RE: [Some]THING TO ADD

Hi Tony
I would also rather be correct than heterodox.

You haven't seemed to reply directly to the posts by Trond, Bill, or me, except to refer back to your review and to some other articles (with which I am less familiar). But let me comment on one point you seemed to place a great deal of weight on, and one which seems to be widely accepted by both heterodox and orthodox, but which seems to me to be wrong-headed. It is difficult for me to be sure that I have picked out what you believe to be the main refutation of our argument, so bear with me.

You are worried that "we" (you were writing in response to my book, but it is probably safe to include Bill here) argue essentially that both the govt deficit-to-GDP ratio and govt debt-to-GDP ratio are of no concern (not even worth reporting). You posit that there must be some "sustainable" ratio determined by private portfolio preferences.

Now it is mathematically and trivially true that if some relationships are violated (say, if the interest rate paid on government debt exceeds the economic growth rate, given some assumptions) then the deficit and debt ratios explode and grow without limit.

But this of course presumes that growth of the deficit and debt ratios don't change the parameters of the model--something we vehemently and consistently deny. Our argument is that as the deficit ratio and debt ratio increase, this changes the behavior of the non-government sector in such a manner as to self-limit growth of these ratios.

You seem to admit in your review that (on a floating exchange rate, with a domestic currency)govt purchases are indeed made by crediting private bank accounts. A deficit results in net HPM creation. You seem to worry that this is limited by portfolio preferences of the non-govt sector--hence, you argue that the "financing" of the govt spending is not done until govt has sold bonds. While I might have misunderstood you, you also seem to worry that there is some maximum limit to the debt ratio that will be accepted--altho you have said you don't want to discuss what determines that.

Here is our position: so long as things are for sale for $US, govt can buy them by crediting accounts (creating HPM). (Note I will deal with the US case; Bill has already noted the differences where interest is paid on reserves.) If this results in "too much liquidity" (as you describe it), then there is downward pressure on overnight rates. Govt could let rates fall (to zero, as in Japan), or could offer bonds as an alternative. Note, govt is not under any reqmt to issue any bonds at all (the mitchell/mosler proposal)--it can just let rates fall to zero and there ain't nothing the private sector can do (it has already sold goods and services to govt, receiving HPM; this exchange was purely voluntary, and it is highly doubtful that those who did the selling did so with a goal to obtain treasuries.) But let us presume govt does not want a zero overnight rate. How many bonds can it offer? Well, if it offers just enuf to exactly drain the unwanted HPM, then the central bank will hit its target. If govt offers t
oo few, rates fall (triggering CB sales to drain the excess). If it offers too many, there could be upward pressure on rates (relieved by the CB buying the excess issue). Over time, rising govt deficits and debts will stimulate private spending thru income and wealth effects. This in turn will raise tax revenue and might lower govt spending, hence will tend to reduce govt deficits. In the US this effect is very strong--our budget will move to surplus when unemp falls to 5% (according to many analyses).

So, yes, we agree that private portfolio and spending preferences are very important, but the causation is different from the one you suggest. The size of the deficit and debt that can be run is indeed determined by private preferences, but not because there is a limit to acceptance of HPM and treasuries (in the manner suggested by you) but rather because stimulative effects wipe out the deficit. Just how big does the deficit ratio need to be to tip the economy back toward growth? Well, it all depends, on what is going on with those private sector preferences. In the case of Japan, it seems that a sustained deficit of 9% of gdp might be enuf (japan looks like it might have begun to recover), after a "lost decade". In the US after the 1930s, a deficit ratio of 25% did the trick. I suspect that in the current decade, a US deficit ratio of some 7% will be required.

You fear that "unsustainable" deficits could result from ELR (Job guarantee). Well, yes, but not for the reasons you suggest.
 
Our argument is that with the ELR/JG, automatic stabilizers are enhanced and the size of the swings of the govt's budget will likely be smaller. By itself, we could care less if this happened. What is important is to minimize unemployment and inflation. but it would give deficit hawks and doves less to worry about. Maybe they could find something more useful to do--solving problems of poverty or environmental degradation, for example.

Finally, I should note that I am also generally skeptical about how useful discussion groups via email are, but I am willing to give it a try.
Randy
Received on Thu Jan 30 00:08:59 2003