Peter Peterson: economic genius.

Peter Peterson is a billionaire who spends a significant proportion of his wealth every year promoting the idea that the deficit and national debt must at all costs be reduced. So does he have any particularly bright ideas to back this claim?

The answer is “no”. The ideas put by the Peterson Foundation site are about as simple minded as it is possible to be. The ideas are set out in an article entitled “A Path to Balance”. (There is a link to the article from the Foundation’s site – see the “This paper” link in orange.)

This article is easily comprehensible to a ten year old: that’s how sophisticated it is.

The article starts with two charts, the first of which shows the deficit as a proportion of GDP rising from about zero in 1949 to an average of (shock horror) about 4% for 2001 to 2009. That of course is grossly misleading because in 1949 national debt was at a near record level as a result of WWII and was rapidly being paid back. You’d expect no deficit in those circumstances: indeed you’d expect the occasional surplus. Collecting tax and using the money to pay back the national debt is almost the definition of “surplus”.

Just under that chart is another, showing national debt as a proportion of GDP declining from around 80% in 1949 to roughly 40% in the seventies and eighties, and then rising again to roughly 60% in 2010. What this omits, because it would spoil the Peterson story, is that the debt was over 200% just after WWII. That is, Peterson wants us to think that a rise to much more than the 80% level is some kind of disaster. That’s a bit hard to reconcile with the fact that the debt was well over 200% just after WWII. So we just keep quiet about that, don’t we?

The Peterson master plan is to gradually reduce the debt: a stroke of genius! That sounds much like a household gradually paying off its mortgage. The latter, of course, is microeconomics: about as relevant to paying off a national debt as chalk is relevant to cheese, because national debts, deficits and so on are macroeconomics, whereas individual household mortgages are microeconomics.

The first big problem with gradually paying off national debt at some pre-determined rate over the next ten years or so is that it might be a totally inappropriate policy in say five years time. For example, if there was an outbreak of irrational exuberance and general all round confidence in five years time, with the economy booming and excess inflation just round the corner, then some form of deflationary policy would be needed: for example raising taxes and paying off the national debt much faster than under the above “ten year plan”!

The second big problem is that collecting extra tax (and/or reducing public spending) is deflationary. Thus the basic effect of the “ten year pay back” scheme is deflationary. That could be wholly in appropriate if the economy stays in the doldrums over that period. So what to do?

Well there is an amazingly simple solution. Indeed, this solution could, at least in theory, wipe out the debt in just one year. Here’s how.

First print money and buy the debt back. That on its own would doubtless be too stimulatory and inflationary. Solution: mix the latter policy with a deflationary method of paying the debt back, that is raise taxes (or reduce government spending) and use the money collected/saved to buy the debt back.

Mix the above deflationary and stimulatory/inflationary measures in the right proportion, and you have a neutral pay back arrangement: no excessive inflation or unemployment while paying back. Indeed, the elements of the above solution can be altered to produce any desired outcome. For example for a more stimulatory stance while effecting the pay back, implement a bit more money printing and a bit less tax increase / public spending reduction.

There is just one problem (and one only) with the latter “wipe the national out” system: it would probably involve too much dislocation if started and completed on just one year. That is, it would be difficult to effect without some abrupt changes in the tax paid by particular groups, and that would bring political problems.

But, essentially paying the entire national debt back in a few years, at the same time as adopting any amount of stimulus or deflation you like is not difficult: how to do it can be explained to an intelligent ten year old. For more on this, see here.

Robert Reich is near to advocating Modern Monetary Theory.

Robert Reich says, quite rightly, that interest rates cannot be dropped any further.

He then points out, correctly, that “The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy enough to turn the economy around.” Agreed.

Put that another way, THE FUNDAMENTAL PURPOSE OF AN ECONOMY is to produce what the consumer wants. In view of this, it might have been an idea, right at the start of the recession, to have given the consumer more of that amazing stuff which ENABLES consumers to go out of buy what they want. And that amazing stuff is called MONEY!!!!!! That would have been better than ar*sing around with interest rates, QE, stuffing the pockets of Wall Street crooks and fraudsters, etc, etc.

Incidentally, in addition to waving their credit cards in the air and demanding various products, consumers also demand (via the ballot box) various publically provided goods and services. So the provision of these also needs to be expanded (or at least not allowed to fall) in a recession – as advocated by Modern Monetary Theory (MMT).

Reich continues: “So what’s the answer? Reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain linking pay to per-capita productivity.” Certainly the middle class (in addition to the lower orders, perhaps) needs more spending power. But there does not need to be a close link between pay and productivity in an MMT scenario.

In particular, come a recession, it would be a good idea to feed more of the above mentioned “amazing stuff” into employees pockets: that is, it is desirable to have employees pay move ahead of productivity, at least for a while. Conversely, given an outburst of irrational exuberance, it would be desirable to have pay fall behind productivity.

Robert Reich: please keep thinking. You’re almost there.

Republicans are sincerely and honestly concerned about deficits......as you can tell from this chart.

Copied from Care2.com.

Governments taylor their economic policies to account for the economic illiteracy of their populations.

Britain’s finance minister, Alistair Darling, created £60bn out of thin air for the benefit of two banks, RBS and HBOS, when they were in trouble, but didn’t announce what he had done till about eighteen months later. Why? I think it was for much the same reason as Keynes backed a policy he knew quite well was second best.

Keynes said that in a recession governments should borrow and spend. Abba Lerner said governments should just print money and spend it. Keyes was well aware of the “print” option, but seems to have favoured the borrow option because it looked or sounded more respectable or sensible.

Keynes said of Lerner, “"Lerner's argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.”

There is something unhealthy about governments pursuing policies they know to be flawed or second best, simply to take account of the economic illiteracy of the population or the “common man”.

To avoid the above problems in future, the ideal would be to make economics a compulsory school subject, with particular emphasis on when money printing is inflationary and when it is not. But not much chance of that, I suppose.

I love the ignorance of the anti-stimulus lobby.

“The free market will sort it out….no need for stimulus.” That’s the message of a hundred anti-stimulus articles.

The monster and glaring omission from nearly all these articles is any explanation as to exactly HOW the market gets out of a recession. The latter question was much debated in the 1930s. But, hey you don’t think the anti-stimulus red-necks have actually studied these debates do you?

There ARE actually two mechanisms via which the free market recovers from recessions: the Pigou effect and Say’s law. But Keynes concluded, quite rightly I think, that while these effects work in the long run “in the long run we are all dead”. I.e. these effects do work, but they work too slowly.

But don’t bother trying to find out what the anti-stimulus lobby think about Say or Pigou: most of them haven’t even heard of the two latter indivduals.

Examples of anti-stimulus articles:

1. by Greenspan (of all people):

2. This article is by Garett Jones, a Prof. at George Mason University. In addition to apparently never having heard of Say or Pigou, he seems to think that micro-economic laws work at the macroeconomic level: that is, he thinks that an all round wage cut reduces unemployment. Does he even know there is a distinction between macro and micro?

Modern Monetary Theory.

One of the beauties of Modern Monetary Theory (or indeed any half intelligent macroeconomic regime) is that under such a regime a whole series of pseudo problems and non problems raised by economic illiterates come out in the wash. That is, these non problems, which so called economists spend months trying to sort out, solve themselves.

First example: Tim Congdon worries about the possibility that tighter bank regulation will thwart the recovery. To be more exact, Congdon (like many leading conventional economists) has long been hooked on monetary aggregates, with little appreciation of the difference between who holds any additional money (e.g. Main Street or Wall Street). Certainly those in charge of sorting out the crunch put the bulk of recovery money (bar the automatic stabilisers) into Wall Street rather than Main Street.

Tighter bank regulation probably IS deflationary. But what of it? If tighter regulation is needed to reduce the chances of another crunch, then so be it. The deflationary effect can always be countered by extra stimulus.

And given that interest rates are currently as low as they can go, the only remaining option is expanding government spending (as prescribed by MMT) or tax cuts (as prescribed by MMT). And if any readers think that the two latter necessarily increase the national debt, please read Milton Friedman.

And as to the idea that we let banks indulge in undesirable practices because the effect is reflationary, you can bet your bottom dollar that clamping down more effectively on bank note forgery has a deflationary effect. Which proves that we should allow bank note forgery?

In short, we should pass whatever laws are deemed necessary in relation to banks, loan sharks and forgers. Whether the effect is deflationary or reflationary does not matter under an MMT regime. Reason is that under MMT, government just net spends to the point where the optimum relationship between inflation and unemployment is attained. If tighter bank regulation IS deflationary, the Treasury and central bank will react automatically under MMT by increasing net government spending.

In other words Congdon does not get the point correctly made by Winterspeak*, namely that the deflationary effects of tighter bank regulation can perfectly well be nullified (and more than nullified) by stimulatory measures. The result would be less bank based economic activity and more non-bank based economic activity. In view of the disastrous effects of banks over the last few years, less bank based activity would on the face of it be highly desirable.

*See Winterspeak’s 17th Sept 2010 post “The Fatal Flaw is Economists.”


Second example of a non problem comes from an Economist article.


This article points to the fact that the corporate sector is hoarding cash, and makes the bizarre claim (in the sub heading) that “For the recovery to proceed smoothly, firms must stop hoarding cash.”

So does The Economist seriously claim that the corporate sector will respond to exhortations from The Economist? Unlikely.

A better solution to this vexed non-problem is to have government net spend till the optimum inflation unemployment relationship is attained. The corporate sector can save cash or dissave to it’s heart’s content – as long as government adopts the above net spending policy, what the corporate sector does won’t make much difference. It’s a problem that solves itself.

The new Basle rules would not hamper economies even if we ignore the beneficial effects of reducing the chance of another credit crunch.

The most popular and naïve assumption (an assumption which is even made in the Basel III reports) is that higher lending costs hamper economies. Though the Basle reports claim the benefits from a reduced chance of another credit crunch will override the “hamper” effect.

The idea that those tighter requirements represent a cost is based on the assumption that any old increase in lending is good, because, er, any old investment is good.

Well, there is actually an OPTIMUM amount of investment.

Now is the amount of investment currently optimum? No, it’s not. It’s actually more than optimum because maturity transformation lets borrowers borrow at lower rates than they otherwise would. And more stringent capital requirements effectively reduces the extent of maturity transformation. For more on this see here, (point No 1 in particular).