Transcript Social Protection in a Crisis - Argentina`s Plan Jefes y

Debt, Deficits
and
Unemployment
By Ken Schultz
Discussants: Bret Frank and Daniel Wendt
Debt, Deficits and
Unemployment
• Question Addressed
o Should the priority of the government’s
monetary and fiscal policy focus on debt
and deficit reduction or reducing
unemployment?
• Thesis Statement
o Additional 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 Theory
o 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 = 0
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).
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 1900
o 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 Basics
o Provides a job to anyone willing and able to work
o Uniform compensation package
o 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 workers
o Inefficiency of government programs
o 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
unemployment
o 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
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•
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Galasso, Emanuela, and Martin Ravallion. Social Protection in a Crisis - Argentina's Plan
Jefes y Jefas. Washington D.C.: Development Research Group, World Bank,
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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
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Mosler, Warren. Comment on “Marginal Revolutionaries.” The Economist. Comment
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Sources
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Reinhart, Carmen, and Kenneth Rogoff. “Growth in a Time of Debt.” American Economic
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