DAVID BROOKS ALMOST GETS MMT: Sovereign Currency is a Tax Credit

By L. Randall Wray

In an interesting post today David Brooks wrote this:

"You might say that a tax break isn’t the same as a spending program. You would be wrong. David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion 'weapons supply tax credit.' The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!”

He then goes on to rail against tax credits, not quite recognizing the major intellectual breakthrough he has made.

Trouble in Euro Zone Paradise?

By Marshall Auerback

The Europeans evidently thrive on instability and the ongoing threat of systemic risk. There is nothing else to explain the renewed hardline stance adopted by both Mario Draghi of the ECB and the German government on fiscal policy, just as the markets appeared to be calming down again.

In response to the question as to whether Greece was a “one-off”, or a deal which would presage similar claims on the part of the other Mediterranean debtor nations, there has been a growing prevailing belief that either the terms demanded of Greece would be so punitive (“pour decourager les autres”) or that, if Greece were to default, a sufficiently large firewall would be constructed by the Troika to ensure that the contagion wouldn’t extend to other countries. This is what Greek economist Yanis Varoufakis has called “cauterize and print”:

Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system.[2] The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed.

Well, the 2nd leg of that strategy seems to be falling apart, even as Greece is slowly being severed from the euro zone (because let’s be honest: Greece has insincerely accepted yet more impossible conditions for implementing another unworkable fiscal adjustment plan, which suggests that both sides are simply playing for yet more time). 

Warren Mosler: Because We Think We Can Be the Next Greece, We're Turning Ourselves Into the Next Japan

Why MMT is Like an Autostereogram

By Isabella Kaminska

(Cross-posted from FT Alphaville)

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

The Real Problem With the GIIPS: Current Account Deficits, not Budget Deficits

By Avraham Baranes

Modern Monetary Theory (MMT) emphasizes the Sectoral Balances approach.  According to the sector balances identity:

Domestic Priv. Sector Balance + Domestic Public Sector Balance + Current Account Balance = 0

It follows that:

Domestic Priv. Sector Surplus = Domestic Public Sector Deficit + Current Account Surplus

The deficit rules for the EU state that each countries budget deficit may not exceed 3% of GDP. This has the unintended consequence of also restricting the maximum sustainable current account deficit to 3%. At any current account deficit greater than 3%, the Domestic Private Sector Balance (DPSB) will be negative, a truly unsustainable situation as Wynne Godley famously predicted. Since 1999, the big winner in the EU has been Germany. Simply looking at current account balances, Germany moved from running small current account deficits in 1996 to amassing large surpluses after 2001. In the meantime, Italy, Ireland, and France saw their current account balances move from surplus (in the case of Italy and Ireland, quite substantial ones, more than 3% of GDP) to deficit.

What these graphs show is that the austerity programs proposed to fix the situation with the GIIPS cannot work. The current account deficits for Portugal, Greece, and Spain make it so that it is impossible to follow the deficit rules and maintain positive DPSB. Furthermore, these charts show why Germany is able to have smaller budget deficits and lower unemployment. By running large current account surpluses, Germany is able to run lower budget deficits or even budget surpluses while maintaining positive DPSB. This is why Germany has lower unemployment compared to GIIPS (Greece, Italy, Ireland, Portugal, and Spain).

The Amazing Vanishing Act: Accounting Control Fraud Disappears from the Regulatory Lexicon

By William K. Black

Criminologists know that accounting control fraud causes greater financial losses than all other forms of property crime – combined.  Some of the world’s best economists, George Akerlof and Paul Romer, praised the S&L regulators’ early recognition of these frauds and set out a formal economic theory of accounting control fraud (“Looting: the Economic Underworld of Bankruptcy for Profit”).  They ended their 1993 article with this paragraph, in order to emphasize its importance.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself.”

The primary reasons that accounting control fraud can produce catastrophic losses are the seeming legitimacy of the firm, the supreme status and respectability of the CEO leading the fraud, the fact that accounting control fraud is a “sure thing” (Akerlof & Romer 1993), the ability of control fraud to hyper-inflate bubbles, allowing the fraud to persist for years and magnify losses, and the paradox that the optimal means for a fraudulent CEO to loot “his” bank is to cause the bank to make exceptionally bad loans. 

MMT Had a Banner Day

By Mitch Green

Via Animals Explain Economics

MMT received some love from the mainstream press today.  WashPo ran a story titled, "You know the deficit hawks.  Now meet the deficit owls." via Ezra Klein's Wonkblog.  Jared Bernstein, Dean Baker and Kevin Drum have each responded with a few words regarding their take on MMT.  For the initiated, this comes as a welcome surprise:  First they ignore you, then they ridicule you, then they run a story about you in the Washington Post.

Every now and again the planets align, and we are presented with an opportunity to do what just moments earlier seemed out of grasp.  There is now space for MMT to influence policy debates beyond the fringes of the blogosphere.  The time is ripe to clarify and strengthen MMT, especially given that as it spreads through new channels we are bound to encounter misinterpretations of our central positions.

It is also important to bear in mind that as MMT spreads beyond the confines of its corner of the blogosphere, we are likely to encounter hostile or opposing views.  Remember to be patient:  you've studied this stuff for awhile now; stay classy and offer resources where appropriate.  It's easy to lose our sense of civility when we forget that at the end of a long chain of cables, routers and wireless cards are two human beings trying to have a conversation.

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Via WaPo

Indiviglio’s Dogmatic Embrace of Failed Dogma in a Column Denouncing Dogma

By William K. Black

Daniel Indiviglio, a columnist for Reuters, wrote a column (“Dogma show”) denouncing the agreement to extend the payroll tax reduction. He was distressed by what he considered faux fiscal restraint.  Indiviglio, writing at the same time that the Eurozone fell back into recession because of its austerity program, denounces both parties for being in the grip of dogmas that cause them to fail to impose greater austerity.

Why does Indiviglio want the U.S. to follow the worst possible response to a severe recession – austerity?  Because he is driven by a failed economic dogma, he has neither the capability nor any felt need to explain why he believes we should copy the Eurozone’s failed policies and join them in falling back into recession.  He is so trapped by his dogma that he knows that austerity is the only rational economic policy and cannot conceive that his views are ideological because they are so self-evidently true.  He has unintentionally proved his point about how destructive discredited economic dogma is. 

“Republicans in Congress, who have pounded the table on deficit reduction since last summer’s bruising debt battle, have backed down on a demand that spending be slashed to cover the cost of extending the tax cut. To let it ride for another 10 months will cost $100 billion. So much for fiscal discipline.”

Calling austerity “fiscal discipline” (a more positive phrase) does not change the fact that the columnist believes that the means to recover from a severe recession (where private sector demand is grossly inadequate) is to reduce public sector demand.  As the Euorzone nations have just shown, however, reducing public sector while trying to emerge from a severe recession is a superb means of causing a renewed recession.  The renewed recession, in turn, deepens the deficit.  Indiviglio’s austerity strategy is self-destructive.