Recently on Bloomberg TV, Intelligence Squared’s “That’s Debatable“ featured James K. Galbraith, Stephanie Kelton, Todd Buchholz, and Otmar Issing arguing for and against the proposition of the program’s title, “Stop Worrying About National Deficits”.
Preliminary note: In this section we are addressing the proper understanding and management of the economic process in normal, non-pandemic times. We affirm that the current pandemic calls for extraordinary measures.
After Christopher Dawson taught him relatively early in his career about the centrality of ‘culture’ for human social and historical life, Lonergn affirmed the overarching role of culture and cultural institutions in any society’s ecology. Because human living is constituted by meaning and value, we can say that culture for Lonergan is what human beings do with their liberty in the concrete technological, economic, and political recurrence schemes that together make up the ecology within which they live. [Fred Lawrence; “Money, Institutions, and The Human Good,” in Liddy, 2010, 175-97]
The debate featured Galbraith and Kelton for the proposition versus Buchholz and Issing against the proposition: Galbraith insisting upon more government spending for medical care, education, climate change, and housing; Kelton espousing Modern Monetary Theory; Buchholz citing historical instances of nation-destroying inflation and warning about future devastation in the U.S. caused by unconstrained government spending; Issing insisting on the necessity of domestic financial stability so that government debt and associated inflation would not be devastating to both the domestic and the international financial systems. John Donvan was the Moderator.
Elsewhere we have treated Modern Monetary Theory and its implementation as a) ignorant of the primacy of Outlays for production in the dynamic, structured production process, and b) tending towards an upward spiral of inflation, escaping the process’s gravity, into an overwhelming, intractable national debt. (Click here and here and here)
We have also composed Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors. These precepts mandate adjustments in the distribution of incomes in conformity to the phases of an expansion.
We have previously stated: Modern Monetary Theory is a disaster waiting to happen. In its unchecked extreme of printing money unconstrained by relation to the real flow of goods, and services, it tends toward rampant inflation and torture of the flows of the financial system, so as to bring about a) the severe impairment of the financial system, and b) social chaos. The longer MMT’s unconstrained printing and irresponsible borrowing last, the greater would be the intractability of ultimate problems.
Observations re the Bloomberg TV Debate:
- The four participants are good people.
- None of the participants had an inkling of how to situate the economic process in the concrete a) technological, b) economic, and c) political schemes that together make up the ecology within which free humans find meaning and value. (Click here)
- None of the debaters appeared to have any idea of what constitutes good macroeconomic theory; consequently their arguments were not strictly theoretical explanations. (Click here)
- None of the participants had any idea that real analysis of the economic process is analysis of the structured production of what money buys.
real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis. If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works. [CWL 21, Editors’ Introduction, xxviii quoting Lonergan]
- None of the participants placed primary responsibility for an equilibrated process on the shoulders of the an enlightened private sector. This failure is not surprising, since enlightenment would have to originate from academics, such as the participants themselves. Kelton groundlessly accused the unenlightened private sector of “using” unemployment to control inflation.
In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society. It does not. And the reason why it does not is not the reason on which simple-minded moralists insist. They blame greed. But the prime cause is ignorance. The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]
When intelligence is a blank, the first law of nature takes over: self-preservation. It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]
- Modern Monetary Theory, espoused by Kelton, does not qualify as economic science. MMT is characterized by a) massive disorientation re basic variables necessary for a superstructure of scientific explanation of the productive process, b) ignorance of the principle of how new money should enter the system and how it should circulate in a phased expansion, c) ignorance of how the distribution of incomes should shift in an expansion of the process, d) failure to grasp the system’s being always the unitary, current, purely dynamic process having an exigence for continuity and equilibrium grounded in concomitances and solidarity of implicitly-defined, explanatory flows, and e) utter disregard for the necessity of trustfulness, trust and promise of constant-value-of-the-currency.
- Lurking beneath Kelton’s arguments was a reliance on the theoretically-debunked Phillips Curve with its poor correlation of inflation and unemployment.
- Kelton mistakenly gave the Phillips Curve theoretical primacy and complete authority. Trust in the poor correlation of inflation and unemployment lurks as the foundation of her arguments.
- Kelton failed to put forth any consideration of the comparison of the benefit to society from government investment versus the detriment to society from debasement of the currency and its intrinsic reduction of purchasing power during the bonds’ duration.
- Kelton’s assertion that the government’s unconstrained borrowing and spending creates a valuable asset for those who wind up holding the IOU must be balanced by consideration of inflation.
- Galbraith did not appear – or perhaps unfairly did not get the chance – to embed his noble desires for more social spending in the constraints of sound economic theory and sound practice.
- Galbraith cherry-picked instances and nations where high debt/GDP ratios did not crowd out investment and cause high interest rates. He should have explained how a low interest rate can be an index of scant investment opportunity.
- Galbraith should read in full Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors, and especially the subsections entitled Basic Expansion Phase and Static Phase.
- The four participants failed to put forth a coherent set of principles and laws which explain the economic process and, by this explanation, formulate the conditions of taxing and spending to achieve a normativity of zero in the national debt.
- Most arguments did not explain or prove; they were just selective descriptive rants regarding isolated elements of social welfare or devastating inflation rather than complete, coherent, purely-relational explanations. Participants referred to historical instances of inflation, but history exhibits multiple variations in a non-systematic manifold; no two instances are alike in every respect; one can’t step into the same river twice; so, a debate such as this must contain principles and laws of explanation, which are general, invariant, and thus universally applicable across all economic systems and in any instance. (See The Relativistic Invariant; The Ideal Pure Cycle At The Root Of The Trade Cycle
- Buchholz’s descriptive citation of past inflations does not constitute an explanation in terms of the inner functional relations of past inflations. Empty postulation of the fact of inflation is not a coherent explanation of the disequilibrated dynamic configuration of flows constituting an instance of inflation.
positive or negative transfers (from the Redistributive Function) to basic demand (D’-s’I’) and consequent similar transfers (from the Redistributive Function) to surplus demand (D”-s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect is on the price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy. But the initial increased transfers to demand [that is, (D’-s’I’) and (D”-s”I”) are not zero] are not simply to be supposed. For that would be postulating without explaining the boom or slump. CWL 15, 64
- Kelton’s description of political relations between Congress and the Fed does not constitute an economic theory of any sort. Congress having the power of the purse is not Congress having Wisdom. Wisdom depends upon sense, understanding, judgment, decision, and a good heart – not upon having the power of the purse.
- Ronald Reagan’s situations were different from today’s situations. Oversimplified and unjustified comparison.
- Issing correctly raised the issue of the massive deficits of many private and government retirement programs.
- Science – unlike debating – is not a matter of charisma, intensity, loudness, or milk-and-honey delivery winning a debate by bamboozling a struggling audience. Science is explanation of phenomena in the form of terms defined by their functional relations to one another. (Check out Clerk-Maxwell’s electromagnetic equations)
- Galbraith’s social goals are noble. But achievement of noble social and familial goals should not violate the laws of the economic process. (Liddy 2010 p 244) The prime culprit in Galbraith’s longstanding quarrels is Congress and the private sector. (See Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors.)
- With reference to The Diagram of Rates of Flow above (enlarged image at the end of this section), Modern Monetary Theory gives operational primacy and priority to D’ and E’, and mandates that a Corporate Balance-Sheet’s Retained Earnings for Investment instead be called Taxes Payable. In contrast, Lonergan’s Macroeconomic Field Theory gives c”O” plus c’O’ and their obverse I’ primacy and priority and calls the balance after all interest, repair & maintenance, amortization, dividends, and taxes “The Social Dividend for Investment.” Further, Lonergan’s Functional Macroeconomic Dynamics insists that a) neither circuit can be allowed to deplete the other, b) a long-term expansion has the nuances of a proportionate phase setting the stage for a surplus phase, the surplus phase being succeeded by a basic phase, the basic phase tapering to zero to be succeeded by a higher static phase of permanent greater abundance, and the static phase setting the stage for a cultural phase, and c) pure surplus income (AKA the social dividend) tending towards zero (See image below) as the basic phase succeeds the surplus phase. (Note: the issue of retained earnings for widening vs. deepening is not addressed here.)
- The laws of normative Functional Macroeconomic Dynamics, AKA Monetary Field Theory, govern the timing and amount of the issuance of new dummy money. Money is to serve the process, not to be served by the process.
money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation. One has to place first human society which is served by the economic process, and second the economic process which is to be served by money. Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)
- Normatively, money enters the system in a constrained amount through the supply channels to finance expanding quantities at frequencies, not to increase demand when the productive process is already being conducted at full capacity after the exhaustion of an expansion.
- The participants did not explicitly clarify the concept that a) money is a dummy invented by man, and b) the classes of money payments are projections (mappings) from the conceptually prior and more fundamental dynamic structure of the dynamic rhythms of real production and exchange. The money supply is a dummy associated in timing and proportionality with the productive process of expansion in phases.
- We-The-People in the person of the government and We-The-People as individuals are one and the same, not a third party to one another. As Mom used to say, “Money doesn’t grow on trees,” for picking either by us or by a mysterious third-party government. Money is a sort of doppelgänger of the real productive process.
- The participants did not thematize in any intelligent way cultural relations relevant to the schemes of recurrence of technology, economics, and politics.
- The inequality eventually resulting systematically from flooding the Redistributive Function by the Fed was not mentioned in the debate. (See A Tale of Two Faulty Circulations) and consider especially Circulation A)
- Arguments on both sides would be sublated by the understanding of shifts of the ratio of basic to surplus incomes as the phase of the expansion of the process proceeds.
Traditional theory looked to shifting interest rates (to manage the economy). The difficulty with this theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15, 141-144]
The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required … the effect of raising interest rates to encourage savings (for investment) is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply (and counterproductively) to end the expansion by eliminating its long-term elements. [CWL 15, 141-144]
Rates of interest, when increasing, encourage saving (but discourage long-term borrowing). This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion. What is needed is a contraction of purchasing power that will direct spending from the basic market of the poor to the surplus market of the rich. The surplus phase is anti-egalitarian … [CWL 15, 141 ftnt 198]
Similarly a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc. What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase. [CWL 15, 141 ftnt 198]
To increase the rate of saving (in a capital-goods-expansion phase), increase the income of the rich (who have a lower average propensity-to-consume percent). … to decrease the rate of saving (in a consumer-goods-expansion phase), increase the income of the poor (who have a higher average propensity-to-consume percent). … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. It reveals that the surplus expansion is anti-egalitarian, … but it also reveals the basic expansion to be egalitarian, for that expansion postulates that increments go to low incomes … [CWL 15, 135-37]
- In fairness to Bloomberg TV, Intelligence Squared, John Donvan, Galbraith, Kelton, Buchholz, and Issing, it is well nigh impossible to discuss and settle deeply-technical issues for a general audience composed of inadequately-educated individuals. All that can be asked is for pointers to a complete explanation by sound theory.
- The Bloomberg program had both good and bad aspects: it is good to drive into the consciousness of the country the fact of disequilibrating annual deficits and accumulated debt and the attendant consequence of inflation (I’m told that a hot-fudge sundae used to cost 25¢); it is bad not to reach an explanation which would sublate once and for all the ideas of the familiar “schools of thought”: Marxist, Classicist, Keynesian,Monetarist, Modern Monetary Theory, and all their Neo’s so as to reach clarity and achieve agreement among the participants and the audience. Perhaps the audience was even more in the dark after the debate.
- IBM’s Watson claimed to evaluate — how or on what basis I do not know — the global audience’s opinions, then aggregate and sort them, and then declare the winner of the debate based on percentage changes in audience opinions. On that basis, Watson had the audience deciding the debate in favor of Galbraith and Kelton’s “No Need To Worry About National Deficits;” but a) for sure, the audience did not understand the issues and was in that respect unqualified to vote, and b) winning a debate by clever persuasion based upon groundless premises – as happened here – does not constitute real victory based sheerly upon the legitimacy and power of one’s arguments. Watson’s participation was bogus.
- In the end though, the Bloomberg and Intelligence Squared program was misleading, disorientating, and harmful to the culture. Again, in part:
Because human living is constituted by meaning and value, we can say that culture for Lonergan is what human beings do with their liberty in the concrete technological, economic, and political recurrence schemes that together make up the ecology within which they live. [Fred Lawrence; “Money, Institutions, and The Human Good,” in Liddy, 2010, 175-97]