Sunday, 9 October 2016
The economic illiteracy of Pete Peterson.
Just for a laugh, let’s run through this article by Pete Peterson, the billionaire founder of the Peterson Institute: the organization that hands out wads of cash to academics with a view to buying academic credibility. The article title is “America can’t afford Greek complacency”
If you know anything about economics, you’ll have spotted a flaw in the article already: comparing the US, a country which issues its own currency, to Greece, which doesn’t.
Peterson doesn’t EXPLICITLY say Greece and the US face exactly the same problems. But the mention of Greece is clearly there for a purpose: to fool the gullible into thinking that the horrendous problems of Greece could be replicated in the US.
Peterson then suggests there are few similarities between Greece and the US. Oh yes? So what was the purpose of the title of his article “America can’t afford Greek complacency”.
Anyway, with a view to showing there are few similarities between Greece and the US, he says, “There are countless differences between the circumstances of the U.S. and Greece.” So exactly which Greek problems might be replicated in the US? Well Peterson is vague on that one, probably because he does not know the answer to the latter question.
But there is SOME SORT OF indication as to where the problems lie in this paragraph:
“Without question, the United States remains on a fiscal path that is unsustainable and dangerous by any international standard. Last month's non-partisan Congressional Budget Office analysis projects that by 2040, federal debt will climb to more than 100% of gross domestic product based on current laws, and would reach 175% of GDP under less optimistic assumptions. Debt at that level, CBO warns, would significantly harm our economy, reduce incomes and increase the chances of a fiscal crisis.”
Well first, the fact that something is “unsustainable” proves precisely and exactly nothing. An accelerating car is not a “sustainable” system: reason is that the car cannot go on accelerating for ever. First, it will reach the legal speed limit, at which point the driver ought to take his foot off the gas. Second, there’s a physical upper limit to the speed of any car. So is the “unsustainability” of an accelerating car anything to worry about? No!
And in fact something very similar to the latter self-limiting characteristic of the speed of a car applies to the national debt. That is, national or government debt is an asset as viewed by those holding the debt, i.e. the private sector. And the larger the private sector’s paper assets (as pointed out over and over by MMTers) the more the private sector will spend, for the same reason as the larger the lottery prize a household wins, the more it will spend.
Thus at some point, a rising national debt will induce extra spending to the extent that no further increase in the debt is needed in order to induce more spending.
Long term planning.
Next, Peterson says “Nonetheless, there are important lessons to be learned about the benefits of long-term planning and maintaining fiscal health and flexibility.” What – it’s an idea to “plan” the deficit in advance, is it? Out by 180 degrees!!
The basic point of a deficit is to make good a shortfall in demand coming from the private sector (or in the case of a SURPLUS, to tone down EXCESS demand coming from the private sector). But no one has much of an idea what excess or deficiency in demand the private sector will be responsible for in two, four or six years’ time.
For example the difference between exports and imports has an effect on demand. No one knows what exports or imports will be doing in four years’ time. And then there’s Alan Greenspan’s “irrational exuberance”. That tends to increase demand. But no one knows whether there’ll be an outbreak of irrational exuberance in a few years’ time or not.
In short, the idea that the deficit should be planned several years in advance is a contradiction in terms. It’s a bit like saying a good way of putting out a house fire is to pour 100% proof alcohol on the fire.
Interest on the debt.
In the next passage, Peterson worries about interest on the debt. He evidently doesn’t understand the point which MMTers make over and over, namely that a country which issues its own currency can pay any rate of interest on its debt that it likes. In fact it can turn large chunks of the debt into “zero interest debt” simply by printing money and buying back the debt. Indeed we’ve been doing that, and on an unprecedented and astronomic scale over the last five years under the guise of QE. Perhaps Pete Peterson hasn’t heard of QE.
And as for the idea that the money printing involved in QE results in inflation, where exactly is the inflation stemming from QE?
As for the “projections” to which Peterson refers, how about using this chart for the purposes of anticipating where the deficit will be in two years’ time. Rather looks like it will have shrunk to zero, not of course that I’m claiming the chart is a brilliantly reliable guide.
As for Peterson’s predictions as to where the deficit will be in 2040, well that’s straight out of cloud cuckoo land.
And finally, for a humorous take down of Peterson type thinking, see here.