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Debt, Deficits and Unemployment By Ken Schultz Discussants: Bret Frank and Daniel Wendt Debt, Deficits and Unemployment • Question Addressed o Should the priority of the government’s monetary and fiscal policy focus on debt and deficit reduction or reducing unemployment? • Thesis Statement o Additional government spending used wisely to stimulate demand will reduce unemployment and increase economic growth without causing higher interest rates, inflation or insolvency. Outline • Background o Modern Money Theory o Basic Principles of Macro Accounting • University of Massachusetts Study about Debt Ratio’s and Growth • Misconceptions Concerning Deficit Spending and Interest Rates • The Reality of Hyperinflation • The Job Guarantee/Employer of Last Resort • Conclusion Modern Money Theory • Sovereign governments with a fiat money and floating exchange rate have more monetary and fiscal flexibility than they may recognize • Governments have the ability to spend whatever is required to revive their economies and restore employment regardless of the amount of taxes collected • Governments can borrow without fear of default or insolvency • Affordability is not the issue, interest rates, inflation and crowding out private investment . Basics of Macro Accounting • One’s financial asset is another’s financial liability • The Three Sector Model • Government deficits are more stable than private sector deficits Private + Government + Foreign = 0 Picture Source: Randall Wray, comment on “Recent USA Sectoral Balances: Goldilocks, the Global Crash, and the Perfect Fiscal Storm,” New Economic Perspectives, comment posted June 19, 2011, (accessed April 26, 2013). Picture Source: Randall Wray, comment on “Recent USA Sectoral Balances: Goldilocks, the Global Crash, and the Perfect Fiscal Storm,” New Economic Perspectives, comment posted June 19, 2011, (accessed April 26, 2013). Public Debt Levels • A 2010 study conducted by Ken Rogoff and Chairman Reinhart showed that growth slowed dramatically when the GDP to debt ratio exceeded 90% • A recent study by The University of Massachusetts found a spreadsheet error • Growth rates may not be drastically different for economies that exceed the 90% threshold • While debt levels and deficit spending are significant, austerity would be counter productive US Debt to GDP Ratio’s Misconceptions about Deficit Spending and Interest Rates • Deficit spending credits bank deposits increasing reserves • Excess reserves lead banks to lend at lower interest rates • If the interest rate falls below the target rate government treasuries are sold in order to drain reserves • Deficit spending also creates a wealth effect spurring investment The Reality of Hyperinflation • Hyper inflation only occurs in very specific situations • Study by Cullen Roche analyzed 10 hyperinflation episodes that occurred after 1900 o In most cases these occurrences happened during a civil war and a majority also occurred with large foreign debts denominated in foreign currency • US foreign debt is held in government paper payable in US dollars The Job Guarantee/Employer of Last Resort (JG/ELR) • JG/ELR Basics o Provides a job to anyone willing and able to work o Uniform compensation package o It expands choices without limiting available choices in the private sector • Critiques o Increased labor costs may put some employers out of business o Ability to terminate workers o Inefficiency of government programs o May lead to outsourcing/offshoring JG/ELR Benefits • Reduction in poverty while at the same time reducing outlays in welfare and food stamp programs • Increased pride and self worth • Amelioration of social ills associated with unemployment o Spousal abuse, divorce, drug abuse and crime • Improved working conditions • Counter cyclical stabilizer Conclusion • While deficits and debt levels are problematic, the move toward austerity, considering current US economic conditions, would be counter productive • The priority of government monetary and fiscal policy should be on maintaining high employment and keeping inflation in check and not on debt levels or deficits • The JG/ELR program could provide sufficient counter cyclical demand stimulus sufficient enough to protect private sector profits and future profit expectations • The greatest threat to our economy today is inaction fueled by fears of inflation and insolvency Sources • • • • • Galasso, Emanuela, and Martin Ravallion. Social Protection in a Crisis - Argentina's Plan Jefes y Jefas. Washington D.C.: Development Research Group, World Bank, 2003. http://wwwwds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2003/12/08/000012009_ 20031208112939/Rendered/PDF/wps3165.pdf(accessed April 29, 2013). Herndon, Thomas, Michael Ash, and Robert Pollin. “Does High Public Debt Consistently Stifle Economic Growth? a Critique of Reinhart and Rogoff.” Political Economy Research Institute University of Massachusetts Amherst. https://docs.google.com/viewer?a=v&pid=gmail&attid=0.1&thid=13e6607ae08 2fdfc&mt=application/pdf&url=https://mail.google.com/mail/u/0/?ui%3D2%26ik%3Dcf2a b8448d%26view%3Datt%26th%3D13e6607ae082fdfc%26attid%3D0.1%26disp%3Dsafe%26z w&sig=AHIEtbSNTEmLVR8qLYkdah(accessed May 6, 2013). Hiltzik, Michael “How an Excel Error Fueled Panic Over the Federal Debt.” Los Angeles Times, April 16, 2013. http://www.latimes.com/business/money/la-fi-mo-debt-excel-error20130416,0,4073638.story (accessed April 26, 2013). Mosler, Warren. Comment on “Marginal Revolutionaries.” The Economist. Comment posted December 31, 2011. http://www.economist.com/node/21542174 (accessed April 29, 2013). Mitchel, Bill. Comment on “Mmt Is Biased Towards Anti-Crony.” Modern Monetary Theory...Macroeconomic Realit. Comment posted December 28, 2011.http://bilbo.economicoutlook.net/blog/?p=17528#more-17528 (accessed April 26, 2013). Sources • • • • • • Reinhart, Carmen, and Kenneth Rogoff. “Growth in a Time of Debt.” American Economic Association 100, no. 2 (January 2010): 573-78. Wray, Randall. “The Basics of Macro Accounting.” New Economic Perspectives. Entry posted June 12, 2011. http://neweconomicperspectives.org/2011/06/mmp-blog-2-basicsof-macro-accounting.html (accessed April 26, 2013). Wray, Randall. “Effects of Sovereign Government Budget Deficits On Saving, Reserves and Interest Rates.” Blog Title. Entry posted October 09, 2011.http://neweconomicperspectives.org/2011/10/mmp-blog-19-effects-ofsovereign.html (accessed April 27, 2013). Wray, Randall. “Functional Finance.” New Economic Perspectives. Entry posted January 08, 12012.http://neweconomicperspectives.org/2012/01/mmp-blog-31-functionalfinance-monetary.html(accessed April 26, 2013). Wray, Randall. “The Jg / Elr and Real World Experience.” New Economic Perspectives. Entry posted April 22, 20112. http://neweconomicperspectives.org/2012/04/mmp-blog47-the-jg-elr-and-real-world-experience.html (accessed April 29, 2013). Wray, Randall. “Job Guarantee Basics: Design and Advantages.” New Economic Perspectives. Entry posted March 25, 2010. http://neweconomicperspectives.org/2012/03/mmp-blog-43-job-guarantee-basicsdesign-and-advantages.html (accessed April 29, 2013). Sources • Wray, Randall. “Not Worth a Continental! How Modern Money Theory Replies to Hyperinflation Hyperventilators (part 2).” EconoMonitor. Entry posted August 21, 2011.http://www.economonitor.com/lrwray/2011/08/31/notworth-a-continental-how-modern-money-theory-replies-tohyperinflation-hyperventilators-part-2/ (accessed April 29, 2013). • Wray, Randall. “Reserves, Government Bond Sales, and Savings.” Entry posted October 31, 2011. http://neweconomicperspectives.org/2011/10/mmpblog-22-reserves-governement-bond.html (accessed April 27, 2013). • Wray, Randall. “What Is Modern Money Theory?” New Economic Perspectives. Entry posted January 01, 2012. http://neweconomicperspectives.org/2012/01/mmpblog-30-what-is-modern-money-theory.html (accessed April 26, 2013).