Click for source. Demand for credit continues to decline, while corporate (especially financial) cash balances are at an all-time high. What are supply-siders smoking? See here and the links therein for much more evidence of the same.
Of all the reading in Modern Monetary Theory that I’ve been doing of late, perhaps the most eyebrow-raising paragraphs I’ve come across are these, from the redoubtable Randall Wray:
With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” (See Wray 1998, p. 63, and Stabile and Cantor 1991.) In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.
Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. (Thayer 1996) The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929.
This all to support the Modern Monetary Theory theory that government creates money through deficit spending (spending creates money, taxing destroys it), and that a growing economy requires more money — hence more deficit spending by government. (Whether those deficits are “financed” through borrowing/bond sales is something of a side issue now that we’re off the gold standard; government could just issue dollar bills instead of T-bills.)
Wray cites a two-page, unsupported (by citations) 1996 article by Frederick C. Thayer. Let me encapsulate it for you:
|Debt Decline Years||Debt Decline||Depression Start|
|1852 to 1857||59%||1857|
|1867 to 1873||27%||1873|
|1880 to 1893||>50% [57% per Thayer]||1893|
|1920–1930||Approx 33% [36% per Thayer]||1929|
That’s enough to make a fellow think. But I’m from Missouri, so I wanted to see the numbers for myself, and in graphical form.
There are a lot of ways to characterize government debt, of course — nominal or inflation-adjusted, total or per-capita, or as a percentage of GDP. Wray and Thayer seem to be talking about nominal totals, which in MMT thinking is the quantity of existing dollars. Here’s that, zoomed in on various periods so you can see the changes (I’ve marked the starts of depressions with arrows):
This seems to bear out what Wray and Thayler say. Every depression was preceded by a big decline in nominal Federal debt. It suggests that a decline in federal debt is a necessary (though obviously not sufficient) cause of depressions.
But what about post-war, and in particular our recent (near-)depression?
First, we have to shift from gross to net debt, a.k.a. debt held by the public, which subtracts money the government owes itself (to the social security and medicare trust funds, and especially recently, to the Fed) to give comparable numbers.
The rabid tea-partier who runs usgovernmentspending.com notably doesn’t share net debt figures (wouldn’t want to spoil the story…), so rather than go dig it up elsewhere I’m going to punt and let Wikipedia give us the picture:
We saw a downturn in nominal debt leading up to the dot-com crash. Otherwise the trend has been flat to increasing.
What all this ignores, of course, is privately-issued debt, something that — confusingly to me — many MMTers don’t talk much about, if at all. I haven’t clarified my thinking on that issue, so I’m going to pass you for the moment to Rodger Mitchell. I haven’t thought through his ideas or data carefully, but I find it useful that he looks at private debt, federal debt, and their relationships over time — something I haven’t found well done elsewhere.
Very interesting thinking from The Economist‘s Democracy in America (whoever that is) on the (apparent) lack of demand in our current economy:
…people … may not be interested in buying a new car this year, but … they’re very interested in riding the subway … There is demand out there. It just isn’t for individual consumer goods.
This to reiterate the point that “there’s a $2 trillion backlog of necessary infrastructure repairs in America”. That’s just repairs.
There’s demand for those infrastructure goods. And because they’re public goods that private actors can’t capture the profit from, the private sector won’t provide them.
Obama went after the elephant in the room, at huge political cost. Say what you will about his political savvy, the way he went about it, or the reform’s likely (as opposed to hoped-for) effects, but it makes pretty clear who’s the adult in the room.
Let’s adopt the unpresuming assumptions that:
1. A prosperous, modern economy needs a certain amount of government (taxing, spending) to become and remain prosperous. And that government has to be paid for via taxes and other government revenues. Simple enough.
2. Either too much or too little government in a country results in a poor economy, forcing the country to alter its taxing and spending policies.
So you won’t see any countries outside the workable range, because they’ll be forced back into it.
Now look at this:
Update: this is local, state, and federal taxes combined.
The first thing to notice: U.S. government revenues (local/state/federal combined) have been flat (with some short- and long-term wiggles) for 45 years. The notion of rampant increases is a myth.
Next: Note that the higher-taxing countries, in aggregate, have been seen long-term growth that’s basically equivalent to ours.
Let’s look at the other countries that are down there near us.
• Australia. They’ve been doing pretty well, but if Steve Keen is right (his arguments are darned compelling), they’ve been living on credit — especially housing credit (sound familiar?) — and they’re riding for a fall.
• Japan. ‘nuf said.
• Switzerland. It’s really amazing what a whole lot of international banks will do for the economy of a small country…
• Canada. As you can see, their average taxation rate has been way above ours for decades. Their rank here is an anomaly.
• Greece. Ahem.
• Spain. Ahem some more.
• New Zealand. I know bubkis about New Zealand’s economy.
• Portugal. Ahem ahem.
I don’t think it’s crazy to suggest that since 1980 we’ve been teetering at the bottom edge of the range where a prosperous, modern economy can thrive. Eventually, we fell off the cliff.
For my Seattle friends (click for source):
As my buddy Steve says, just float in a new span before the current one sinks, and call it good.
Lane Kenworthy once again gives us one of those graphs that encapsulates a whole global scenario, over four decades:
Yeah: we’re #1.
Edit: just to note that while we were on the high end of the spending pack until about 1980, we were within the normal range. It’s only since then that things really went off the tracks.
Reinhard and Rogoff again repeat this claim.
1. As I pointed out, out of 3,700 samples (country/years) they find five (I found six) years of U.S. debt at that level: 1944-1949. Which was followed, of course, by the best two decades of U. S. growth in living memory.
2. Krugman went deeper:
as best I can tell, all or almost all observations of advanced countries with gross debt over 90 percent of GDP come from four main groupings:
1. The US and the UK in the immediate aftermath of WWII
2. Japan after 1995
3. Canada in the mid 90s
4. Belgium and Italy since the late 1980s
We’ve already seen that (1) is a case of spurious correlation [see #1, above]. Surely (2) is largely a case of causation running the other way, from Japan’s slide into slow growth and deflation to its rising debt. As for (3), advocates of austerity have been using Canada in the mid-90s as an example of a success story; surely they can’t have it both ways. This leaves (4)
3. Now somebody (Dean Baker? Matthew Yglesias? For the life of me I can’t find the item I read just yesterday) points out that the debt of the British empire exceeded 90% of GDP for most of the eighteenth and nineteenth centuries — the very period in which it was establishing global hegemony and growing by leaps and bounds.
Here’s what that looks like:
Krugman’s right: while their historical research is fascinating (yes I’ve read their book; great stuff), Reinhart and Rogoff’s “90% conclusion” is not up to their usual standards. Given the tiny and misrepresentative sample supposedly supporting that conclusion, judicious souls will ignore it.
I don’t usually just give the link and leave it at that. But I can’t hope to encapsulate the video here — essential viewing for everyone with any interest in economics, even if you have read Chapter Two of Keen’s book. (If you haven’t, watch the video now and wait till September to buy the book; the second edition is coming out.)
Mike Konczal makes a key distinction that importantly frames recent discussions about “rentiers.” In my words:
Rent is money received for having money.
Profit is money earned for using money (your own and others’) to generate and sell real production — goods and services that have human value.
As I’ve suggested in previous posts, American corporations generate a far larger percentage of their “profits” today from rent (as opposed to real profit) than in decades past. And corporate leaders are, increasingly, not intrepid industrialists and entrepreneurs, but financiers. It’s getting harder to distinguish between the real economy and the financial economy.
In an earlier post, Mike gives us this graph as demonstration:
I’ve tried to dig up more comprehensive data on the percentage of corporate “profits” that come from financial “investments” as opposed to real business operations, but haven’t found it so far. I’ll keep digging.