Tuesday, March 26, 2019

What, me worry?

Should we worry about "the deficit"? Well, what do you mean by "worry"?

Let me ask a similar question: should you worry about the natural gas forced-air heater in your home?

Could the heater burn down your house or kill everyone inside from carbon monoxide poisoning? Well, yeah? I guess? It does happen, but it happens only when you have a pretty serious malfunction in the heater.

If you run the heater non-stop and keep your house at 90°F (32°C), you're going to run up a hell of a gas bill. Perhaps not the best idea, but that's not a reason to worry about your bill if you maintain a more reasonable temperature.

When I hear scholars of Monetary Monetary Theory* argue that "we shouldn't worry about the deficit," I read their arguments in the same sense that we shouldn't worry that the heater might kill us all. I mean, yeah, we should kinda worry, we should make sure our monetary institutions aren't seriously defective. But they're not seriously defective, at least not in the United States. Most importantly, we have effective tax collection institutions: the IRS, state and local governments, etc. They're perhaps not as efficient as we might like, but they're a long way from the dysfunctional institutions in Austria or Zimbabwe. As long as we can credibly collect taxes, deficits won't kill us all.

*I have not studied MMT academically. Any errors here are my own.

Similarly, yes, I suppose we miiiiight run the deficit so high that it would impose substantial economic hardship. But I read MMT scholars as saying that the present deficit is way too low; it seems misplaced to argue by analogy that it would be too expensive to heat the house to 90°F when it's snowing outside and the temperature inside is in the low 50s and dropping fast.

There may be some legitimate bad faith in mainstream economists' polemics against MMT, that MMT ignores real dangers of deficit spending. However, I think a big part of what's going on is that economists tend to internalize blindness to a fundamental political problem: that the capitalist ruling class will destroy the economy rather than give up power. That's the lesson from Venezuela: the capitalist ruling class — theirs and ours — destroyed the economy rather than let poor children have milk. Chavez's failure was not what what he tried, it was that he failed — perhaps from his own hubris or incompetence, or because success was impossible — to defend Venezuela from the capitalists.

Sunday, March 24, 2019

Who's going to pay for it?

We want nice things, right? Medicaid* for all, green energy and transportation systems, "free" college tuition, etc.

*I mean Medicaid for poor people, not Medicare for old people. I've been on Medicaid, and it's fucking awesome, at least in my home state.

But, of course, we have to pay for the nice things, n'est ce pas?

We run into a conceptual problem, though, because paying for things is really two distinct but related ideas.

The first idea is what economists call opportunity cost: if we pick one thing, there's something else we can't have. Everything takes work, and there are only so many people, who can work only so many hours. If we work to make one thing we can't make other things. If we want to train more doctors, we have to make fewer toasters; more solar power plants means fewer couches.

As far as I know, there isn't a single economist anywhere who says that we can have as much stuff as we want. Many, myself included, say we could have more and better stuff than we have now, but literally zero say there is no limit on the stuff we can have.

The other idea is what economists call a budget constraint: if someone wants to get something, they have to get the actual money together to buy it. If a person spends money on lattes, that's less money they have to spend on yoga lessons. If someone wants to buy a house, they have to convince a bank (or their parents) to lend or give them the money.

If we want Medicaid for all, we have to give actual US dollars to doctors. We might have to train more doctors, which means giving actual US dollars to medical schools and their professors. If we want to build solar power plants, we have to give actual US dollars to the workers who make and install solar panels and hook them up to the grid.

Opportunity costs and budget constraints are related. Budgets give traction to opportunity costs; they make opportunity costs immediate and direct. Budgets also distribute opportunity costs: whoever actually coughs up the cash is the one who incurs the opportunity cost.

For most ordinary stuff, private goods, stuff that individuals buy and consume themselves, the mapping of budgets to opportunity costs works reasonably well (not counting structural income and wealth inequality, which is a topic for another day); for public goods, which benefit everyone, not so much. If we spend real labor to keep the air and water clean, we lose whatever else that labor could have produced. But who gives up what? Should we insist that poor families give up some of their food while rich families have to give up their sixth vacation home?

Even for some private goods, there are problems mapping money budgets directly to opportunity costs It's one thing to say that if you can't afford a Ferrari, well, do without. It's quite another thing, at least in my mind, to demand that if a person can't afford the money to see a doctor, they should just do without.

Now, gentle reader, you might say, well, yes: If you can't afford to see a doctor, do without; if you die, too bad. If you can't afford clean air and clean water, breathe the smog and drink the sewage. I mean, if you feel that way, fuck you, but I'm not talking to you here.

I'm talking to the people who agree that it would be a good thing — the inevitable overhead included — to have Medicaid for all, a Green New Deal, free college tuition, etc. but worry, How are we ever to pay for these?

If you think that Medicaid for all would be good to have, then you're saying that having it is better than having the next best thing we would have had. The social benefit is greater than the social opportunity cost. And that's the only decision we really need to make. Is it worth it? Yes? Then find a way to do it.

I'm indebted for the following analysis to the scholars and analysts of Modern Monetary Theory. I have not studied MMT academically; any errors following are my own.

So how do we pay for it? The government creates the money. Boom. Paid for. Done. Congress authorizes the money and the Treasury Department starts writing checks. The Federal Reserve will honor the checks; if they don't, Congress can amend the Federal Reserve Act and make them do so.

We don't need to tax anyone or borrow from anyone to get the money. I think it would be advantageous to tax the rich, because fuck those guys, but we don't need to tax them or anyone. It might be advantageous to "borrow" from people, i.e. sell them government bonds, but we don't need to borrow anyone's money.

This solution might cause other problems (which I discuss below), all but the most trivial solutions do, but the first problem is easy to solve. It looks "too easy" only because we've been trained to not understand how money works.

There are two possible economic problems: inflation and interest rates.

If the government dumps a bunch of money in the economy for any reason, we should worry about inflation, i.e. a general rise in prices. However, inflation is not a big mystery. Inflation might not be a problem at all if new government money and the associated increase in bank lending creates enough new goods and services to absorb the additional money. If we create the money wisely, we can improve economic efficiency or put idle labor to productive work. Even if increased output doesn't absorb all the new money, it will definitely mitigate inflation.

Inflation by itself distributes the opportunity costs: inflation is really just a tax. If there's a general rise in price levels, people will reduce consumption: they might have to pay more for groceries and gasoline in return for getting, for example, universal access to health care or clean air and water. If we don't expect the government to perpetually flood new money into the economy, the irritating* inflationary spiral of the 1970s shouldn't repeat itself.

*The inflation of the 1970s was just irritating. The "cure" was economically devastating.

If we don't like how inflation distributes opportunity costs, we can increase taxes, which directly adjust people's budgets to impose opportunity costs. We would almost certainly do so for Medicaid for All, but we would just be exchanging premiums for less efficient private insurance for taxes for more efficient single-payer or "socialized" medicine.

The other more technical problem is interest rates. Dumping money into the economy lowers interest rates because of the increase in the money supply. If we don't want all the money swamping bank reserves, we can drain some of the money back by selling the banks government bonds (or just paying interest on reserves).

The technical economic problems of the government spending large amounts of new money are actually fairly well understood. Anything can be done poorly, so we would have to go about any large government spending with professionalism and care. But we would by no means be sailing into uncharted waters.

The political problems, however, are quite severe, perhaps intractable. But more on this later.