…because I’m an economist and a mom–that’s why!

Should It All Be Greek to Us?

May 17th, 2010 . by economistmom

The IMF’s Fiscal Monitor released on Friday should be troubling to us Americans for what it says about the required adjustments we’ll have to make to get to sustainable levels of public debt–because it puts us in the same category as Greece.  From page 32 in the report:

26. The extent of fiscal adjustment required to achieve certain debt targets varies significantly across advanced economies.

The adjustment is highest—close to or above 10 percent of GDP in the baseline scenario described above—in countries with high initial CA primary deficit and debt levels (Greece, Ireland, Japan, Spain, the United Kingdom, and the United States) (Figure 13 and Appendix 2).

…and yet the report also explains why the U.S. will find such a large adjustment especially difficult to achieve given our projected age-related spending needs.  From page 36, where Figure 14 shows the U.S. as the top-rightmost data point in a graph that plots the required fiscal adjustment against projected age-related spending increases:

29. The fiscal adjustment described above will be made more challenging by the spending pressures that will arise in the decades ahead, particularly in advanced economies.

The adjustments discussed above do not take into account those needed to offset the spending pressures already in train due to population aging and other spending trend increases. In particular, for several countries, total adjustment required goes well beyond the net improvement needed in the primary balance, as measures will also be required to offset higher health and pension spending (let alone pressures arising from global warming). On average, spending increases in health and pensions are projected at 4 to 5 percentage points of GDP in advanced economies over the next 20 years (see IMF 2010c). The relative position across countries along these two dimensions—the needed change in the primary balance to lower public debt below 60 percent of GDP for advanced economies, and the increase in spending pressures for pensions and health—is illustrated in Figure 14. Countries with adjustment requirements clearly above the (simple) averages in both dimensions—those located far in the upper right quadrant—include the United States, Spain, the United Kingdom, France, and the Netherlands.

That’s why the IMF report also explains that although the challenges are created by pressures on the spending side of the federal budget, “achieving large fiscal adjustments will require a variety of measures”–and they examine a variety of specific revenue measures (VAT, excise tax increases, and carbon fees/taxes–as shown in Table 11 on page 47) that for the U.S. could contribute a total of over 6 percent of GDP, or just about half the 12 percent of GDP adjustment needed over the next couple decades to stabilize debt/GDP to around 60 percent.  That doesn’t even include any possible base broadening of the current federal income tax.

Their point being that age-related spending may be driving most of the longer-term problem but it can’t be all of the solution, because it’s doubtful we could damp down such spending enough, and even if we theoretically could, would we really want to (as a compassionate society)?  On the other hand, there are a lot of ways to raise revenue in a socially-optimal, economically-efficient way–by as they put it “strengthening broad-based taxes on relatively immobile bases and increasing externality-reducing taxes” (pg. 45).

And if we don’t take advantage of the luxury of having adjustments like these available for us to make gradually over the next couple decades, we may be forced instead to make that huge adjustment suddenly.  And then suddenly we may look a lot more like Greece.

45 Responses to “Should It All Be Greek to Us?”

  1. comment number 1 by: VAT Brat

    Raising eligibility ages for Medicare and Social Security would make the biggest impact on spending reductions. It is the one change that could be most easily explained and justified to voters. It must be gradually implemented so we must start immediately to make an impact 10 years from now.

    Democrats could swallow this because it doesn’t undermine the principle justifying these programs. It’s just a recognition that life expectancy and the increased percentage of service sector employment has undermined the fiscal assumptions of legislators back in 1935 and 1965 when these programs were conceived. Republicans have no philosophical issues with these cuts, either.

    Raising eligbility age is a 2 for 1 kind of payoff. You get 1 extra year of being a net tax payer and 1 less year of being a net tax taker.

    Raise the SS full benefit age from 67 to 70, and shift the schedule up 3 years. Raise Medicare eligibility from 65 to 68. Gradually phase in these changes over a 15 year period.

    I’m not sure how much money that saves. If anyone knows any studies that have looked at this option, then I’d like to know. I only know that it’s the one change that is broad-based where you could point to objective facts on the ground for a justification. In contrast, other reforms, especially on taxation, involves clashes of political philosophy that pit voters against each other.

    Because each of us grows older and faces the consequence of this change someday, it doesn’t pit one segment of the population against another.

  2. comment number 2 by: SteveinCH

    Actually, means testing is a better solution than raising the age because it targets the benefit to those with the greatest need.

    Having said that, the IMF report is very disturbing, particularly relative to the President’s commission that has a CA target of slightly over 1 percentage point.

  3. comment number 3 by: AMTbuff

    it’s doubtful we could damp down such spending enough, and even if we theoretically could, would we really want to (as a compassionate society)?…

    if we don’t take advantage of the luxury of having adjustments like these available for us to make gradually over the next couple decades, we may be forced instead to make that huge adjustment suddenly.

    I contend that progressives (including Diane) are making a serious error. Sure, they would prefer not to make deep cuts in benefits. But that is not a viable option. The real choice is between deep cuts now and catastrophic cuts (at least 3 times larger) when the government suddenly loses its ability to borrow.

    Cuts now that bring the deficit to 2% of GDP might preserve the government’s ability to borrow. Otherwise the government will suddenly have to move well beyond balance to a substantial fiscal surplus, as bondholders refuse to roll over their loans the government. Len Burman has ably described this frightening but realistic scenario.

    All governments facing this situation in the past have chosen default on the debt or printing money or both. Benefit cuts in that situation are guaranteed to be much worse than anything progressives today see as too deep to accept. Conservatives should also fear this outcome, because tax rates will skyrocket at the same time.

    Conservatives believe that tax increases now will be used to avoid cutting benefits to the extent needed to avoid a crash. That would be a complete waste regardless of your political preference.

    Progressives have no matching fear that large benefit cuts will be used to cut tax rates from today’s levels. The bond market simply would not allow that.

    Therefore the conservatives have the better argument: that dramatic spending cuts should come first, before tax increases.

    To summarize: progressives are far too sanguine about the depth of benefit cuts needed to correct this situation. This error will damage the progressive agenda for a generation or more.

  4. comment number 4 by: VAT Brat


    Means testing SS and Medicare is opposed by both Democrats and Republicans. Democrats especially oppose it because it undermines the broad-based buy-in they get from the myth that SS and Medicare programs are insurance programs where you “earn” what you receive in benefits. So while means-testing seems better, it’s politically DOA. That’s why increasing the eligibility age is more likely to be the option selected.

  5. comment number 5 by: SteveinCH


    The it’s politically infeasible argument is tiresome. If it’s the best you’ve got, then I suspect we’re done.

    If we don’t figure out that we should stop giving money to people based on age, we’re going down no matter what else we do.

  6. comment number 6 by: SteveinCH

    Further to the point,

    We can balance the budget within 5 years with reasonable means testing of SS and Medicare combined with defense cuts and allowing the Bush and Obama tax breaks to expire.

    What’s so hard about that?

  7. comment number 7 by: Arne

    Slowly increasing payroll taxes enough to cover the entire gap leaves workers with more takehome pay as the economy grows through the years.

    Increasing the Normal Retirement Age to 70 in 15 years asks them to work 4 more years and have 3 less years in retirement than current retirees. (Average normal retirement dropping from 16 years to 13 years for men.)

  8. comment number 8 by: AMTbuff

    We can balance the budget within 5 years with reasonable means testing of SS and Medicare combined with defense cuts and allowing the Bush and Obama tax breaks to expire.

    What’s so hard about that?

    I disagree with the implication that letting the alternative minimum tax return to non-indexed parameters set 18 years ago would not be a major tax increase. Inflation indexing should be part of any tax discussion. Otherwise it’s just as valid to say that the easiest way to balance the budget simply by returning to 1954 tax law. As a bonus, we’ll all get to be rich!

    The fantasy of an unindexed AMT springing back to life promises huge revenue gains, but that’s only because it would be a huge tax increase from anything the AMT was ever meant to be.

    The rest of the Bush and Obama tax cuts should definitely be on the table, but relief from the effects of non-indexation of the AMT should be part of the baseline for any honest discussion, in my opinion. Obama got this issue right.

  9. comment number 9 by: SteveinCH

    Fair enough AMT but it is still quite doable even if you leave the AMT fix in.

    My point is the argument that we have to have massive tax increases to solve the problem is simply incorrect and is an assertion that is never proven.

  10. comment number 10 by: VAT Brat

    Arne, SteveinCH

    Check out the SSA actuarial tables ( ) to see that the contingent life expectancy for males at age 65 is 17 yrs and at age 70 is 13.5 yrs. For females it’s 19.7 and 15.9 yrs. The crucial mathematics of SS and Medicare is not so much the tax rates as the ratio of beneficiaries to the workforce supporting the benefits. As time marches on, that ratio worsens. It is what drives the necessity of raising the eligibility age.

    The “politically infeasible” argument may be tiresome, but if it weren’t a crucial obstacle, then I suspect that Diane wouldn’t be hosting this blog.

    Giving people money based on age is the central political genius behind the voters’ support for the Democrats 2 signature programs of the 20th century. It’s what saves the Democrats from being simply categorized as a Socialist party. Dismissing that fact as a trivial obstacle is breathtaking in its delusion.

    Personally, I’d prefer means-testing over raising the eligibility age. But, over time, that would undermine broad based political support for these 2 entitlement programs. No doubt that the Republicans could get on board with that.

  11. comment number 11 by: SteveinCH

    The undermining support thing also gets a bit tiresome. Where’s the evidence. How many Federal programs are universal…almost none. And yet, they all seem to continue so it’s unclear to me why in this particular case support will be undermined once we stop giving SS and Medicare to millionaires.

    All solutions to the budget crisis (not just SS) are politically infeasible. My point about the argument is it applies to everything and is thus just a copout.

  12. comment number 12 by: VAT Brat

    You’d save more money ending pork-barrel program spending than you would be ceasing to give millionaires SS and Medicare benefits. For means-testing to really have an impact, you’d have to drop below $1MM and reach folks making less than $70,000/yr.
    Writing that “all solutions are politically infeasible” is lazy. Some policies are just more feasible than others and raising the eligibility age is more feasible than “meaningful” means-testing of benefits.

  13. comment number 13 by: SteveinCH


    Im means testing on wealth not income. The top quintile of seniors have a median net worth of $500,000. That seems a reasonable place to start.

    I agree some are more feasible than others but which you think more feasible is an unprovable value judgment. That’s what makes it a lazy argument. As to your contention, you may be right but the easy thing isn’t the right thing often. Of course, nobody has ever put the net worth statistics in front of the public in a compelling way. That might change what is perceived to be more or less feasible.

  14. comment number 14 by: Arne

    As time marches on the ratio of beneficiaries to workers that can be supported by a particular tax rate increases as the economy grows. For any particular year increasing the ratio would require a proportional increase in payroll taxes to keep the system in balance (exclusive of trust fund considerations).

    Mathematically, either solution can fill the gap.

    Go back to the life expectancy tables in the other columns and you see that raising the retirement age to 70 closes the gap by having another 10 percent of the population die without ever reaching retirement.

  15. comment number 15 by: Underwriterguy

    Means testing either by income or wealth could fly for SS. I collect and would not under a means test. I could accept that for the “greater good.”
    I would not feel that same about Medicare. While anyone can and should save for retirement, it is almost impossible to insure against medical expenses in old age. There is no medical equivalent to Whole Life Insurance. Until there is, and medical insurance is separated from employment, we are stuck with Medicare for all. Increasing cost sharing for the wealthy might work, IMO.

  16. comment number 16 by: Michael

    Disclaimer: I am a Republican.

    The simplicity side of me says raise the retirement age. But the problem with that solution is that not all people die at the same age - duh. Specifically, African-Americans and the poor do not have the same lifespan as middle and upper class Caucasians. So raising the retirement age will benefit people like me compared to “others” and I don’t think that is what we want to do.


  17. comment number 17 by: SteveinCH


    The reason it’s impossible to buy health insurance in old age is because you aren’t allowed to today. My in-laws wanted to buy insurance outside of Medicare and couldn’t. If suddenly, 20 percent or so of seniors were in the individual market, I rather suspect policies would be available. Seniors should have the choice of private insurers or be allowed to buy into Medicare directly at the average cost/beneficiary (about $10,000 per person today I believe). This is the same as increased cost sharing with the option to exit the program for a better private option (e.g., better coverage for more money) if chosen.

    My point about means testing is that it’s wrong to subsidize intergenerational wealth transfer. When you give money to seniors who already have a lot of money, that’s all you’re really doing.

    While I don’t collect SS or Medicare today, I would not in the future under what I’ve proposed. I’m OK with that.

  18. comment number 18 by: SteveinCH


    Your logic is yet another reason I favor means testing over raising the age. Sure it’s discriminatory but the basis for the discrimination makes more sense to me.

  19. comment number 19 by: VAT Brat

    Mike, SteveinCH,

    I favor means-testing over raising the retirement age too. Not sure what the relevance of my personal preferences has to do with realistic policy recommendations.

    As for racial arguments about the injustice of SS retirment ages, you’d have to broaden the scope of government benefits (food stamps, Section 8 housing, Medicaid, WIC, SS Disability Insurance, etc.) to determine whether certain racial groups are getting a raw deal on a collective basis vis a vis taxes contributed versus benefits paid out. Anyone care to bet that African Americans are getting the short end of the stick?

    At age 65 white males average life expectancy (ALE) is 2 yrs. higher than black males. White females ALE is 1.3 yrs higher than black females.

    While we’re talking about discrimination, what about the huge discrimination against males inherent in the Social Security and Medicare systems? Each discriminates against males in favor of females because females on average will receive more benefits for the same contributions due to their higher ALE.

    Each of these programs is about wealth redistribution. These programs would never survive in a market exchange where people receive expected benefits proportional to their contributions. That’s why the government makes participation compulsory! That’s also why they’re driving the government into insolvency.

  20. comment number 20 by: Arne

    Means testing does increases the amount that SS or Medicare redistribute money. If that is the problem, then I don’t understand the position.

  21. comment number 21 by: SteveinCH

    The problem is not the amount of redistribution, it’s the total amount of spending.

  22. comment number 22 by: Arne

    Taking just SS for the moment: If redistribution is not an issue, then you are simply saying that retirees spend too much.

  23. comment number 23 by: Matt

    Ezra Klein interviews Prof James Galbraith.

    EK: But couldn’t there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.

    JG: No, it’s not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we’re paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.


  24. comment number 24 by: John Bailey

    First, I want to salute everyone who is actually acknowledging some of the problems and proposing solutions.

    Second, however, we need to understand that the problems include that Social Security, Federal civilian and military retirement, state and local pension funds, the Pension Benefit Guaranty Corporation, Medicare, Medicaid, state and Federal retiree health benefits, private health insurance, Federal, state and local spending, U.S. Postal Service, unemployment, underwater mortgages, Fannie, Freddie,, bank failures, the FDIC, and the Federal debt.

    Third, we are going to have to choose between a health care system that rations care via some type of bureaucratic formula or one that is based upon health care consumers largely paying for their lifestyle and health care choices.

    (Wake up Diane), someone needs to be assembling these choices, producing good data so that intelligent reasoned choices can be made.

    Finally, we need to agree who will make the choices. My position is that the people who have to bear the burdens make the choices. Tax, spending, and debt levels should be set directly by the citizens/taxpayers. They should also make the decisions on major policy questions. Everyone will lose something. Everyone also needs to have the opportunity to participate in the decisions that impact their lives.

  25. comment number 25 by: SteveinCH


  26. comment number 26 by: Michael Cain

    “The reason it’s impossible to buy health insurance in old age is because you aren’t allowed to today.”

    It seems worth noting that the same statement was largely true in 1965 when Medicare was created, at least for the elderly who did not have insurance as a retiree. Of course, the party that wasn’t allowing such purchases was the insurance companies themselves, who generally wanted nothing to do with those aged 65+. Or would deal with the elderly, but at premium rates that very few could afford.

  27. comment number 27 by: SteveinCH


    Being 65 today isn’t the same as being 65 forty-five years ago. That said, your statement smacks of assertion rather than fact, particularly the statement “premium rates that very few could afford.”

    Today, the median senior HH has a net worth of over $200,000. What’s your definition of “could afford”?

  28. comment number 28 by: Matt Franko

    Burmans rebuttal is uninformed at best. His examples of Greece, Iceland and Argentina are inapplicable because they were/are currency users the US is a currency issuer. Big difference. His inflation hysteria for the US is irrational with 18% underemployment and 70% utilization, he is putting the health of our seniors at risk for nothing.

    If we made a policy shift to redeem US bonds ($8T or so that are out) and just rolled the current holders into reserve balances and paid them the current 0.25% interest (renumeration) on reserves, that would equate to $20B per year in payments to existing holders. A very small amount.

    there are a lot of other options available to us if we allow ourselves to think “outside the box”.

  29. comment number 29 by: AMTbuff

    The reason the US dollar is a reserve currency is that its value has been relatively stable compared with other practical alternatives. People trust the dollar as a store of value, at least over the medium term.

    Abuse that trust and the market will abandon the dollar, choosing something else as the preferred store of value. The dollar’s reserve role is not God-given and permanent. It can and will be lost if the government starts printing money wildly.

  30. comment number 30 by: Matt Franko

    I mean “reserves” as in Federal ‘Reserve’ Balances. The role of the USD as a so-called “reserve currency” is a separate issue. Some countries decide to ‘peg’ their currency to the USD (think China/Carribean, etc), in this use some people call the USD a ‘reserve’ currency, ie the central banks of the foreign countries keep a ‘reserve’ of USD at their central bank.

    To redeem the outstanding US Treasury bonds and credit reserve accounts for the current holders, they would in effect have a US bank account instead of a securities account. Once the US govt spends the USDs into existance (say for a medicare reimbursement or Social Security credit to a Senior), they can only exist as reserve balances at a depository institution, or be used to purchase Treasury Securities, there is nowhere else for them to go. Perhaps if we decided to just let the dollars exist as “excess” reserve balalnces instead of be invested in Treasury securities, all of this so-called “debt” doomsday that is bandied about would go away, and we could focus on pure policy. Resp,

  31. comment number 31 by: VAT Brat

    Mr. Franko,
    Some people look at the balance sheet of the Federal Reserve and think there is magic going on. Using terms like Federal Reserve Balances, excess reserve balances, etc. is smoke and sand kicked in your eyes obstructing a clear vision.

    The liabilties on the balance sheet of the Federal Reserve are conceptually equivalent to dollar bills printed by the US Treasury. Instead of going through the expense of printing currency or minting coins, the Fed uses journal entries (debit US Treausuries, credit Federal Reserve liabilities) as a high-tech method for increasing or (credit US Treasuries, debt Federal Reserve liabilities) decreasing the money supply.
    You treat these electronic accounting entries as if they possessed some magical mystical quality inherently different than currency and coin.

    Just so you’re aware of this fact, the US Government cannot “spends the USDs into existence…” under current law. Only the Federal Reserve has the power to usher US dollars into existence through an open market operation where it purchases US Treasury securities that were already purchased by private parties. The Fed cannot directly lend money to the US government.

    Exceptions to this restriction are made in emergencies where the Fed can lend troubled banks funds to avert a failure — an act that also increases the money supply.

    The balance sheet of the Federal Reserve is simply a tool that reveals how much money the Fed is creating or destroying. Conceptually, that’s no different than the King of Spain in 1500 knowing how much gold coins were minted and in circulation, or the Emperor of China knowing how much paper money was printed and in circulation.

    I don’t know the authors you’ve read who have poisoned your mind with these muddled notions of monetary theory. Please enroll in course, Introduction to Financial Accounting at your local college so that you can understand that there is no great mystery or secret insights that everyone else is missing regarding the operations of the Federal Reserve.

  32. comment number 32 by: Matt Franko

    I look at the Fed balance sheet and i see ACCOUNTING going on, you seem to be the one with magic in your eyes. Accounting is not smoke and sand.

    heres the the book YOU would want to read:Understanding Modern Money by Prof Randall Wray, Ive met Prof Wray and consider him THE expert on modern Free-floating, non-convertable currencies such as we here in the US have been operating for 40 YEARS NOW.

    THE FED IS PART OF THE GOVERNMENT, GET OVER IT. If the Dealers are short of reserve balances leading up to an auction, the Fed will do a repo with them to provide the balances to buy the bonds, ie Govt provides the funds to buy the Treasuries if necessary.

    Lose your anachronistic “King of Spain with gold coins” mentality and move into at least the 20th century.

  33. comment number 33 by: VAT Brat

    Mr. Franko,

    I’ve read articles by Prof. Randall Wray. I think he would cringe if he read what you have written on this blog insinuating that you are representing his views.

    All Prof. Wray is saying is that there isn’t a causual link between the Fed’s money creation policies and the amount of credit lent by banks. How you can take that simple notion and spin the prose you do on deficit spending by the government is beyond my comprehension.

  34. comment number 34 by: AMTbuff

    It’s like any other dogma, especially conspiracy theories of all stripes. Or, if you prefer, it’s like the tax protesters who invoke the 5th Amendment on their 1040s. If you read only one side of an issue from extremists who make a living pushing that view, you will be misinformed.

    Selectively quoting authoritative sources while leaving out pertinent facts and counterarguments is often enough to construct a plausible explanation for events that normally require extensive expertise to understand. This leaves the gullible reader firmly believing a story that is not true, or at best wildly implausible.

    The common thread is that the reader WANTS the implausible to be true. It gives the reader a feeling of being special, privy to a secret known to only a select few (namely the paying customers of the promoter). And it may also resonate with the reader’s pre-existing feelings about the subject or the personalities involved. Almost all conspiracy theories share both of these characteristics.

    If the government could print its way out of debt, and eliminate taxation at the same time, all without crashing the economy and reducing the country to barter, that would be wonderful. It’s a great fantasy, but fantasy is what it is.

  35. comment number 35 by: Jim Glass

    The liabilties on the balance sheet of the Federal Reserve are conceptually equivalent to dollar bills printed by the US Treasury. Instead of going through the expense of printing currency or minting coins…

    Yes, yes, of course you are correct — but you have to understand the strange belief system of those you are talking too.

    The self-dubbed “money monetary theorists” (no name could be more wrong, but onto that later) have three very strange principles in their creed to start with.

    #1) As Warren Mosler explained to me in a usenet discussion some years ago, “the supply line for money is horizontal”. This means money is created — and money supply is increased or reduced — in the banking system entirely via the multiplier exclusively in response to the demand for it in transactions, not at all by the central bank affecting, increasing or reducing the money supply. I.e., if the Fed creates reserves in any amount, but there is no increased demand for loan funds, the money supply will be unchanged.

    Ergo, the Fed can create reserves by trillions of dollars, to pay off debt of any size or for any other purpose, and there will be no effect on inflation at all. After all, with a modern fiat money system payments are only “electronic bookkeeping entries”, not real money. Nobody spends bookkeeping entries. (Ahem, cough.)

    To the contrary, changes in real economic activity are directed by government spending. So since increased government spending boosts the real economy, and the govt paying for it is totally non-inflationary (just the creation of bookkeeping entries) — inflation only arises when the economy hits productive capacity — the best policy is to deficit spend, deficit spend, deficit spend, until the economy is where you want to be. (Don’t even bother issuing bonds, just spend!) There is no govt debt that can’t be paid in a non-inflationary manner by the govt just crediting the borrowers’ accounts.

    Of course, there is nothing at all either “modern” or “monetary” in any of this. It is ye olde “money doesn’t matter” Paleo-Keynesianism taken to an extreme caricature.

    #2) Their own bizarre creation of “net private sector financial savings”. Their musing here seems to work along these strange lines:

    Saving is good and desired … but it is impossible for the private sector by itself to save on net, since whatever is saved by one party must be borrowed by another, netting to zero … so the private sector can save on net only if it lends to the government … ergo, government deficits are good because they create net private sector financial savings! The bigger the deficits, the greater the savings! (So again, don’t be shy piling up the govt debt!).

    Wrap your head around that for a few moments.

    Of course, it is oblivious to the fact that what matters to the growth of the economy is capital formation — investment in plant, equipment, research, human capital, etc. — and the importance of savings is that it funds such private sector capital formation … and the savings that matter is the amount of gross savings available for investors to borrow. Who would ever care about “net private sector financial savings”? (That’s why they had to invent the term, to put a rhetorical/abstract positive spin on “deficits”.)

    In reality, by its definition, “net private sector financial savings” — more commonly known as “government deficits” — are *bad* because they definition ally defund capital formation. Govt deficits suck up gross private savings that would be used for it and spend them on govt consumption instead.

    But their answer here is: No, no, no, remember that the money supply line is flat. Thus there always is an unlimited amount of money available to borrow to fund capital formation if one wants to form some capital. The supply of funds that is available to invest isn’t limited by gross private savings. Simple as that!

    #3) They, the (non-)Modern (non)Monetary Theory people are just a whole lot smarter than everybody else in the whole world.

    I’m not saying this to slur them, they tell it to themselves over and over. Go to their web sites and you will learn that all the world’s central bankers are too stupid, too riddled with old superstition, to understand how the money systems they manage work. And all these stupid textbook writers don’t even know that the world isn’t using the gold standard anymore!

    E.g., go to tales of Warren Mosler and we see him instructing Larry Summers …

    “Senator Daschle was looking at all this in disbelief. … Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

    “So I spend the next twenty minutes explaining the ‘paradox of thrift’ step by step, which he sort of got it right when he finally responded “Ah ha, so we need more investment which will show up as savings?”

    “I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting.”


    See, I’m not kidding. There are lots of stories like that. (I especially enjoy his tale of instructing the Finance Minister of Italy.) Of course, the first bright waving flag of crankery is “I am/we few are/smarter than all the professionals in the world on this subject, who are all wrong”… because, why?

    What’s amazing is how many people are impressed by this, in a positive sense.

    I imagine Mosler & Co sponsoring Modern Energy Theory and selling a perpetual motion machine, with his fans throwing accolades …

    “He went in Richard Feynman’s office and said, ‘Dick, you’re just confusing yourself with all this quantum mechanics mumbo jumbo. Do you know there are these things called molecules? Picture them as being made of little tiny solar systems, hooked together…’ and Feynman just looked at him, speechless, disbelieving, for 20 minutes!”

    “Wow, he instructed a Noble physicist in first year physics! He’s great. I’ll invest in that perpetual motion machine. MET has to be the truth! While all those working and academic physicists are too superstitious and still believing in the aether to understand it. Ha!”

    Really. :-)

    To be fair to Mosler, very unlike most “smarter than all the world’s experts” cranks who are snarkily bitter that their genius isn’t recognized, Warren was always very friendly and gracious.

    But one principle his crew has no conception of is Occam’s Razor — “if all the working professionals, and textbooks, and Nobel winners in the world totally disagree with us, so somebody has to be wrong, either them or us, who is it more likely to be?”

    Back in the day on usenet, the strange Internet land where anything goes, it was great fun interacting with these people and their strange ideas.

    But if we are trying to maintain a more focused, higher-level discussion forum here, know who you are dealing with and consider the old usenet wisdom: “Don’t feed the trolls.”

  36. comment number 36 by: Jim Glass

    The self-dubbed “money monetary theorists”…

    That would be “modern monetary theorists”.

    …(no name could be more wrong, but onto that later) have three very strange principles in their creed to start with…

  37. comment number 37 by: Jim Glass

    Ooops, the link to Mosler instructing Larry Summers “in first year economics” didn’t work.

  38. comment number 38 by: VAT Brat


    Thanks for the links. I laughed out loud reading it. I go back to Introduction to Financial Accounting. If Mosler and his coterie were to actually sit down and write down debit and credit journal entries for all the economic participants in these scenarios they spin about government expenditures, debt payments, etc., that would expose their nonsense in 2 minutes.

    The bit about tax payments going into a “shredder” was hilarious.

    Moving from prose to mathematical modeling eliminates a lot of BS. The verbal sleights of hands and skipping over steps are easy to do when you don’t constrain yourself with a logically constructed model.

    They also have no clue about the actual historical origins of money. It’s the triumph of theory over reality.

  39. comment number 39 by: Matt Franko


    here’s the accounting you’re looking for.


    here’s Prof Bill Mitchell breaking it down into terms you may be able to interpret.

  40. comment number 40 by: VAT Brat

    Mr. Franko:

    Here is the root of the fallacy in all the writings you cite:

    “Dollar’s worth is the result of the fact that you and I can fulfil our tax obligation to the US govt only in US Dollars.”

    This is an historical falsehood. There is no currency in circulation today anywhere in the world that at one time was not linked to a commitment to redeem the currency in exchange for a commodity, or that was a specific weight of some commodity like gold. Money originated from the private sector, not government. All government did was standardize what already was in use by the market by stamping pictures of a sovereign on a fixed weight of a metal that was already in use as a medium of exchange. Governments “piggy backed” on something created by the private sector, not vice versa.

    Even communist-economy “money” derives its value from the ability of consumers to go to the government store and redeem currency for commodities at a government-run store. The communists didn’t have a gold standard. They had a multiple commodity standard for their currencies. THERE ARE NO TAXES IN NORTH KOREA OR IN THE FORMER SOVIET UNION so how did their money derive its value according to your theories of money? When governments own the means of production how can their money have value? The theories of your crank monetary theorists cannot explain it.

    Just because fiat money or accounting entries are today manufactured by government and no longer linked to a commodity redemption doesn’t mean that their value comes from government compulsion to pay taxes. Here’s the thought experiment to help convince you that I’m correct.

    Suppose tomorrow the US Government announces that it will no longer accept US Dollars for tax payments. Now everyone must accept Obamas as the new currency. All expenditures will henceforth be made in Obamas. You are not able to exchange your US Dollars for Obamas at the Fed. You’ll just have to wait to receive your government expenditures in Obamas, which of course will be valuable because you’ll owe taxes in the form of Obamas. All holders of US Dollar-denominated debt and financial instruments and bank accounts will have to figure something out.

    Explain to the class what would happen, please. Oh, and no cheating. Because if you pledge to exchange US Dollars at some fixed exchange rate for Obamas, then you’ve not severed the historical chain linking fiat money to a commodity. No, you have to prove to the class how you will create pure value out of thin air for the new currency.

  41. comment number 41 by: Jim Glass

    Mr. Franko:

    Here is the root of the fallacy in all the writings you cite:

    “Dollar’s worth is the result of the fact that you and I can fulfil our tax obligation to the US govt only in US Dollars.”

    This is an historical falsehood…

    It’s also a contemporary falsehood.

    The US govt, via the IRS, has always accepted tax payments in foreign currencies — and still does. It even pays refunds in foreign currencies! (See IRS Reg Sec. 301.6316-5 (a))

    What, do the Moslerites think that if you earn your income in a foreign currency, so you don’t have dollars, the IRS will say, “OK, don’t pay us anything.”? :-)

    In today’s world the IRS wants you to pay in dollars only so it doesn’t have to pay the exchange rate fee incurred in swapping the foreign currency for the dollars that the Treasury needs to obtain to make domestic purchases and payments. You get to pay that fee, if the currency can be exchanged.

    But if your foreign currency isn’t convertable due to exhange controls or whatever, the IRS will happily take payment in the foreign currency — in fact, it will insist!

    Back in the post-war era when everybody had currency controls the US govt collected taxes in pounds, francs, marks, you name it, whatever people had.

    So the proclamation “you and I can fulfil our tax obligation to the US govt only in US Dollars” is totally bogus and always has been.

    How do they come up with this stuff? By the power of pure thought, exercising their self-proclaimed superior understanding. Without being distracted by the real world.

    Since they have already deduced that the govt can pay for anything it wants by just creating money, so taxes aren’t needed to finance govt, well, taxes must serve another purpose … yeah! by forcing everybody to pay taxes only in the govt’s currency, it gives the govt’s currency value, in the form of dollars being “tax payment certificates”, and enforces the use of the currency! That must be it! QED.

    LMAO :-)

    They also have no clue about the actual historical origins of money.

    Nope, they don’t — nor have they any clue about how tax policy has developed historically or functions in the real world.

    But why check the results of the power of pure reason against factual reality 101 — it ruins the fun. :-(

    It is amusing, though, that they pretend to give lectures on Econ 101 to the likes of Larry Summers and the Finance Minister of Italy while making howlers like this.

    BTW, this bizarre notion that a currency derives its value from the govt demanding that taxes be paid in it is another very *not* new, old, archaic idea … what’s the name of it? I forget. Dang, that’s annoying.

    From where does the dollar really get its worth?

    Maybe from the fact that so many hundreds of millions of people around the world want to use it in commerce, trade and finance — even when they don’t owe any US taxes? What an extraordinary thought!

  42. comment number 42 by: AMTbuff

    Almost anything can become currency:

  43. comment number 43 by: Anandakos

    VAT Brat,

    Conceptually your plan makes good sense. It is essentially Greenspan 2, and Greenspan 1 worked pretty darn well, at least for OASDI.

    The fly in the ointment is that you’re making the same mistake that everyone else is: assuming that the US economy will grow itself out of its current funk and create enough jobs for people to work those three extra years.

    It is not going to happen. In 1986 the early baby boomers educated by the brilliant women forced into teaching by lack of any other option were just coming into decision making positions in the economy. Now the young people — while very cosmopolitan and socially progressive — don’t know much except how to manipulate icons on a computer screen.

    We’ve already blown it on their education. Instead of teaching them how to think we taught them how to game the system, how to cut corners, to “teach to the test”, to “collaborate” so that the slow kids get blue ribbons too.

    Today’s radical visionaries of the tech and medical sectors are mostly immigrants. Most of the good ol’ boys produced by the dysfunctional American “education” system for the past three decades have no skill beyond that of a confidence man defrauding their neighbors and no moral compass to dissuade them from doing it.

    I’m glad I’m old and will die within a decade.


    I’m flabbergasted to admit that I give Jim’s post two above five stars. Normally he is factually accurate but sneers at the proles. But this is really pretty darn funny as well as being spot on.

    Keep up the new you, Jim.

  44. comment number 44 by: Anandakos


    Why will drastic benefit cuts “damage the progressive agenda”? Don’t you think that the people suffering the cuts will look around them and see the remaining pockets of wealth as potential plunder?

    That plunder won’t just be punitive hikes in taxes. It will arrive in a tumbrel with Madame La Guillotine.

    So you BETTER take a look at history and recognize that maximum marginal rates of 50% and north supported a MORE dynamic and prosperous society, because everyone had a stake in its success.

    It is certainly true that America in the 1950’s “golden age” was as successful as it was largely because it was the only advanced country with a significant industrial base left. So people pretty much HAD to buy from us. That will never happen again.

    That said, when bitter, aging white people vote to deny brown children access to an education HALF as good as the one provided to them by ruthlessly exploited brilliant women, they deserve to visit from the tumbrel.

  45. comment number 45 by: AMTbuff

    >Why will drastic benefit cuts “damage the progressive agenda”?

    Because the progressive agenda is for the government to do more good things for more people. Less revenue means a diminished scope for government benefits. No amount of taxing the rich will make up for a crashed economy and inability of the government to borrow.