Debt, Deficits and

UnemploymentBy Ken Schultz

Discussants: Bret Frank and Daniel Wendt

Debt, Deficits and Unemployment

• Question Addressedo Should the priority of the government’s

monetary and fiscal policy focus on debt and deficit reduction or reducing unemployment?

• Thesis StatementoAdditional 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 Theoryo 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 = 0Picture 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 1900o 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 Basicso Provides a job to anyone willing and able to

worko Uniform compensation packageo 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 workerso Inefficiency of government programso 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

unemploymento 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://www-wds.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=13e6607ae082fdfc&mt=application/pdf&url=https://mail.google.com/mail/u/0/?ui%3D2%26ik%3Dcf2ab8448d%26view%3Datt%26th%3D13e6607ae082fdfc%26attid%3D0.1%26disp%3Dsafe%26zw&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-error-20130416,0,4073638.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-basics-of-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-of-sovereign.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-functional-finance-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-blog-47-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-basics-design-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/not-worth-a-continental-how-modern-money-theory-replies-to-hyperinflation-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/mmp-blog-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/mmp-blog-30-what-is-modern-money-theory.html (accessed April 26, 2013).