“Does US need a second stimulus to create jobs?”

Reader Doug Smith was not happy with an article in the Christian Science Monitor yesterday, titled, “Does US need a second stimulus to create jobs? His remarks:

Could you, Edward or someone consider reading this article and responding to it? My sense is that it perfectly captures ‘conventional wisdom’ and, in that sense, is a bell weather for what our nation is confronting when it comes to just how far conventional wisdom lies from real insight that matters.

I am up to my elbows in alligators right now, and Ed Harrison and Marshall Auerback have offered to take this one on, with Marshall’s reaction below.

As an aside, I have to say it has been a bit disturbing to see readers resort to knee-jerk reactions when they see the mention of deficit spending, and then badly distort the arguments made in support of it. Marshall has repeatedly made the point that a government is not operationally constrained in running a deficit. It faces a practical constraint, which is inflation. We are so far from having inflation that those concerns seem badly misplaced right now and for the foreseeable future. And before you point to the massive Fed balance sheet, let me remind you of Japan, which has had massive money supply creation and still remains mired in mild deflation (now to me, that suggests we have wrong policy mix, advanced economies rely overmuch on liquidity creation because it’s easy to do, but that’s another topic).

The second issue is that deficit spending is likely inevitable. If you go into Mellonite liquidationist mode, you see collapsing government revenues versus certain minimum government service requirements, made worse by a vast increase in the debt burden in real terms. So the issue is not fiscal deficit versus no deficit; the issue is how much deficit and how to deploy the funds to maximum effect. Marshall argues for trying to compensate for the fall in private sector demand; other might argue for a lesser goal of simply trying to prevent deflation.

The Christian Science Monitor article says:

Simon Johnson, a former International Monetary Fund economist now at the Massachusetts Institute of Technology, takes a similar view of the challenge.

“With such countries that have ‘lived beyond their means’ … it is a mistake to try to prevent this process of competitive adjustment,” he told a congressional panel last month. “The adjustment can be cushioned by fiscal policy…. But attempting to postpone adjustment with repeated fiscal stimulus is almost always a mistake.”

Marshall Auerback responds:

“First of all, I’m sort of surprised to hear Simon Johnson say this, as he’s made a lot of very astute comments on the financial crisis, but then again, he is an ex-IMF economist and clearly not well versed in Modern Monetary Theory (MMT).

Obama’s attempts at using the public sector to facilitate private sector debt deleveraging to date have been pitiful. There has been very little focused on creating jobs and a lot spent on the top-end-of-town. If I was to give his stimulus package a score out of 10 for effectiveness it would be around 3/10. Doesn’t that tell you something about the quality of his advisors and the sort of connections they have and the theories they are using to design policy initiatives?

Why design inefficient fiscal interventions that have benefitted Wall Street enormously despite the fact they create very little real output or employment and then turn around with this lame story that the Chinese are to blame because our citizens voluntarily buy the junk they make?

What we desperately need to do is to increase our deficit by several percentage points of GDP and offer public sector jobs to all those who want one. Government as Employer of Last Resort is one idea I have been pushing (along with Randy Wray, Bill Mitchell and a host of other people). As I said in an earlier post,

The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. Other benefits could be provided, including vacation and sick leave, and contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom up reform of the current patchwork health care system.

Obama’s attempts at deficit expansion to date have been pitiful. There has been very little focused on creating jobs and instead have constituted a massive subsidy to Wall Street, in effect providing a direct financial incentive to reward bad behaviour. In spite of their pitiful attempts at apology, the likes of Goldman Sachs understand that better than most. To aid the recovery, Goldman launched a scheme to help 10,000 small businesses, to which it will donate $500m over five years. Some were left unimpressed; Goldman pulled in at least $82 billion … trading just in the 2nd & 3rd quarters of 2009. It has set aside $16.7 billion for pay and compensation so far this year, according to the NY Times.

Why design inefficient fiscal interventions that have benefitted Wall Street enormously despite the fact they create very little real output or employment and then turn around with this lame story that the Chinese are to blame because your citizens voluntary buy the junk they make? How is a revaluation of the yuan going to bring back jobs to America? China should not revalue, certainly not abruptly. Slow appreciation may be optimal, since it keeps the foreign money in. A big appreciation yields a capital gain, and would precipitate both a profits crash in the export sector (social disaster) and a rapid outflow as hot money cashes in and checks out. It would do nothing for the US current account, since (of course) any loss of competitiveness in China would be taken up by other countries.

At any rate, what we desperately need to do is to increase our deficit by several percentage points of GDP and offer public sector jobs to all those who want one. We thus have to aim to ensure public spending fills the gap left by non-government saving (a consolidated position combining the private domestic and foreign sectors) and keeps aggregate demand growing at such a rate that it provides scope for the private savings desires to be realised without compromising our public purpose goal to ensure there is sustained full employment and inclusive income distribution outcomes.

But by far the majority of the unemployed workers could be offered a minimum wage job to work on community and environmental care projects for as long as they desired. I would suggest we also raise the minimum wage so that everyone has access to decent housing and health care etc. But the ELR scheme would only be offering a wage to workers who have no market bid for their services by definition. It will give them a job, some income security, will add to aggregate demand and help stimulate a broader recovery and, in itself, will not be inflationary.

Consider these facts:

  • US capacity utilisation rates are around 70 per cent and even lower in Manufacturing.
  • The official unemployment rate was 10.2 per cent in October 2009.
  • The BLS U6 broader labour underutilisation rate is at 17.5 per cent in October … can I repeat that … 17.5 per cent. That, as Ed Harrison has pointed out repeatedly, is a depression-like number.
  • Foreclosures are still rising and are at dangerously high levels in terms of the viability of the overall housing market
  • Our children are increasingly being fed by food stamps. In some black neighbourhoods “around 90 per cent live in homes that receive food stamps at one stage or another” .

The US Government is a monopoly issuer of the US dollar and is not revenue-constrained The facts I presented above would tell anyone who knows the slightest bit about how our currency operates that anyone who talks about “neutral deficit” outcome at present is an irresponsible lunatic.

The recognition of the national accounting relationships which underpin modern monetary theory are not matters of opinion. These include (but the list is not exhaustive):

  • That a government deficit (surplus) will be exactly equal ($-for-$) to a non-government surplus (deficit).
  • That a deficiency of spending overall relative to full capacity output will cause output to contract and employment to fall.
  • That government net spending funds the private desire to save while at the same ensuring output levels are high.
  • That a national government which issues its own currency is not revenue-constrained in its own spending, irrespective of the voluntary (political) arrangements it puts in place which may constrain it in spending in any number of ways.
  • That public debt issuance of a sovereign government is about interest-rate maintenance and has nothing to do with “funding” net government spending.
  • That a sovereign government can buy whatever is for sale at any time but should only net spend up to the desire by the non-government sector to save otherwise nominal spending will outstrip the real capacity of the economy to respond in quantity terms and inflation will result.

Note the last point in bold. I do not, as the caricatures suggest, advocate completely unrestrained government spending, paying no heed to inflation. But inflation is the constraint on government spending, not a uninformed ideas about ‘solvency’.

Consider Obama’s claim that “if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession”.

Where did he get that idea from? Did the moronic Larry Summers read it out to you from Greg Mankiw or something? People have already lost confidence in the US economy – that is why they are not spending. That is why your deficit has risen sharply mostly via the automatic stabilisers as your revenue side collapsed.

We don’t need that revenue to allow you to spend. Not in the least. All I am noting is that in an accounting sense, government revenue has fallen off a cliff and our net spending has risen which is a good thing because the automatic stabilisers are not called that for nothing. They start adding to demand as soon as they start working to push our net spending up.

People who think that investors will lose confidence in the US Government and somehow that will stop them spending even more because your spending is helping to put some semblance of a floor into aggregate demand which is retarding the jobs loss somewhat? If you think that tell Larry to close Mankiw for a while and learn something about how your monetary operations actually work.

The other dubious idea is that the government spending gets conflated with some idea of “fiscal insolvency”.

I can certainly see how government overspending creates inflation, but is that what you mean by “fiscal insolvency” in the sense that the inflation represents the de facto default?

That to me is a separate issue.

The inflation would be from too much aggregate demand and a too small output gap.

That would mean that fatefull day would be an economy with maybe 4% unemployment and 90%+ capacity utilization and an overheating economy in general.

Yves here. I have to interject. I imagine some readers will say, “But what about about 1970s stagflation?” We had inflation BEFORE the stagnation. The economy was overheating in the late 1960s. The 1973 oil crisis both kicked up inflation a notch higher (and labor had bargaining power, so wages would rise in response to inflation, creating a self-perpetuating cycle), and businesses and consumer were hit by the combo of not just higher oil prices but also supply uncertainty. Very different facts on the ground here. Back to Marshall:

Sounds like that’s the goal of deficit spending to me- so in fact you are indirectly confirming that deficit spending does work.

And if we do need to raise taxes to cool things down some day, we can start with a tax on interest income if we want to cut payments to bond holders or a financial transactions tax on the “polluter pays” principle.

Regarding the supposed default alternative to inflation, in the full employment and high capacity utilization scenario that might call for a tax increase to cool it down, I don’t see how default fits in or why it would even be considered. So again, I’m confused by the concept of fiscal insolvency, which would only seem to apply if there was an external constraint, such as a currency board, or large quantities of foreign debt.

In fact, with our countercyclical tax structure, strong growth that follows deficits automatically drives down the deficit, and can even drive it into surplus, as happened in the 1990’s. In that case one must be quick to reverse the growth constraining surplus should the economy fall apart as happened shortly after Clinton ran budget surpluses for 3 straight years.

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  1. Mogden

    How can anyone seriously propose raising the minimum wage at a time of skyrocketing unemployment, especially among low skilled teenagers? If we want to raise employment, the minimum wage should be abolished.

    Make it more expensive to hire workers => less workers will be hired. It is as simple as that.

    1. Yves Smith Post author


      There is quite a bit of empirical work that contradicts your view. I suggest you familiarize yourself with it before you make such confident assertions.

      1. Mogden

        I’d certainly be willing to look at them if you have a pointer to something you find credible.

        It seems intuitively obvious to me that someone with $5/hr skills is not going to be hired at $10/hr, so I await enlightenment as to what I am missing.

        1. Toby

          Hi Mogden,

          two books I think might help generally are The End of Work by Jeremy Rifkin and The Spirit Level by Wilkinson and Pickett. Probably the latter is more relevant, but the former does raise a lot of relevant questions. Important is to do your own research so that you can come to your own informed conclusions in your own way, rather than rely on other people’s perhaps uninformed opinions by debating them. Go to the source.

        2. Marshall Auerback


          You might also want to check out the work by David Card and Alan Krueger, “Myth and Measurement: The New Economics of the Minimum Wage” (Princeton, NJ, Princeton University Press, 1995) on the subject of the minimum wage and employment.

      2. Dan Duncan

        Yves, there’s quite a bit of empirical work that supports Modgen’s view as well. Of course, I’ll follow your lead and be decidedly UN-empirical and just leave it at that.

        As for the admonishing others on making “confident assertions”…are you kidding? Did read Marshall’s post? Talk about confident assertions….

        Marshall, I had no idea that all our problems could be solved so easily.

        Marshall writes: “At any rate, what we desperately need to do is to increase our deficit by several percentage points of GDP and offer public sector jobs to all those who want one.”

        Unemployment: Solved!

        “But by far the majority of the unemployed workers could be offered a minimum wage job to work on community and environmental care projects for as long as they desired. I would suggest we also raise the minimum wage so that everyone has access to decent housing and health care etc.”

        Housing and Health Care: Solved! And it’ll be good for the environment too!

        I could go on as the post is filled with governance straight from a Nike commercial: Cue some edgy music and replace Lebron, and Federer with Pelosi and Reid….Watch ’em “go to work”. Just do it, baby!

        I had no idea it all so easy.

        But, hey….While you’re giving us all the answers, Marshall, could you tell me why, on health care, for example, that the bill is over 2000 F&*^ing pages long?

        You may state that the length of the health care bill is not relevant to whether or not we should have Stimulus 2.0.

        But it is relevant.

        You’re asserting that we should all just turn over more of our money to this government…

        You’re asserting (with undue confidence) that this government is capable of wise stewardship.

        Yet…on every level this government (be it Republican or Democrat) is an abysmal failure.

        Marshall, you are simply “deriving ought from is”…A textbook case of fallacious thinking.

        Back to Yves: I know you’re really into empiricism. That 2000 F&%$ing page, opaque health care bill was designed to be unread; thus it was designed to stymie any empirical review. It is an astonishingly dishonest attempt at addressing health care….by a dishonest government that has not earned the trust of many taxpayers.

        But for some reason a reality such as this just seems too pedestrian to capture the Left’s interest.

        “Ah, but these are just technicalities. If only we made this government BIGGER, it would become wiser and more efficient. It just would.”

        1. Marshall Auerback

          Dan, I think you’d make your points more effectively without the resort to obscenity and personal insult, but yes, I do think it was relatively easy to solving the problems we now face. Technically it would have been fairly easy, ten months ago, to get this bus
          back on the road. There could have been open-ended fiscal assistance to stop the budget hemorrhage of the states and cities. There could have been a payroll tax holiday. There could have been a jobs program and effective
          foreclosure relief. There could have been a strategy for sustained massive effort on infrastructure, energy and climate. There could have been prompt corrective action to resolve, instead of coddle, the worst of the banks.
          You obviously have an issue with the government doing anything, but the reality is that it was wild west of free market finance that got us into this mess, not the “interfering government” that you love to caricature in your comments.

          1. Andrew Bissell

            Back in the Wild West days did the government come riding to the rescue of every homesteader and cattle driver whose ventures came to grief? Did they imbue the participants with a sense that some safety net would always be there to catch them if they fell?

            Private markets can boom and bust all on their own, but to pretend the government had no hand in goosing the easy credit mania of the past several decades — that it was, as you put it, analogous to the Wild West –is historically misguided at best or deceptive at worst. Or was the Greenspan put just a figment of Wall Street’s overabundant imagination?

          2. Rick Caird

            I do not understand how Auerback can claim it was the financial institutions that got us into this mess. It was first and foremost the government and the GSE’s. The financial institutions piled in after the GSE’s had defined and built the MBS markets. I believe it was Arnold Kling who noted that he had at first expected Freddie and Fannie to hold abut 25% of the bad mortgages, but it turns out it is at least 75% and may be 90%.

            Now, we have the FHA giving out loans with 3.5% down (and less if the first time buyer credit is available) and Barney Frank wants to get back into the CRA business.

            And, Auerback thinks it is the financial institutions? But, you have to think that way if you are a Keynesian. All that just goes to show Keynes is still wrong.


  2. thanks

    I just started reading this blog and know little about monetary theory, but I think this is the most helpful post I’ve read so far. It seems to make sense.

  3. David

    I agree with this article. On the other hand, someone else could say that the “private sector’s desire to save” is not homogeneous. Those who already have savings have less desire to save more and instead want to preserve the value of what they saved already. Those deep in debt need to save and/or pay down debt, and want the value of that debt (perhaps owed to those with savings) reduced. The private sector is not all of one mind.

    I agree with the article’s conclusion, because I think those in debt need help more than those with net dollar-denominated financial assets deserve to have their value preserved. If the Chinese complain their dollars will go down in value, I would answer that they knew how much debt of ours they held anyway, and if they thought that was payable, they were crazy. They should expect a devaluation and they have a right to complain, but we have a right to devalue.

  4. Brian

    “Obama’s attempts at deficit expansion to date have been pitiful.”

    You make a large and probably faulty assumption that he meant to do something different than make sure Goldman got huge bonuses.

    The US Gov may have a monopoly on issuing dollars, but they don’t have a monopoly on giving them any value.

    You can’t just give everyone enough money through some make-work job to afford decent housing and decent lifestyles defined as the US middle class. Not everyone deserves that, and if the people who actually have valuable skills and take risks with small businesses and the like can’t get ahead of their ditch digging or filling neighbors, no one is going to do anything.

    This theoretical treatment of the economy and not a value-producing system is driving me away from Naked Capitalism, only Yves’s original work keeps me checking for something decent here.

    1. DownSouth


      There is a moral war transpiring in America. During the 1930s one side in this conflict advanced mightily. But beginning in the early 80s the other side gained its footing and mounted a highly successful counteroffensive. Now, with the advent of the financial crisis, there are signs that the tide of war is about to turn again.

      Free-riding is a problem universal to all human groups, beginning at the family level and extending all the way to large nations like the United States. Equal work merits equal pay, stellar performers get rewarded, slackers get punished, and herein lies the most basic and universal definition of human morality. Societies that don’t live by this code become dysfunctional and risk dissolution.

      The rub is that in America there is no agreement as to who the free-riders are, and thus the moral war to define these malefactors rages on.

      From your comment, it is evident you believe the most egregious free-riders are the ones at the bottom of the socio-economic ladder—those who lack “valuable skills” and don’t “take risks with small businesses.” As a form of punishment, these should be deprived of “decent housing and decent lifestyles” because they “deserve” no better.

      On the other side of the moral divide in America are those who think the most egregious free-riders are at the top of the socio-economic spectrum. Here the most undeserving are the bankers and Wall Street types who knock down multi-million dollar pay packages for destroying the American economy.

      Economists, to their great detriment, typically ignore the moral debate altogether, as i on the ball patriot pointed out yesterday:

      Addressing this problem in the very limited framework of economics, that includes only the “private sector, the public sector and the foreign sector”, without looking at the far more pivotally important — and now all pervasive — “corruption sector” as the driving force of societal direction is a distraction and a disservice to your readers.

      Or as Daniel Yankelovich pointed out in Coming to Public Judgment:

      The public…analyzes the competitiveness issue in moral rather than in technical terms. Both the cause and the cure to America’s economic sluggishness are seen to be the same. An increasing number of Americans believe that the country has lost its moral fiber.

      1. Siggy

        There was a time when the study of ‘economics was styled as Political Economy. The academic search for a rational approach to the study set in motion the adoption of econometrics. Thus has been imposed the rationale of equations and statistical inference. What has gone ill considered is the fact that individuals and their societies are often irrational.

        Recently, I note that there is a rising body of literature that is studying economic choices and which studies are beginning to challenge the absolute applicability of rational choices. That price alone does not establish demand seems to be the developing theme.

        Now, to the issue of this piece and its thread. Government spending is funded primarily by taxes. In that what the government spends it also takes away from the taxpayers.

        Government spending that is not supported by taxation is suppoted by money creation. We do that in a convulated way. Congress appropriates, Treasury sells bonds, Federal Reserve, Foreign Banks, the Public and other private entities buy bonds. The creation of money now comes into play. Banks accept Treasury bonds as collateral and issue loans. The loans are spent and demand deposits are created to the extent that required reseves are satisfied. The multiplier for this process approximates something north of 10 times.

        The Treasury bonds carry an interest rate. The constraint on government spending is ultimately determined by this rate. As the annual amount of interest to be paid on the Federal Debt approaches GDP, the government’s ability to sell bonds is diminished by rising interest rates and diminishing confidence on the part of bond buyers.

        This loss of confidence is triggered by the fact that the government is spending more than the country is earning and thereby reducing the purchasing power of the currency.

        The resolution of this problem is to: repudiate the government debt, default if you will, and/or stop deficit spending.

        You will notice that the emphasis of the Federal Reserve influence of the Yield Curve is at the short end of the scale. This is purposeful in that it bears the lowest interest rate cost for Treasury debt and thereby forestalls interst rates that would otherwise rapidly push the cost of borrowing to a rate equal to, or gretare than, the level of GDP.

        In the short run, a second stimulus package might begin to help the unemployment rate. In the long run it means a substantial loss of purchasing power for the currency. Increases in the minimum wage will not cure this problem. What is required is a mssive restructuring of the economy.

        For that restructuring we need to examine the manner in which purchsing power has been eroded, and the fact that this country has eschewed saving because of that continuos erossion.

  5. Toby

    Marshall Auerback said:

    “The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment.”

    Forgive me, but this sounds like Communism. I work in Berlin and all my colleagues are ex-East Germans. They would laugh bitterly to read the above paragraph. One of the best pieces of information I got was when I asked them what the chief difference between Communism and Capitalism was. The answer? Shopping. It made me laugh, but now it seems to be becoming horribly true.

    What might the economy need all these unemployed millions for? We have more goods and services out there than any one could ever buy, want or need, and yet still U6 of over 17%, and the argument is to employ people until we reach 0%. Doing what? There are factories out there with almost no workers because they are so automated. New factories built will deploy automation to whatever degree they can in order to stay competitive. So what need does the economy have for human labor going forward? What data is there to support the idea that natural unemployment can return to even 4%?

    I am well aware of the lump of labor fallacy, but do not agree with it. I agree with Tom Walker (who is offering a $10,000 reward to anyone who can refute his rebuttal of the fallacy, see here: http://econospeak.blogspot.com/2009/03/glass-houses-alert.html) that the way to more stability and dignity than we have now is reducing the work week.

    The other thing to mention — linked in my view to this belief that total employment is possible — is that we should not be resting our theses on the assumption of infinite wants. Wants cannot be infinite. There are limits in the form of changing societal moods, paradigms, etc., not to mention the sheer mathematical impossibility of infinite wants. Without infinite wants there can be no justified expectation that the consumer will consume more and more and more forever, thereby creating demand for jobs somewhere in the economy, not to mention the technological aspect rendering human labor progressively less necessary to that economy. “Infinite wants” is a dangerous assumption. Phyisics, I believe, works hard to keep infinities out of their equations, economics is built on top of one.

    I’m sorry if I’ve missed something obvious. That’s happened before and will no doubt happen again, but this is how it looks to me, and I don’t see how any other approach can have any long term chance of success. Things are changing quickly and profoundly. We need therefore to adapt our understandings, not cling to the “old way” that got us into this mess in the first place.

    1. pigeon

      First I got the same feeling as you had about communism. But a second thought told me that the comparison with former GDR might not be appropriate. That is because GDR was in effect paying the burden of reparation to the Soviet Union and thus became bankrupt due to that outflow. (This cost of reparation is now payed back by the western germans through enormous transfer payments).

    2. frequent

      Two thoughts:

      1. As long as it’s easier to generate high earnings at lower perceived risk from investment in stocks/commodities/alike it will be difficult to persuade independent financial intermediaries to invest funds in areas with lower projected earnings and perceived higher risks, such as small businesses and other potentially job-creating ventures. Spending more doesn’t solve the problem. Finding means to channel funds maybe would.

      2. There’s always going to be wants, even on top of the pyramid. The number next to infinite is large, but it still is a number… Technology makes manual work obsolete – I agree. Still it also creates new jobs in different areas. The problem in my view trying to ride out business and industry cycles to the limit, thereby maximizing shareholder value and forgeting about developing new busines models. New business models create new wants, create new jobs.

      1. Toby

        Thought 1 seems premised on the assumption that the economy will always need human labor in sufficient quantities and thereby keep purchasing power sufficiently high. This assumption is based on the orthodox idea that increasing production efficiencies, by lowering prices, create demand in the economy which creates employment in new areas. This assumes that some sufficient number of human abilities are not technically replicable. That is an assumption, not a fact. We have had ever increasing production efficiencies while wages have stagnated and demand for labor is falling. How is this possible?

        You mention manual labor in thought two. There is a piece of software in a University somewhere in America called The Eureka Machine, which postulates physical laws. It needed something like 15 minutes to come up with with (I might be misremembering) conservation of momentum, which took Newton years. This from observation and a software that extrapolates in the language of math equations, set up by humans, yes, but doing intellectual work, not manual labor. The human scientists can’t keep up with it. Technological unemployment is not at all just about manual labor, but about human “soft” skills too. And AI is in its infancy.

        Yes there will always be wants, and new wants too, but they will never be infinite. Economics defines scarcity as “inifinte wants versus finite resources,” which sound impossible to solve. If we say scarcity is finite wants versus finite resources we have a totally different problem. Which is the more accurate definition? The history of consumerism is instructive on “infinite” wants. Conspicuous consumption used to be gauche. Who knows what will happen as a result of people’s chaning relationship with the ecosystem; perhaps greed will indeed become uncool again. What would that do to GDP?

        I know what classical economics says, I just don’t agree. It seems to me the people who write these theories don’t study technology as well, and certainly not how technological development is accelerating. It is not my position that every single human ability can be replicated, rather that a very high proportion of them can be (a computer wrote a (bad) novel in the 1980s for example — humans write bad novels too by the way, most of the time), to the degree that we need in fact a radically different economics. Far be it from me to describe this new economics, but I feel at least justified in calling for cross-discipline discussions to address such questions. We’re entering a profoundly different period to that which we have known; the old way of thinking doesn’t work any more.

        1. frequent

          > Production efficiencies

          I thought efficiencies are more economies of scale, learning curve and process innovation. Technological progress both reduces (think car assembly line) and increases demand for labor (somebody needs to build the assembly machines)… more of a shift than a reduction.

          If one simply maximizes profits, labor is one of the costs incurred during production. Costs need to be minimized. Wages are costs. Wages are stagnant.

          So, increasing efficiencies, stagnant wages and reduced demand for labor are possible in a profit-max world.

          > Eureka and AI

          My calculator is also much quicker than I am :-). Smaller scale, same thing: trying to compete with software in terms of quickness of information processing is a waste of time. I read a nice article a few days ago. The author claimed the advantage of humans over machines is that humans are not perfect – they are creative, tolerant, etc. I like the idea… I guess it’s a question of Spielberg’s AI or Cameron’s Terminator :-)

          > Wants

          There have been a lot of proposals lately on alternatives to pure GDP measurement. Add maximizing profits versus optimizing profits or shareholder value versus stakeholder value and will be interesting to see how a new system would look like.

          Will “change” be a bottom-up or top-down thing? Will people stop “lending” money to banks or will govt. stop lending peoples’ money to banks (to gamble (for bonuses))?

          Maybe it’s only a matter of channeling funds. Less speculation, more investment into new businesses. Less profit, more progress.

          1. Toby

            Hi frequent,

            thanks for the second response. You wrote:

            “I thought efficiencies are more economies of scale, learning curve and process innovation. Technological progress both reduces (think car assembly line) and increases demand for labor (somebody needs to build the assembly machines)… more of a shift than a reduction.

            If one simply maximizes profits, labor is one of the costs incurred during production. Costs need to be minimized. Wages are costs. Wages are stagnant.

            So, increasing efficiencies, stagnant wages and reduced demand for labor are possible in a profit-max world.”

            If new technologies shift labor from one job and into another one, and if the lower prices won via increased efficiencies increase demand, which increases demand for labor, labor should be able to demand a higher wage. Instead we have stagnant wages over the last three decades. If we refer to the time-lag which occurs due to retraining, surely we should be seeing signs of improvement after three decades? How many generations does it take to retrain?

            In the end though, no matter how we couch this, if the theory is that increasing efficiencies lead to rising demand for labor, even the profit maximizing of shenanigans of the employer could not be effective. By my lights this should fall under the supply demand side of things. In short I see no evidence to support the classical dismissal of technological unemployment as it now stands. Tom Walker, via his rebuttal of the lump of labor fallacy, has put $10,000 on this. He has more guts than I.

            As to the coldness or otherwise of shiny, metallic technology, I always like to point out that farming itself is a technology, in that all it is, is human ingenuity made real. Technology is problem solving. The Hollywood representation of it is sensational entertainment, not much more. The part of the future we need fear is our own continuing ignorance, not heartless machines.

            But again, thanks for engaging the loony from the fringe. I am painfully aware of how odd my ravings must sound ;-)


    3. dan bednarz

      The limits we face are of energy and matter (resources). Most economists think Harold Hoteling solved the resource problem (with math) 70 years ago: technology and substitutes will keep energy and matter flowing more or less infinitely. We’re now facing the empirical negation of this assumption/dogma.

      But we do have millions facing deprivation, and rhetoric about someone’s relative value to society or what’s good for capitalism strikes me as unseemly, decadent and sanctimonious.

      For a comparison of the fall of the myth of socialism in the GDR and reaching the limits to grwoth in the USA see: “Watching Myths Unwind”: http://healthafteroil.wordpress.com/2009/08/21/watching-myths-unwind/.

      1. Toby

        Hi Dan,

        I just finished reading the piece you link to in your response. Wonderful stuff, very interesting and instructive. Paradigm changes are very difficult, and shouting about them, whether eloquently or otherwise, seems to do very little to soften their impact. My hope is always to try and ask the right questions, and to do my best to stay patient.

        Thank you for bringing my attention to it. It has given me a lot of useful information.


    4. n


      What can the unemployed do, since we are at (approx) 70% of capacity? You must either be an economist or without imagination. Clearly the world has unmet needs for education, health care, clean water, housing, etc. Just because you and yours have the above, does not mean there is nothing to do.
      And guess what, shortly you will clearly see that your labor is not worth 10x a similarly educated Asian or Indian.
      I would suggest that we (as a society) find a way to make a business out of providing those unmet needs.

      1. Toby


        you’re right, except I don’t think business is the answer. It is not my intent to say humans without labour are valueless, not at all, the exact opposite in fact. I myself was unemployed for ten years of my life. I seek a new value system in which the arbitrary nature of having one’s worth valued by the shifting needs of a money-driven economy becomes a thing of the past. The things you mention are far more important to me than all the money in the world, but they don’t make money. They have to be funded. Thus, they tend to get pushed further and further to the system’s back burners when the money runs out — and the money always runs out. We are seeing this now in state-level cuts.

        Because I don’t want always to write massively long posts explaining every detail of what I believe, I focus only on one aspect of it. This time round it was a narrow focus on technological unemployment. In my eyes, humans need humans more than they need money. Personally, I’m not at all motivated by money. Indeed, I believe only a transition to a resource-based economy makes sense, that only such a radical change of direction can take all relevant factors into account, such as tech unemployment, such as human dignity in the face of rapidly improving automation, the ecosystem, peak oil etc. If we managed (slim hope!) to redirect culture globally down this path, then things such as education and health would instantly become top priority, as they should be. All monetary systems fail to sustain, over time, focus on the importance of these two vital aspects of society.

        Sorry to have given a false impression.

  6. mmckinl

    Why deficit spend at all?

    Just print the money without debt. Raise taxes on high income, high net worth transactions … income, capital gains, dividends and estates. We reduce defense spending by several hundred million.

    Take the money out of the high end and recycle it to those that need it for daily expenses.

    We do this by nationalizing the privately owned an operated Federal Reserve and place it in the UST. Why should we pay interest on our own debt?

    With this printed money we lower the workweek to 30 hours, implement single payer and have unlimited but depreciating unemployment insurance.

    We make workers cheaper by underwriting them instead of Wall Street Banks. We keep more workers employed at 30 hours because, let’s face it, the debt accrual economy is over, done.

    Just single payer alone would save over 2.5 million jobs according to a survey by the California Nurses Union. Thirty hour workweeks would add several millions more. By getting money to those that would spend it the economy regenerates.

    To put more money into the economy use a carbon tax that is distributed per capita to get everyone some money while pushing people away from energy usage.

    Trouble is our political system is bought and paid for and what isn’t is dysfunctional. Our major problem now is a broken government …

  7. RFReud

    I don’t want to get into the discussion of government spending, except to say its always a question of what, as a citizen, you get for your money. So far, a lot more money than usual has been spent and people who want jobs aren’t working, a lot of them. Whether the gov’t creates jobs by subsidizing housing or banks or technology research that private companies turn to profit or medical care or war, doesn’t much matter from one point of view.

    What’s everyone’s best idea for a gov’t paid temporary job? Here’s mine: Everybody gets disaster training boot camp. We get ourselves ready for terrorist attacks and natural disasters so that when the next one comes, everybody knows what to do, how to organize themselves to mitigate the losses, how to do CPR.

  8. M.G. in Progress

    We can always have some more stimuli provided that someone clearly indicates how they will be funded. Otherwise you may create jobs today just borrowing from tomorrow spending money that you do not have. I contend that you may also have tax credits for job creation provided that they are funded by windfall tax on banking or other Pigouvian taxes like financial transaction taxes. The simple principle is to tax capitals not labor, nor consumption nor production. And spend only money you have and you are sure to get.

  9. Jo

    So we just have to accept that Modern Monetary Theory is correct….and therefore to oppose it makes one dismissable as old fashioned or just plain wrong?

    Good luck with that my friends – God chuckles when economists theorise.

  10. a

    At the moment the US is importing oil and handing out bits of paper in return. Do you think the only manifestation of those people refusing the bits of paper for oil is inflation? Or do you think another possible manifestation is in terms of solvency?

  11. M

    My university in California has lost 1/3 of its faculty. It would have lost 2/3 if not for the stimulus. Similar things have happened in K-12 education.

    Yves: Your remarks about deficit-spending are exactly right on all counts. Exactly right.

    1. pebird

      Are you talking about the public or the private central planners?

      At least there is some semblance of public control over the public central planners remaining.

      I guess we can hope for the market to control our private central planners – withdraw your money from Bank of America and deposit it in Citi – that will show them.

      My hands just disappeared – they’re invisible!

  12. capricorn

    I don’t see an issue with deficit spending as such, provided that, in the end, it restores the US economy.

    And there is the problem.

    It would seem that restoring the US economy really means the US has to become sufficiently competitive (in terms of world trade) to create a reasonable balance of trade, leading to full employment – i.e., stop borrowing and start producing.

    That seems an extremely difficult objective in the present situation, even with the falling value of the US dollar.

    Most important, though, is that further deficit spending really only makes sense if that is its’ objective. Otherwise we are just propping up a defunct economy.

    1. Peripheral Visionary

      Exactly. And this seems to be the subject that modern economists want to studiously avoid: the competitiveness of Western economies, or rather lack thereof. The situation is incredibly grim, with Western workers facing competition from Eastern workers who will work for a fraction of their pay.

      Adjusting interest rates, changing the minimum wage, changing the work week, borrowing more money, none of it will make any difference to the core fact that there are more workers than jobs, and whatever level of compensation American workers will accept, the Chinese will work for less.

      If Marshall is looking for a functional definition of “fiscal insolvency” as relates to the government, here is one: when no one will lend you in your domestic currency for fear of uncontrolled inflation, and when the trade deficit has to be funded through borrowings in foreign currency at crushing rates. And that comes about when the core productive economy has been gutted and the government is propping the economy up through make-work programs funded by printing of money. Until we have a competitive economy again, that risk will be there, and the consequences of such a development are far darker than the pain of a short-term deflationary cycle.

  13. Brick

    Comparing Japanese deficits and US deficits is not really a fair comparison because Japan’s deficits make up less than 5 percent of the global sovereign debt market whereas the US sovereign debt makes up 30 percent of the market. The market is not of infinite size, but I will accept that you can print money to side step this.
    Raising the minimum wage does sound like a good idea, but I wonder if this is really the right way to go about things. My take would be that we should look at corporate governance rules limiting any single persons take home pay to a multiple of the average wage in the company and number of employees. This gives an incentive for firms to increase wages and employ more people. This I think raises tax revenues for the government.
    I can see that employing the unemployed would raise demand, but first you need to tackle state deficits and their need to cut back. The question is whether the amount of demand you create balances out the cost and what is the exit strategy.
    I accept the arguments about solvency but as Yves points out this rather ignores the possibility of stagflation. The argument here is that as the economy picks up tax receipts will pick up also, which is something I would not necessarily agree with. Firms can be pretty creative when it comes to tax and personal taxation is limited by wage inflation. Low interest rates place a constraint on wages and hence tax receipts.
    The US can ignore the outside world except for oil and currency valuations tend to reflect outside perceptions of the long term balance between tax receipts and expenditure, regardless of whether they are true or not.

  14. DownSouth


    You say the “US can ignore the outside world except for oil and currency valuations.”

    Doesn’t this kind of speak to one of the dilemmas? We want the dollar-denominated price of oil to stay the same or go down. On the other hand, we want the dollar-denominated price of “stuff” imported from China to go up.

    So if we flood the world with dollars, then the dollar-denominated price of both oil and the “stuff” from China should go up.

    However, this is not what is happening. Last Christmas, Black Friday brought us $299 laptops. This Christmas, it is bringing us $199 laptops. Last Christmas, the price of oil was about $35 per barrel. This Christmas looks like it will be about $80 per barrel.

    US policymakers seem prone to blunt instruments. Instead of addressing problems head on with the accuracy of a rifle shot, they use these shotgun approaches. So instead of hitting the bird they want to hit (or at least the bird they tell us they want to hit), they end up hitting the wrong bird.

    The same has happened in bailing out Wall Street. Team Obama, with its trickle-down economic theory, claims the tens of trillions of dollars it lavished on Wall Street is to help Main Street. But the reality is proving to be something quite different. Wall Street has recovered quite spectacularly, but Main Street is still in a downward spiral.

    If we fall back on the old maxim that “the proof is in the pudding,” then it seems rather clear that Team Obama, despite its protestations to the contrary, is really working for the benefit of China and Wall Street, and not the rank and file American.

    If Team Obama really wanted to do something about China’s huge trade surplus, wouldn’t it fire a rifle shot at that problem, instead of a shotgun blast off into the blue (flooding the world with dollars) hoping to fell that problem?

    Likewise, if Team Obama really wanted to do something for American workers, wouldn’t it fire a rife shot at that problem, doing something for American workers instead a shotgun blast of trillions of dollars lavished on Wall Street, hoping one of the pellets might hit American workers?

  15. Graveltongue

    The classic economic models are failing, don’t you genii see that? You talk of 100% employment as if it’s just a flick of a switch! I know it isn’t the responsibility of economists to create those jobs. You just demand it so that your ‘science’ can work. The government should soak up the millions of unemployed, let them build roads and infrastructure. That’s the next twenty years taken care of. What happens after that? Not what I would call sustainable growth.
    There must be something we can all do, surly, come on, this is the 21st century. Lets get the unemployed to count the leaves on all the trees and paint all the yellow blades of grass green.
    Why do you ignore the elephant under the carpet? Why doesn’t anyone challenge the arguments that Toby so eloquently proffers? (For $10,000.00 I’d like to refute Tom Walkers rebuttal of the lump of labor fallacy but I’m an economics degree short of an idea of where to start with that one.) Maybe you folks and don’t need the money, lucky you.
    The argument that when machines replace human labor the dislodged humans find work elsewhere doesn’t cut it anymore. In developed de-industrialized nations where is the growth in the labor market going to be? Black Swan event? How long have we strangled the progress of advanced technologies just so we can maintain the economic status quo?
    Malaysian taxi drivers protested over the proposed introduction of an autonomous public transport system and the got their way. (Damned narrow minded unions!) Royal Mail in the UK are calling strikes, demanding that new technology should not be introduced for the sake of their livelihoods. How can a public company remain competitive with private firms who modernize their services as a matter of course? -204,000 jobs created in the US in the last ten years. Technological unemployment cannot be dismissed as just a change in direction.
    I saw a milking machine on television the other night, robotic. Cow wanders around all day chewing the cud, happy as Larry (or Daisy), when it feels a little bloated it wanders, entirely of its own accord, onto a platform and is offered a little amuse bouche while the robot locates swollen teats and empties the lot. Fantastic. Cow is unstressed, produces 30% more milk and of a much higher quality. Has the price of milk gone down since the introduction of this wonder machine? Has it f**k) How long before agriculture and food production could be entirely autonomous? Distribution – autonomous vehicle delivery systems? How long before retail is totally cybernetic? Smart fridges, order what you’ve run out of, delivered to your door.
    ‘Work smart, not hard’ was something that was taught to me early on in my employment. If you follow that through to its natural conclusion, we will eventually figure out a way to do no work at all. Then we can become what we were born to be; social, problem solving, cooperative human beings. Like my kids.

    1. Graveltongue

      PS. I just wanted to add that you all right beautifully on this blog, my apologies for lowering the standard, lack of a tertiary education methinks.

  16. surferdude808

    why can we not do simple math? another stimulus package to jump start the economy since the on-set of the crisis would actually be the 3rd not 2nd. remember the tax rebate under bush. it is important to get the count accurate so the country will wake up to how many failed and counterproductive interventions into the economy the government has actually done.

  17. Eric

    “Doesn’t that tell you something about the quality of his advisors and the sort of connections they have and the theories they are using to design policy initiatives?”

    What a copout! This tells us about the quality of the President and sorts of connections that he has. Why point a finger at the advisors? The President selected them and their advice has been exactly what was predicted of them.

  18. RebelEconomist

    This blog is being taken over by quacks offering magic solutions. Yes, it is true that, if a government compels its central bank to finance it, government spending in terms of units of its currency is unconstrained, but how far can this get the government in real terms? The stock of non-interest-bearing money typically represents a few percent of GDP, which suggests that, if the government doubles the price level, it can distribute a one-off stimulus of about this size without paying for it later. I can believe that this would produce full employment and capacity utilisation while the stimulus lasts, but would this be worth the cost in terms of inflation (eg 100% inflation for a year, or about 20% inflation for four years) and any insurance premium that creditors will demand in future to cover themselves against the possibility of repetition? Money-financed stimulus is possible in accounting principle, but is not viable on sufficient scale to make much difference in real terms.

  19. jdmckay

    Marshall has repeatedly made the point that a government is not OPERATIONALLY constrained in running a deficit.

    Well obviously… we’re running (fast( one, and gov is still operating!!! I’d ad that an alchoholic is not OPERATIONALLY constrained from drinking, a liar from lieing, or a murderer from murdering… at least until something constrains ’em.

    It faces a PRACTICAL constraint, which is inflation.

    Well you used Japan example, so post WWI Germany suggests this PRACRTICAL constraint can be overcome w/a little ink, a few printing presses, some shopping carts and a whole lot of political will foisted upon a public to ignore the obvious.

    We are so far from having inflation that those concerns seem badly misplaced right now and for the foreseeable future.

    Sounds to me like a formula to ignore current conditions incubating (in de)flation so that, when it does hit, the economists ignoring reality can once again (aka. Greenspan… “how did this happen?”) they can provide us w/post mortem causes of death rather than stop the bleeding prior to said event.

    And before you point to the massive Fed balance sheet, let me remind you of Japan, which has had massive money supply creation and still remains mired in mild deflation (…)

    Ok, you’ve reminded me. So what? Are we so ignorant of current conditions… so devoid of common sense resources that we need a historical model to address current conditions?

    The last stimulus hasn’t addressed much, really. The few $$ our city got for transportation are going to buy a few energy-effecient buses… made in Canada. So I guess that did create jobs, right?

    So ok, an exercise for the economists: given…
    * (xxx) stimulus $$ spent for ABQ buses.
    * said buses made in Canada, ’cause couldn’t find any good ones made this side of the border.
    * those bus $$ fortified job security in Canada

    Questions for economists:
    a) Why did purchasing (xxx) fuel efficient buses not impact US job creation?
    b) Given this discussion about more stimulus $$… should we therefore conclude (assuming a correct answer divined in response question a) that a good, healthy Keynesian response to this deficiency in job creation would be… buy more Canadian buses? (this is yes or no question).

    Yves, I’m not picking on you… you’ve done a great job for a while in posting illuminating snapshots of conditions by which a more accurate measure of economic reality can be apprised. I both respect you, and have gratitude for that.

    But… IMO there’s a huge vacum here between macro data (how much to spend?… (xxx) $$ stimulus produces (xxx) in consumer spending… etc. etc.) and just what to spend it on. Or how about what’s actually needed?

    We’ve just experienced massive, massive fraud by a financial industry that swallowed up untold $$trillions… literally. They lied about value… period. They bribed ratings agencies, federal lawmakers, and they strong armed beguiled both state and private retirement/investment funds… sold ’em shit.

    There’s enough email from Lehman/Merrill floating around to know that they knew they were selling shit… some of the Lehman mails actually said: “don’t worry, the feds will bail us out.”

    And incredibly, to me anyway, GS is selling re-wrapped mortgage bonds again…

    NONE OF THIS HAS BEEN FIXED. THERE HAVE BEEN NO PENALTIES. THERE HAS BEEN NO LEGAL CONSEQUENCE… and in fact these bastards have been refinanced on the public dime and are advising holders of the federal purse strings precisely where those purses get emptied.

    One of my favorite snippets was from Patrick Monyihan:

    “You can’t solve a problem until you measure it.”

    Well, I don’t see any measuring going on… period. And I hear nothing from most economists that suggest they connect $$ spent to value returned. Intelligent questions are not being asked.

    It’s like you all are huddling inside your box, hidden from sunlight of reality, telling us you’re thinking outside the box. At current levels of intelligence (IMO) these recent discussions are akin to a alcoholic trying to fix things by switching from Bud to Miller Lite… it’s absurd.

    I think you all need to get away from spreadsheets and earnings reports… get out there and find out what’s going on in the world. Find out how much know how for stuff we really need is on the sidelines ’cause actually building this stuff (an into-the-future able grid, for example) WS can’t squeeze enough short term return out of the stuff that really matters.

    Wake up people, wake up.

    1. jdmckay

      Off topic: would be nice to have a preview-prior-to-post screen here for proof reading/tag correction etc. Sorry for sloppines in prior post, just no way to fix it (is there?).

    2. JTFaraday

      “We’ve just experienced massive, massive fraud by a financial industry that swallowed up untold $$trillions… literally. They lied about value… period. They bribed ratings agencies, federal lawmakers, and they strong armed beguiled both state and private retirement/investment funds… sold ‘em shit.”

      I agree with you. This systemic fraud has become a fundamental crisis in the government of the State itself. To respond to that with “Oh, we’ll make the canaille little government make work jobs and that’ll fix it” is just a little too much chutzpah for me.

  20. Mickey, Akron, Ohio

    Initially a reply to Capricorn with ‘No. Not really.’ But my comment expanded…

    If we’re all working for minimum wage then lower unemployemnt can be had. That’s Marshall’s real message, if not his proposed solution.

    But such a proposal can’t “compete” or “interfere” with existing labor markets since they’re already working so well. For whom perhaps are they working is the real question with U6 at 17.5? And some accounts have it over 20%! But let’s not touch that one. That would be taking the debate outside the box.

    But a MMT without a MLT [Modern Labor Theory] is woefully inadequate. And by MLT I mean one that addresses what is patently obvious: The labor supply exceeds the number of jobs paying a living wage in the private sector and what to do about it. Marshall’s solution is to offer the unemployed a minimum wage job at public expense. I guess it’s better than nothing, but is it? Next there will be a call to privatize unemployment insurance in return for a guaranteed minimum wage job. Oh, I forgot Ed Harrison trotted that idea out last week. After all, to many a mainstream economist, all unemployment is VOLUNTARY! Not to say Ed or Marshall subscribe to that view.

    Didn’t Hitler abolish unemployment insurance in Nazi Germany? Or did he criminalize it?

    But reducing the work week as some have proposed, myself included, isn’t even considered. Why? It would upset/interfere with existing labor markets… wouldn’t want to do that cause they’re working so well.

    But I repeat myself. Let me posit a much simpler question: Will proposals borrowed from the New Deal 70 years ago address the current unemployment situation in this country? That’s the real question.

    Deficit spending to offset job loss in the private sector is not a longterm solution if the jobs losses are permanent. Deficit spending to stimulate depressed aggregate demand is not a longterm solution if that reduction in demand is permanent because the credit spigot that made it once possible has been turned off. Additional deficit spending will not resolve the structural factors making such spending necessary in the first place. It’s merely a borrowed bandaid for a hemorrhage…

    The structural factors we find ourselves bound by are the result of supply-side economic policies. And until such policies are consigned to the dustbin of history, the hemorrhaging will continue. It was their success, not their failure, that put US here. We’ve gone from the New Deal to the Raw Deal. Proposing to address the problems of the Raw Deal with proposals from the New Deal is backward, if not reactionary, thinking plain and simple. Such proposals are designed to keep the overall thrust and consequences of supply-side economics intact.

    Only now, the public is being asked to pay for the consequences with additional deficit spending all in the name of reducing unemployment. The costs are socialized whereas the profits remain privatized! Does that sound like thinking outside the box?

  21. pebird

    Side note on stagflation:

    I think you can argue that the stagflation of the early 70s was due to the reducing of spending due to Vietnam winding down – a reshuffling of capital investment, and the global financial system figuring out how to incorporate Nixon’s canceling of gold convertibility (which was also the proximate cause of the oil shocks, along with geopolitical instability).

    With all that happening in the early 70s, how could you NOT have stagflation – reducing public spending would have had no positive effect.

    For all the hysterics out there whining about government spending, go do some research on how private spending has cratered – figure out what that does to the money supply, since you are good monetarists, and tell us how to avoid massive deflation.

    Sometimes I think people who have guns just want an excuse to go out and use them.

  22. c1ue

    The problem with Marshall Auerbeck’s view – and indeed his kind like Krugman – is that they fail to distinguish ‘real’ demand vs. artificial. Government deficit spending to compensate for lost private demand might make sense were the level of demand at some level which is supportable, but the reality is American consumption levels are simply too high.

    Thus deficit spending in an attempt to maintain an artificially high standard of living is doomed to failure – not just now but for future generations of Americans forced to repay this debt (or suffer the inflationary consequences).

    The second major fault with the Auerbeck/Krugman view is that somehow government sponsored minimum wage jobs will in any way help the problem. The error here is applying the lessons of the Great Depression to our modern era: in the 1930s and 1940s, there were many projects which could and did yield productivity and enhance the economy: dams, roads, bridges, etc.

    These projects could be built with largely unskilled manual labor.

    Today the projects needed to enhance the US economy and increase productivity are very little enabled by unskilled labor: electrical grid upgrades, alternative energy, specialty manufacturing/technical trades, etc etc.

    Thirdly the entire concept of fixing the 1 in 7 or 1 in 10 failing mortgages via minimum wage jobs is ludicrous. $8/hour or even $12/hour does not yield enough income to pay for even a $150,000 mortgage.

    What needs to be done is a writedown of debt across the system. Lowering the cost of living via lowered housing costs via a debt writedown is the best thing the US government can do in order to encourage domestic production.

    Imposition of a Dr. Michael Hudson reissuance of property tax as a primary state/local government funding mechanism isa second and necessary step.

    Reregulation of the financial sector as well as breaking up the unholy TBTF institutions is a third step.

    A medical safety net in the form of a government managed health care provider network is a fourth step.

    If indeed deficit spending is necessary – it should be applied in such a way to benefit the American people and American economy as opposed to continue to subsidize banksters and other failed businessmen.

  23. Cullpepper

    “We are so far from having inflation that those concerns seem badly misplaced right now and for the foreseeable future. ”

    Oh? They why are three-month treasuries running negative yields…

    New mantra: “Currency is priced in energy. Energy is not priced in currency.”

  24. Bob_in_MA

    I think Marshall Auerback gives some validation to his critics’ arguments when he points out that the massive stimulus put through this year was largely ineffectual.

    The problem with an economy built on artificial demand is that the demand is doled out for political reasons. Thus, the real estate lobby is strong, so we are giving $6,500 to all home buyers, something that will aid no one but realtors and net home sellers. Publicly traded homebuilders, completely unnecessary for the economy, receive huge tax credits. We are encouraging young families to buy homes with no-money-down mortgages from the FHA.

    At the end of the day we consume more than we produce. There is no perpetual motion machine to solve that problem, we just need to consume less and/or produce more. In a world of excess capacity, the odds of us producing more are zero.

    Yes, government spending should be used to ease the pain, but it isn’t any sort of solution to the problem.

  25. RSDallas

    Put that Kool-Aid back in your panty’s people! Why can’t anyone just acknowledge the fact that we simply have forced to much debt on our society. Now the debt is going bad. It’s simple. Maybe it’s just too simple for the so called intellects dominating our airwaves and setting policy in Washington.

    Elected officials in our government (State & National) are there because of one simple reason. A majority of people cast a vote for them. Theoretically that vote was cast in hopes that this person could bring about some type of positive change. Has their ever been a politician elected because he ran on the platform that he would initiate changes that would, temporarily, have a negative impact on each and every person in our Nation.

    Henceforth: this is why our Nation is in its current situation. Nobody in our Government wants to face the realities of today’s problems. They do however want to concentrate of on how to address the symptoms (employment, foreclosure, decreasing asset prices etc. etc.) of the actual problem. Why? Because these answers will make things BETTER for everyone. It lessens the pain and garnishes them future votes. Over the years our government has encouraged (and sometimes mandated) that EVERYBODY have access to credit. Equality for EVERYONE! It doesn’t matter how much money you have saved or if you have the income to pay for your debt. This philosophy actually worked real well for a long, long time. UNTIL NOW!

    Our Nation and its people have gorged too long and now their stomachs are hurting in a big, big way. There is only one answer to this. STOP eating! We can’t re-inflate a consumer who has been devastated by this debt problem. Obama and his cronies will NOT achieve any positive results by relying on their money multiplier strategies.

    Bottom line: The debt needs to be either paid back or wiped out through bankruptcy and our Government officials better get our Nations check book balanced at the same time.

  26. DJBrown

    You’ve got to be kidding. Markets aren’t clearing because of government interference and your solution is to replace the market for money and labor entirely. The currency market is not clearing – China is undervaluing its currency through a ridiculous peg and causing treasury yields to be depressed. The Fed is holding down interest rates to an absurd 0% and printing money, thereby supressing yields even further, and you want to print more money. Mark-to-market has been eliminated, but banks know that the loans are not performing regardless of the accounting tricks meant to hide that fact. Unemployment is rising. A rational actor would not lend to a private business in this environment, just park the free money in safe financial assets and let compounding do its magic, which is what is exactly happening. Moreover, government is crowding out investment through ill-timed and poorly thought-out expenditures and taxes, and you want more government intervention. Why would a rational actor hire in that environment? How much in terms of inflation, interest rate increases, or taxes is this private firm going to pay for the government to hire ditch-diggers? I, as an employer, would want to know this before adding to my labor force. Keynesianism is dead, long live Keynesianism.

  27. Andrew Bissell

    Marshall Auerback’s posts read better as a demonstration of how ridiculous our “modern” monetary system has become than they do as any kind of set of serious policy ideas.

    Perhaps some day decades or centuries hence they will be read with interest by historians curious to study what fiat money’s partisans believed about its infallibility just a few years before its spectacular unraveling.

  28. psychohistorian

    Where to start.

    We live in a global economy where raising the US minimum wage will only drive jobs elsewhere as has already occurred as part of “free” markets.

    While lowering the work week to 30 hours will employ more people, the wedge of costs on top of salary/wage associated with employing another body will drive more employers to get work done offshore or not at all.

    We live in a world where there are not enough jobs to employ everyone who wants one. And that is looking at the recent consumptive madness of America. When we stop consuming all the non-essential crap more jobs will be gone all over the world. When are the policy makers going to wake up to this reality?

    Those folks that say that we can only have deflation or inflation but not both at the same time are delusional. IMO we are already experiencing both but our govt. measurements of such are corrupted. I believe this will be obvious in less than one year.

    While we spew our textual white noise here the criminal components of our fascist system (corporations and government) are economically raping the world. If this cannot be stopped the rest is inconsequential, IMO

    We need to stop real fascism in America, not the right wing propaganda nonsense that they attribute to the liberals.

    My fear is that the fascist propaganda machine will triumph over common sense when the crash comes. I fear the oligarchy will crash the system before we the people can come together to force change in a positive direction.

    1. Mickey, Akron, Ohio


      “While we spew our textual white noise …”

      I too find myself wondering if blogging is the new opium of the interneterati.

      Recalling Pink Floyd:

      So, so you think you can tell Heaven from Hell,
      blue skies from pain.
      Can you tell a green field from a cold steel rail?
      A smile from a veil?
      Do you think you can tell?
      And did they get you to trade your heroes for ghosts?
      Hot ashes for trees?
      Hot air for a cool breeze?
      Cold comfort for change?
      And did you exchange a walk on part in the war for a lead role in a cage?
      How I wish, how I wish you were here.
      We’re just two lost souls swimming in a fish bowl, year after year,
      Running over the same old ground.
      What have you found? The same old fears.
      Wish you were here.

      1. Toby

        Mickey, I agree. The blogoshpere is like this enormous lightning rod taking up way to much time and energy chatting at each other! Here I am in Berlin discussing stuff with people I’ve never met from all over the world (which is great), but we’ve got to get organized. Being pissed is one thing, getting organized something else entirely.

        What are we going to do? I want to demand open discussions of where we are and in which direction we might point our culture. Multi-themed, multi-discipline, non-peer reviewed discussions until a shape emerges, and have them televised, filmed, freely available on the internet etc. This thing has got to be opened up wide.

        Anyone know how to start a social movement?

        1. psychohistorian

          Toby said:
          “Anyone know how to start a social movement?”

          Education is a good first start and it will only take a generation or so…….

          I wish I had a better answer for you but I don’t at this time but encourage folks to build community around you that is about sharing and fairness. Someone said once that all we really have in this world is our example to motivate others. Give good example in your life.

    2. Toby

      Absolutely pyschohistorian. This is a race against ignorance in an atomized society, one in which we are all indoctrinated, to varying degrees, from reaching mature consensus amongst ourselves as adults. We all still want our arses and noses wiped by ma and pa political parties, and get way too much of a kick out of hunkering down in our chance trenches to sling spoon-fed propaganda at each other. O joy.

      I’ll stop now. I just depressed myself.

  29. Ed

    “two books I think might help generally are The End of Work by Jeremy Rifkin and The Spirit Level by Wilkinson and Picket”

    You may want to add a fictional book, Kurt Vonnegut’s early novel “Player Piano”. Its about what happens to a society where technology really does make much of the workforce obsolete. There is lots of welfare, lots of make work jobs, and a demoralized populace. For what its worth, this book is not written in the distinctive style Vonnegut became known for, which he developed later.

    I’d hate to pile on to the comments critical of this post, plus I’ve made the same arguments elsewhere on this blog. But this is not the same crisis as the 1930s. There is a larger population, different technologies, much more debt, and fewer controls on movement of capital and labor. The US is the world’s net debtor, not net creditor nation, which as far as the US is concerned makes a huge difference. As Keynes would say, you should change your mind when the evidence changes.

    1. Toby

      No one wants a dystopia, obviously. I haven’t read the book, but was recommended it, didn’t like the synopsis, so didn’t buy it. Besides, I’ve read Brave New World and 1984, so I figure I’ve seen enough of literature’s take on what technology might do to society. Like I said elsewhere, it’s us we have to worry about. We can’t stop technological development, because that’s what humans do. We don’t want Brave New World, we don’t want a corpratocracy, we don’t want our freedoms taken away, and yet change is coming. In my opinion we need to take a very fresh look at work versus labour, because labour for a wage is running out of rope. The only socioeconomic system that I am aware of that is radical enough, is a resource-based economy, as kooky a system as this seems to us now.

      Right now this seems like crazy talk, I know, and too far away in the future to be helpful in addressing the current problem set, but seriously, in terms of direction, what else is there that can cope with the inescapable progression of needing fewer and fewer humans to power the economy? I don’t see anything. All is offered within economic orthodoxy is more and more of the same, which Einstein once famously called insanity.

  30. Chad S

    In response to the identity equation of what some call the national income and products or “savings-investment” identity…

    Marshall seems to be of the neo-Keynesian school which makes no distinction between investment and consumption – they are all bunched into aggregate demand. Under that school, it seems to be an easy answer: in order to make up for consumer retrenchment, government savings must fall.

    I don’t believe that is true. Investment is going to fall if the national savings + net fixed investment is negative. that is the identity equation. If we debt finance government spending, or try and engineer private consumption through transfer payments, then investment falls. in the future, our national income will suffer for it. Investment, not spending, is what will create jobs and new businesses.

    The problem seems to be that we’re looking for a way out of a much needed and inevitable adjustment period, not only to cure the balance sheets of households, businesses, and governments, but also the mismatch bewteen the supply of goods and services and the demand for same.

  31. Jim in MN

    Yves does us all a great service with this blog, and I for one can’t wait for her book. I believe that the blogosphere has had a good distilling and examination role in the ‘serial crises’. Let’s keep rolling.

    On deficit spending, my take for a while, starting on Krugman’s blog (although the Nobel laurate didn’t seem to take up the thought) was that all the economists and advisors who bank (ha ha) on their studies of the Great Depression seem to have gotten the basic analysis all wrong. In fact an open-minded read of the history suggests that there were, and probably now are, three distinct phases: Crash, slump and then depression.

    So the depression-fighting policies may not be misguided bu they are premature, and as we are seeing have left us weaker than before. Meanwhile we do nothing to deal with the crash (oops too late) and the slump. So when the depression finally gets here–2011 according to my math–we will need a good big stimulus. Bumer abot the ammo supply, eh?

    I do have some careful thoughts about the slump–bank lending, small businesses, safety nets etc.–but hey, who cares? The depression is so much more sexy.

  32. Roy

    US needs public sector corporations to create and retain more jobs. Unfortunately it has maligned such ideas for quite some time. World over there are several successful examples of public sector corporations that are profitable and have done well. And even if they make loss once in a while it is preferable than handing over public money to private sector in form of bail outs.

  33. Sandwichman

    Wow. Great discussion, folks. I just want to re-affirm my $10,000 prize offer to anyone who can successfully refute my rebuttal of the so-called lump-of-labor fallacy (see the blog post on EconoSpeak for details). In fact, for a limited time only, I will raise the offer to $25,000. I can make this offer because I have just completed a comprehensive survey of the working time discourse over the past 240 years and there is no doubt in my mind that the fallacy claim is as phony as a three-dollar bill.

    To qualify for the enhanced prize all you have to do is download the journal article, “Why Economists Dislike a Lump of Labor” and notify me by email before November 31, 2009 of your intention to meet the challenge. To confirm that you have indeed downloaded the article I will ask you a question about it (e.g. “what is the seventh word in the sentence that begins at the top of page 281?). Then, of course, you will have to comply with the posted challenge rules to actually win the prize.

    Is there a catch? There is. I posted my challenge a year and a half ago and set a deadline of December 31, 2009 for submission of your article to one of the specified journals. That gives you a little less than six weeks to research, write and submit your article. Good luck.

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