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The Deficit Myth: a review

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One common objection to neoclassical economics is that it underweights the importance of history and class. It is therefore paradoxical that Stephanie Kelton's The Deficit Myth, which claims to challenge orthodox economics, should be guilty of just these vices.

Let's start by saying that I wholly agree with the main claims she makes – that a government which enjoys monetary sovereignty can always finance its borrowing. Asking how we will pay for public spending is therefore daft. Instead, the question, as Dr Kelton says, is: can the extra spending be resourced? The constraint on raising health spending for example – if there is one – is a lack of doctors and nurses, not a lack of finance. Where there are resources lying idle, governments should raise spending to employ them. Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality. And rightly so. I was simply channelling Kalecki, Beveridge, Lerner and Keynes, who famously said back in 1933:

Look after the unemployment, and the Budget will look after itself.

For me, Kelton is – albeit very lucidly – reinventing the wheel. Reading her, I felt like Mr Jourdain in Moliere's The Bourgeois Gentleman, who was surprised to discover that he had been speaking prose all his life.

Here, Dr Kelton is more ambiguous than I would like. At one stage she claims that MMT "didn't exist" before the late 90s. But whilst the phrase did not exist, the ideas certainly did. Randall Wray is right to say (pdf) that "the main principles of functional finance were relatively widely held in the immediate postwar period."

And indeed Kelton does occasionally see this. There is passing reference to Lerner and to Keynes' How to Pay for the War, though not to Kalecki. And she cites JFK agreeing with James Tobin saying that "the only limit [on government borrowing] really is inflation."

Which is why I say she underplays history. I agree with Gavin Jackson that MMT is not new, and with Hans Despain that she neglects the ontology of MMT. We must ask, as she doesn't: why did these old truths get forgotten*?

I'm not sure about Wray's explanation, that it was because of the inflation of the 1970s. In principle, we might have interpreted that as consistent with functional finance, except that the inflation constraint on borrowing had tightened since the 50s.

Instead, I suspect the answer lies in Kalecki's great paper (pdf), "Political Aspects of Full Employment", written in 1942. He starts by saying "we are all 'MMTers' now":

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a Government spending programme, provided there is in existence adequate plant to employ all existing labour power, and provided adequate supplies of necessary foreign raw materials may be obtained in exchange for exports.

What's not to like, he asks? His answer lay in something else Kelton neglects: class.

Capitalists, he wrote, disliked what we now call MMT because it weakened their power. If governments can use fiscal policy to maintain full employment, they don't need to maintain business confidence and so "this powerful controlling device loses its effectiveness":

The social function of the doctrine of "sound finance" is to make the level of employment dependent on the "state of confidence…[Capitalists'] class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the " normal " capitalist system.

It is surely no accident that the backlash against functional finance came at a time when capitalists re-asserted their power over governments. Nor is it an accident that it's happened when capitalism has shifted away from mass-market Fordism to extractive finance capital: the former requires full employment and a mass market, the latter requires cheap money instead.

The analogy between government and household finances is of course a fiction – as we've known for almost a century – but it is a useful fiction for maintaining capitalists power.

Which is a big gap in Kelton's analysis. In treating public finances as merely a technocratic matter, she is ignoring the fact that capitalist power sometimes precludes good policy. She is making the error Kalecki warned us against:

The assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious.

Kelton is right. To implement her ideas (and those of Kalecki, Keynes, Lerner, Beveridge and Minskly!) however requires more than an intellectual (counter-)revolution. It requires a dismantling of capitalist power. And that's a tougher job.

* She neglects another historical question: if monetary sovereignty is as good as she claims, why were European nations (with the support of both public and economists) so keen to abandon it in the 1990s? One answer, I suspect, is that countries lacking the US's "exorbitant privilege" had less effective sovereignty. Whereas demand for Treasuries and dollars is so great as to give the US room to borrow, demand for drachmas, escudos and lira was not so great – and the dumping of such currencies meant their governments faced a tighter inflation constraint than the US.



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Economy

IPA’s weekly links

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Guest post by Jeff Mosenkis of Innovations for Poverty Action.

Some student-created infographic examples from the Communicating Economics website. 

  • Communicating Economics is a site with tools, tips, and videos of in-person college level lectures on, well, pretty much what the title says. It comes from the person behind Econ Films, whom I’ve worked with before and are very good at at what they do.
  • A Belgian court has cleared the way for the remains of the first Prime Minister of an independent Republic of Congo (now the DRC) to be returned to his family. In 1961 Patrice Lumumba had been in the job for three months when the Belgian government had him killed, along with two family members. And his “remains” consists of a tooth, because the Belgian authorities also ordered his body to be dissolved in acid. Longer story (for those with strong stomachs) here.
  • An interesting paper by Obie Porteous, analyzing 27,000 econ papers about Africa finds:

“45% of all economics journal articles and 65% of articles in the top five economics journals are about five countries accounting for just 16% of the continent’s population. I show that 91% of the variation in the number of articles across countries can be explained by a peacefulness index, the number of international tourist arrivals, having English as an official language, and population.”

The “big five” locations that dominate Western econ are Kenya, Uganda, South Africa, Ghana, and Malawi. On Conversations with Tyler recently, Tyler Cowen asked Nathan Nunn about this (particularly as relates to RCTs). Nunn responded that it’s very difficult to set up a research infrastructure, but once it’s there, it’s hard to go somewhere new and start again, and admitted that even though he doesn’t do RCTs he’s fallen into the same pattern.

  • A cool-looking paper from Agyei-Holmes, Buehren, Goldstein, Osei, Osei-Akoto, & Udry looks at a land titling program in Ghana (I know, see above, but to be fair, I know that at least Udry’s been doing research in Ghana for 30 years, and two of the authors are at Ghanaian institutions). The paper looks at how giving formal ownership to farmers increased their investments into their land and agricultural output. Except that it did the opposite – interestingly, when people got titles to the land, the value of the land increased and the owners, particularly women, shifted to other types of work, and business profits went up.

The post IPA’s weekly links appeared first on Chris Blattman.



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6 Crucial Races That Will Flip the SenateThis November, we have…

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6 Crucial Races That Will Flip the Senate

This November, we have an opportunity to harness your energy and momentum into political power and not just defeat Trump, but also flip the Senate. Here are six key races you should be paying attention to.

1. The first is North Carolina Republican senator Thom Tillis, notable for his “olympic gold” flip-flops. He voted to repeal the Affordable Care Act, then offered a loophole-filled replacement that excluded many with preexisting conditions. In 2014 Tillis took the position that climate change was “not a fact” and later urged Trump to withdraw from the Paris Climate Accord, before begrudgingly acknowledging the realities of climate change in 2018. And in 2019, although briefly opposing Trump’s emergency border wall declaration, he almost immediately caved to pressure.

But Tillis’ real legacy is the restrictive 2013 voter suppression law he helped pass as Speaker of the North Carolina House. The federal judge who struck down the egregious law said its provisions “targeted African Americans with almost surgical precision.”

Enter Democrat Cal Cunningham, who unlike his opponent, is taking no money from corporate PACs. Cunningham is a veteran who supports overturning the Supreme Court’s disastrous Citizens United decision, restoring the Voting Rights Act, and advancing other policies that would expand access to the ballot box.

2. Maine Senator Susan Collins, a self-proclaimed moderate whose unpopularity has made her especially vulnerable, once said that Trump was unworthy of the presidency. Unfortunately, she spent the last four years enabling his worst behavior. Collins voted to confirm Trump’s judges, including Brett Kavanaugh, and voted to acquit Trump in the impeachment trial, saying he had “learned his lesson” through the process alone. Rubbish.

Collins’ opponent is Sara Gideon, speaker of the House in Maine. As Speaker, Gideon pushed Maine to adopt ambitious climate legislation, anti-poverty initiatives, and ranked choice voting. And unlike Collins, Gideon supports comprehensive democracy reforms to ensure politicians are accountable to the people, not billionaire donors.

Another Collins term would be six more years of cowardly appeasement, no matter the cost to our democracy.

3. Down in South Carolina, Republican Senator Lindsey Graham is also vulnerable. Graham once said he’d “rather lose without Donald Trump than try to win with him.” But after refusing to vote for him in 2016, Graham spent the last four years becoming one of Trump’s most reliable enablers. Graham also introduced legislation to end birthright citizenship, lobbied for heavy restrictions on reproductive rights, and vigorously defended Brett Kavanaugh. Earlier this year, he said that pandemic relief benefits would only be renewed over his dead body.

His opponent, Democrat Jaime Harrison, has brought the race into a dead heat with his bold vision for a “New South.” Harrison’s platform centers on expanding access to healthcare, enacting paid family and sick leave, and investing in climate resistant infrastructure.

Graham once said that if the Republicans nominated Trump the party would “get destroyed,” and “deserve it.” We should heed his words, and help Jaime Harrison replace him in the Senate.

4. Let’s turn to Montana’s Senate race. The incumbent, Republican Steve Daines, has defended Trump’s racist tweets, thanked him for tear-gassing peaceful protestors, and parroted his push to reopen the country during the pandemic as early as May.

Daine’s challenger is former Democratic Governor Steve Bullock. Bullock is proof that Democratic policies can actually gain support in supposedly red states because they benefit people, not the wealthy and corporations. During his two terms, he oversaw the expansion of Medicaid, prevented the passage of union-busting laws, and vetoed two extreme bills that restricted access to abortions.The choice here, once again, is a no-brainer.

5. In Iowa, like Montana, is a state full of surprises. After the state voted for Obama twice, Republican Joni Ernst won her Senate seat in 2014. Her win was a boon for her corporate backers, but has been a disaster for everyone else.

Ernst, a staunch Trump ally, holds a slew of fringe opinions. She pushed anti-abortion laws that would have outlawed most contraception, shared her belief that states can nullify federal laws, and has hinted that she wants to privatize or fundamentally alter social security “behind closed doors.”

Her opponent, Democrat Theresa Greenfield, is a firm supporter of a strong social safety net because she knows its importance firsthand. Union and Social Security survivor benefits helped her rebuild her life after the tragic death of her spouse. With the crippling impact of coronavirus at the forefront of Americans’ minds, Greenfield would be a much needed advocate in the Senate.

6. In Arizona, incumbent Senate Republican Martha McSally is facing Democrat Mark Kelly. Two months after being defeated by Democrat Kyrsten SINema for Arizona’s other Senate seat, McSally was appointed to fill John McCain’s seat following his death. Since then, she’s used that seat to praise Trump and confirm industry lobbyists to agencies like the EPA, and keep cities from receiving additional funds to fight COVID-19. As she voted to block coronavirus relief funds, McSally even had the audacity to ask supporters to “fast a meal” to help support her campaign.

Mark Kelly, a former astronaut and husband of Congresswoman Gabby Giffords, became a gun-control activist following the attempt on her life in 2011. His support of universal background checks and crucial policies on the climate crisis, reproductive health, and wealth inequality make him the clear choice.

These are just a few of the important Senate races happening this year.

In addition, the entire House of Representatives will be on the ballot, along with 86 state legislative chambers and thousands of local seats.

Winning the White House is absolutely crucial, but it’s just one piece of the fight to save our democracy and push a people’s agenda. Securing victories in state legislatures is essential to stopping the GOP’s plans to entrench minority rule through gerrymandered congressional districts and restrictive voting laws — and it’s often state-level policies that have the biggest impact on our everyday lives. Even small changes to the makeup of a body like the Texas Board of Education, which determines textbook content for much of the country, will make a huge difference.

Plus, every school board member, state representative, and congressperson you elect can be pushed to enact policies that benefit the people, not just corporate donors.

This is how you build a movement that lasts.



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Economy

Fear & Data

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Causes of Death

 

 

Fear.

It is a key driver of behavior, whether in markets (Fear & Greed), politics (Tribalism), Health care (Anti-Vaxxers) or whatever (FOMO).

Fear is a great memory aid. For most of human history, people communicated not via the written word, but by oral storytelling. Hence, we are primed for emotional, memorable narratives. Looking at data and performing cold, calculated analyses is a learned, not innate, skill.

Social media understands this. Is it any surprise the algorithms of Facebook surfaces the most extreme views and claims? Look at what plays directly into that evolutionary trait, via clickbait and manufactured outrage. With our perfect hindsight bias, isn’t it obvious how inevitable this was?

Irrational fear is a driver of much of what we think and do. Often reflexively, frequently without thought. Contemplate what this means as you process new pandemic information, relying on mental models, performing data analysis.

How often do we react to a headline we disagree with, but after diving into the data underneath, it changes our mind? Not often enough, but on those rare occasions when that happens, it is a sign that you are doing this correctly. Our first reaction is the thoughtless programmed emotional response; the second is the more complex analytical result. It is your lizard brain (basal ganglia and brainstem) versus developed frontal lobe (neocortex).

Which brings us back to Covid-19. The probability of anyone of person getting this disease and then suffering a fatality is exceedingly low. I don’t want to suggest things are statistically normal, and you should definitely do things to stay safe: wear masks, socially distance, wash your hands frequently, and not touch your face. You can be (relatively) safe by doing these simple things.

But excess fear is driving all sorts of negative consequences, including stress, psychoses, economic damage, relationship issues, and health problems. This is counter-productive.

One day, this pandemic will end. Then we can all go back to worrying about cholesterol, high blood pressure and sugar.

 

 

 

 

Previously:
Over/Under Represented: Causes of Death in the Media (June 13, 2019)

Fearing the Dramatic, Complacent for the Mundane (April 29, 2019)

Denominator Blindness, Shark Attack edition (February 5, 2019)

Shark Attacks Illustrate an Investing Problem (February 4, 2019)

MiB: Danny Kahneman (February 11, 2017)

Crashes & Terrorists & Sharks – Oh, My! (November 9, 2015)

How’s Your MetaCognition? (August 16, 2013)

 


Source: Our World In Data

 

 

The post Fear & Data appeared first on The Big Picture.



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