish among us, “if we give people money that will discourage them from working, and where would America be without workers?”
WRONG.
Among certain classes there is the false belief that the poor are inherently lazy, and would rather collect meager welfare checks than exert the effort to improve their lives.
Receiving money begets the desire for more money, which is obtained via labor. The vast majority at any income level would gladly work for more money, if they knew how, where, and what. The primary cause of poverty is circumstance, not laziness.
Actually, on average, the poor labor harder than do the rich, the main difference being the better cards the rich have been dealt.
“But,” cry the uninformed, “all that federal spending is socialism.”
WRONG.
Socialism is not government spending. All governments spend. Socialism is government ownership and control. Sending check to people does not constitute ownership or control. It does not, in any way, constitute socialism.
The primary complaints about the stimulus programs being “excessive” will come from the Republicans, who want the economy to fail under President Biden. These are the people who put politics before patriotism.
They want America to suffer, so they will have election talking points. It’s a traitorous lust for power that has become all too common among the right.
Sadly, we fear the left could fall into the trap. Only recently, left-wing supporters of “Medicare for All,” tried to explain it would be paid for via circuitous, convoluted, complex bookkeeping rather than simply telling the truth: The federal government will pay for it, the way it pays for everything: Via ad hoc money creation.
We only can pray that the past year’s multi-trillion dollar federal deficit, combined with federal tax decreases and a growing economy, will educate the populace about Monetary Sovereignty.
Perhaps then, we can use the federal government’s unlimited resources to eliminate poverty and to fund the many heretofore underfunded strategies that will improve our lives.
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:
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.
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 enoughto 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.
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:
#Monetary Sovereignty - Mitchell 