Saturday, December 6, 2014

Four Questions about Fiscal Policy

Earlier this fall, I spent a pleasant few days at the 12th Post Keynesian Conference in Kansas City, including a long chat over beers with Robert Skidelsky. In addition to presenting some of my current work, I took part in an interesting roundtable discussion of functional finance with Steve Fazzari, Peter Skott, Marc Lavoie and Mario Seccarechia. Here is an edited version of what I said.

* * *

We all agree that fiscal policy is effective. If output is too low, by whatever standard, higher public spending or lower taxes will cause it to rise. And we all agree that the current level of public debt has no implications for the feasibility or desirability of fiscal policy, at least in a country like the United States. In the wider world that might be a controversial statement but in this room it is not.

It’s not productive to repeat points on which we all agree. So instead, I want to pose four questions about functional finance on which there is not a consensus. These aren’t questions I necessarily have (or expect to hear) good answers to at the moment, but ones that I hope will be the focus of future work. First, the political economy question. Why does the idea of a government financial constraint have such a tenacious hold on both the policy conversation and the economics profession? What function, what interest, does this idea serve? Second, how confident are we about the level of aggregate expenditure that policy should target? Is there a well-defined level of potential output that corresponds to both full employment and price stability? Third, what is the problem that we imagine fiscal policy to be solving? Is it stabilizing of output in the face of “shocks” of some kind, or is it adjusting the long term trend? And what are the sources for the variation in private demand to which policy must respond? Finally, if functional finance means that fiscal policy replaces monetary policy as the main tool for managing aggregate expenditure, what role does that leave for the interest rate?

1. The political economy question.  We all agree that in a country like the modern United States (or the EU as a whole), public budgets are never constrained by the willingness of the private sector to hold the government’s liabilities. There are a number of routes, both logical and empirical, to reach this conclusion, which I won’t repeat here. And yet both policymakers and academic economists are, with few exceptions, committed to the idea that government does face a financial constraint. I don’t think it’s a sufficient explanation that people are just stupid. I was on an earlier panel with Randy Wray, where he quoted Paul Samuelson describing the idea of a government financial constraint as “religion” that has no rational basis but is nonetheless "scares people ... into behaving the way that civilized life requires." [1] Randy focused, understandably, on the first half of that quote, the acknowledgement that a balanced budget is desirable only on ritual or aesthetic criteria. But what about the second part? What is the civilized life that benefits from this taboo?

The political salience of the balanced-budegt myth has been particularly clear in the debt-ceiling fights of the past few years.  You read John Cassidy in New Yorker: “Every country needs to pay its creditors or face ruin.” [2] This is framed as a statement of fact, but it really describes a political project. Creditors need to threaten countries with ruin if they are going to be obeyed. The threat doesn’t have to be real, but it does have to be believed.

The most important political use of the government budget constraint today is undoubtedly in the Euro area, where it seems clear that a central part of the elite motivation for the single currency was precisely to reimpose financial constraints on national governments. This view of the euro project was forcefully expressed by Massimo Pivetti in a 2013 article in Contributions to Political Economy. As he puts it, the ultimate effect of European countries’ renunciation of monetary sovereignty has been the dismantling of the social democratic order.
What is being liquidated is but one of the most advanced experiences of civil coexistence the world has ever known—in fact, the greatest ever achievement of the bourgeois civilization. ... 
Surrender of national sovereignty in the monetary and fiscal fields subscribed by European governments produced a situation of political ‘irresponsibility’, which greatly facilitated their declining commitment to high employment and the redistribution of income, as well as the priority given to reducing inflation, the gradual dismantling of the welfare state, and the privatization drive. ...  [The euro] is an infernal machine: a machine born out of a deliberate continental project to undermine wage earners’ bargaining powers.
Wolfgang Streeck similarly argues that policies that result in rising debt are not the result of rising demands for redistribution and public services, but rather have been supported by the wealthy, precisely because “rising public debt can be utilized politically to argue for cutbacks in state spending and for privati­zation of public services.” You can find similar arguments by Perry Anderson (in The New Old World), Gindin and Panitch, and others. Financial constraint “disciplines” “irresponsible” policymakers — in other words, it makes them responsive to the interests of owners of financial assets. And I would stress the same fundamental point emphasized by Gindin and Panitch — the interest that counts here is not a direct pecuniary interest, defined within the economic system. It is the interest of wealthowners as a class in the perpetuation of a social order based on the accumulation of private wealth.

2. Next, I think we need to interrogate the notion of potential output more critically. The assumption of almost the entire functional finance literature — including my own work — is that there is a well-defined level of aggregate expenditure that policy should be targeting, which corresponds to full employment and full utilization of society's resources. In the standard formula, once we see rising inflation, we know that this target has been reached and there should be no further expansionary policy. In this respect, there is no difference between functional finance and mainstream policy thought. The difference is about the tools used, not about the goal. Most importantly, both policy orthodoxy and functional finance assume that neither inflation nor employment is affected directly by macroeconomic policy, but only via the level of output. So output, inflation and employment can be treated as three indicators for a single target. [3]

It is not obvious, though, why the goals of full employment, price stability and steady output growth should always coincide. Now, in practice it may be that they generally do, or at least are close enough that this is not a big problem. One thing Arjun and I do in our paper is examine this question directly. We compute a number of different measures of the output gap from 1953 to the present. We compare output gaps based on the deviation of current output from trend, the level of unemployment, the level of inflation, and the change in inflation, as well as a measure combining unemployment and the change in inflation that corresponds to the Taylor rule. The interesting thing is that these different measures perform very similarly. The output and unemployment measures fit especially closely, with a simple correlation coefficient of 0.94.  In other words, the Okun relationship between output and unemployment is very stable, and the Phillips curve relationship between output or employment and inflation is also fairly stable. So the statement “When output is above trend, you will see rising inflation; when output is below trend, you will see high unemployment” does in fact seem to be a reliable generalization. (See figure below.)

The figure shows measures of the difference between current output and potential based on (1) trend GDP, as computed by the BEA; (2) the deviation of unemployment from its long-term average; (3) the average of the deviations of unemployment and inflation from their long-term averages; (4) the average of the deviation of unemployment from average and the year-over-year change in inflation; and (5) the year-over-year change in inflation. 

But even if these measures agree with each other for the US over the past 60 years, that doesn’t mean they will agree in other times and places. And in fact, we see that the inflation-change measure does not agree with the others for the post-2007 period, suggesting a much smaller negative output gap. (This is because inflation has stabilized at a low level, rather than continuing to fall.) And even if these measures do generally agree with each other, that doesn’t mean they are right, or that interpreting them is straightforward. In particular, we should ask if hysteresis might not be a more general phenomenon, and that the inflation that comes with output above potential isn't better thought of as an adjustment cost. This brings me to the next question.

3. Is aggregate demand only an issue in the short run, or does it matter in the long run as well? In other words, is the problem to be solved by policy deviations of output around a trend that is determined on the supply side, or is the trend itself the object of policy?

If the former, shouldn't we have a more positive theory about what these "shocks" are that policy is responding to. This has always struck me as one of the weirdest lacunae in mainstream macro. The entire problem of policy in this framework is responding to these shocks, so you would think that a central question would be where they come from, how large they are, whether there are identifiable factors that affect their distribution. But instead the existence of these vaguely defined "shocks" is just the unquestioned starting point of analysis. Now obviously there are reasons for this. Shocks, by definition, are changes in the state of the world that are not due to rational optimization, so if that's your methodology, then "shocks" just means "things I have nothing to say about." (And I have a sneaking suspicion that there is a logical inconsistency between the existence of unanticipated shocks and the idea of intertemporal equilibrium. But maybe not.) But on our side we don't have that excuse. We shouldn't limit ourselves to showing that changes in the government budget position can offset changes in desired private spending. We should try to explain why desired private spending varies so dramatically.

And what if demand matters in the long run, thanks to hysteresis (and what I call anti-hysteresis) in the laborforce, and Verdoorn-Kaldor changes in productivity growth? [4] In that case these questions are even more urgent. And we also have to face the political question that was banished from respectable macro in the 1980s: What is the desirable tradeoff between output and inflation? More broadly, if we can't take a given path of potential output as given, how do we define the goals of macro policy?

4. What is the role of interest rate policy in a functional finance framework, given that it is no longer the primary tool for adjusting aggregate expenditure? On Thursday’s panel, we had three different answers to this question. Arjun and I say that if for whatever reason the public debt to GDP ratio is a concern for policymakers, adjusting the policy interest rate is in general sufficient to stabilize that ratio at some desired level. Peter Skott says that if we have some idea of the optimal long-run capital-output ratio (or perhaps more precisely, the optimal choice of technique), the interest rate can be set to achieve that. And Randy says that we shouldn’t worry about the debt-GDP ratio and that business investment decisions are not very responsive to the interest rate, so its main consequences are distributional. Since there is no social interest in providing a passive, risk-free income to rentiers, the nominal interest rate should be set to zero permanently.

[1] The quote is from an interview with Mark Blaug:  "I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires."

[2] The title of the piece is "Why America Needs a Stock Market Crash."

[3] This isn’t strictly correct, since an important component of functional finance in its modern UMKC form is a job guarantee or employer of last resort (ELR) policy. But given the stability of the Okun relationship, employment and output can safely be treated as a single target in practice. The problem is the relationship of employment and output, on the one hand, with inflation, on the other.

[4] As late as the 1980s, people like Tobin took it for granted that the reason that inflationary or deflationary gaps would not continue indefinitely, was that aggregate supply would adjust.


  1. The major shocks seem to revolve around changes in private sector investment behaviour. Since prospective returns on investment can change dramatically, we get a big shock to investment. These shifts are pretty much cannot be forecast (as otherwise it would be easy to make money in markets).

    It seems that policy cannot cannot do much but react to these swings unless there are massive interventions to control private investment.

    1. The major shocks seem to revolve around changes in private sector investment behaviour.

      That's right. So we need an economic theory in which large fluctuations in private investment demand are possible, that has a coherent story about where they come from. Why is it that "prospective returns on investment can change dramatically"? I don't think the orthodox idea of "technology shocks" is logically coherent; in any case it doesn't describe any observable phenomenon in the real world. The Keynesian answer is that long-run expectations are essentially conventional; there is no objective fact of the matter about the distribution of possible yields from an investment project.

      These shifts are pretty much cannot be forecast (as otherwise it would be easy to make money in markets).

      People say this sort of thing all the time, but I think they should be more careful. First of all, lots of things are predictable but not arbitragable -- you also have to have sufficient liquidity, risk tolerance, and a stable institutional position. (A correct belief about future market outcomes will not make you money if you can't convince your boss and/or client you're correct, and keep them convinced.) This is Shiller's whole point, among many others. Stock markets are fairly predictable over long horizons; arbitrage is only feasible over short horizons. Second, even if this were true, it implies a kind of nihilism about the possibility of a scientific approach to the economy. Taken to its logical extreme, it suggests we shouldn't try to learn anything about the economy because if there were anything worth knowing, we would already know it. Third, even if unconditional prediction is impossible, we can still have an understanding of the range over which investment demand fluctuates, the factors that create the possibility of fluctuations, etc.

      It seems that policy cannot cannot do much but react to these swings unless there are massive interventions to control private investment.

      Right. Most people don't realize it, but this was Keynes' position. He was very doubtful that monetary OR fiscal policy could offset the swings in private investment demand. So in his view the only path to stability was to organize long-lived investment on some principle other than private profit.

    2. "These shifts are pretty much cannot be forecast (as otherwise it would be easy to make money in markets)."

      Well people were forecasting that the housing bubble would pop and that the 2000 tech stock bubble couldn't continue. Some people made a lot of money shorting the mortgage companies, etc.

      Today Krugman has a post on the last three "postmodern" recessions and jobless recoveries.

      They are all preceded by the Fed raising rates (just as the Fed did in 1929 to fight stock market speculation) and worrying about nonexistent inflation and then the financial industry takes a tumble after a Minsky moment.

      What I would suggest is that in the past 40 years as incomes have stagnated and inequality increased, is that income can't maintain sustainable levels of aggregate demand as fiscal policy isn't sufficient to compensate. So what is left is currency and monetary policy. Lately currency policy has been leaving a $500 billion trade deficit hole in the economy, so it falls to monetary policy and the private sector.

      In the 2000s the extra investment stimulated by monetary policy was unwisely used to build houses nobody wanted or could afford. It wasn't sustainable and as the bubble popped the housing wealth related to bubble disappeared too, effecting the real economy.

      What if that money the Fed had created had been invested more wisely and productively without so much leverage and shenanigans? What if the government had directed it towards productive investments? The return would have been lower but economic growth would have been more sustainable. The Fed probably would have had to lower rates ever more to maintain aggregate demand, because the mortgage fraud and leverage pumped up unsustainable demand. And as incomes can't maintain aggregate demand levels and fiscal policy isn't compensating, the central banks engage in the "euthanasia of the rentier" in order to try to keep up levels of demand

      In other words, these shocks have been Minsky moments lately where risk has been underpriced. The growth based on the financial industry's casino investment decisions isn't sustainable.

      The only reason that the post-bubble recoveries are jobless and lame is that the Fed refuses to do what needs to be done, given fiscal austerity and trade deficits.

      Anyway, Mr. (Prof.?) Mason, thought provoking blog posts and discussion. Thank you.

    3. I just read Josh's response and it seems we agree.

      Let me add another point about the Fiscal talk and functional finance. The focus on "sound finance" seems to be all about Kalecki. The Greek debt crisis was a gift from the gods for the "sound finance" types. Same with Detroit which is accused of living beyond its means.

      It's what Mason was discussing in point one about the social order and power relationships.

      In past recessions, the Federal government would provide aid to the states who were forced to balance their budgets with lower revenue. In Obama's stimulus there wasn't the necessary aid to states. Republicans' didn't want to let state government off the hook for their debt, and Democrats didn't want to help out Republican governors who might run for the Senate.

      In the Euro area, the Germans and other European elite want to force budget "discipline" as discussed in the talk. Providing aid in stimulating aggregate demand would "let them off the hook." They only way to adjust is by hysterisis and a lower equilibrium.

      And as Kalecki wrote if economic growth is made to (or seem to made to) depend on investors and business owners, public policy will be bent in a direction that pleases them. Lower taxes helps. Deregulation helps. Slack labor markets and docile labor force helps growth. Profits are the priority. Etc.

      If the Fed controlled long term interest rates without a risk of inflation, nobody could argue that government debt and deficits will be punished by rising borrowing cost by a fearful vengeful "market", i.e. the bond vigilantes!

    4. I will note that I agree with your various responses to my point about "unpredictability", but I made my point somewhat too brief.

      Even if you could predict that the late 1990s tech bubble was going to pop, if you could not time it correctly, discretionary fiscal policy could do little about it. If you intervened too early, the bubble may have just re-inflated. You would have to wait until the bubble was popped, at which point the economy will have already suffered a shock.

      This is what happened in the financial crisis in most countries; fiscal policy was tried, but it was done too late to prevent damage.

      Canada managed to avoid the collapse seen in the U.S., partly due to a well-timed fiscal stimulus by a Conservative (!) government. But this also meant that the housing bubble re-inflated, which still hangs over the economy.

      In investing, if you have patient investors behind you, you may be in a position to wait out a market trend and then ultimately be vindicated. This means your timing can be off. But for active counter-cyclical policy (and most investors with impatient backers), you have to time it right.

      As a result, I prefer passive fiscal policy (automatic stabilisers) created by a robust welfare state that protects workers from effects of downturns.

      (And yes, it was Keynes' proposal for nationalising investment that I had in mind when I wrote about "massive intervention".)

    5. Seems we agree on all the main points. But note that Keynes did NOT favor nationalizing investment. Rather, he thought that in industries where long-lived capital goods were important, for-profit corporations should be replaced with "semi-autonomous" non-profit corporations with a defined public mission, similar to the universities, voluntary hospitals, etc. we have today. The best discussion of this is here.

  2. The MMT position on interest rates was something I've always had trouble really feeling like I had a handle on it. The "its main consequences are distributional" comment goes a long way towards crystallizing that for me.

    Are there any materials from that conference panel available online? (Transcripts, video, further reading, etc)

  3. Question #3 is the one I'd really like to hear more about. It is an unquestioned agreement of the neoliberal consensus that while demand might matter in the short run (there are plenty of arguments about the extent to which this is true) everyone agrees it's the supply side that matters over the long run. Yet occasionally economists will say something that contradicts this without acknowledging the contradiction. Even not-so-Keynesian economists like Tyler Cowen have acknowledged at times that China's success is due to export led growth. (see for example.) This is very weird from a supply-side view. The IMF has long applied the supply-side model of growth with not much success: poor countries take out loans from rich countries so that they can invest. But China has turned that on its head with great success: poor countries should loan to rich countries so they will consume. The result is demand for goods exported from the poor country, which creates demand for factories in the poor country, which creates growth.

    I do think one of the most straightforward explanation for how aggregate demand affects growth is that it affects investment. The demand for private investment and research is determined by the potential return, which is determined by the demand for the consumption goods that will be more efficiently produced if investment is done. This runs counter to the mainstream view of investment as a purely supply-side phenomenon. The idea seems to be that investment is determined in the long run by desired saving, and don't ask what determines desired saving, it is some exogenously determined fraction of the economy. This idea seems problematic to me for two reasons. One is that the definition of saving they are using *includes* investment, so a big part of desired saving is desired investment, so we should still be asking where that desire to invest comes from. The other is that the definition of investment they use lumps together a variety of spending that is not equal in terms of its implications for growth. For example, it is reasonable to assume that persistently falling interest rates means that the marginal dollar being spent on investment now is creating less growth, as the investment it is going to wouldn't be worth doing if interest rates were higher. Also, the growth generated by research in increasing productivity is determined by the scale at which any resulting innovations can be used, which is determined by consumer demand, possibly by the size of the class of consumers wealthy enough to enjoy the output of that innovation. So there are a lot of ways demand-side factors can influence investment and research and therefore growth.

    This has gotten long and rambling, but to sum up, this question strikes me as the big one where I'd like to see a change in the conversation. So much of heterodox economics seems to be about questioning modeling assumptions that are likely to yield equivalent results in most situations anyway (do banks lend before or after they get a deposit?) but this really strikes at one of the unjustified but unchallenged *conclusions* of mainstream macroeconomics with big implications.

    1. It is an unquestioned agreement of the neoliberal consensus that while demand might matter in the short run (there are plenty of arguments about the extent to which this is true) everyone agrees it's the supply side that matters over the long run.

      I just saw Steve Fazzari again on Tuesday, at an event at Columbia. And he said afterward that he felt like he’d just become a heretic, because this was the first time he’d ever stood up in a group of economists and affirmed that he believed that demand mattered in the long run.

      I do think one of the most straightforward explanation for how aggregate demand affects growth is that it affects investment.

      That’s right. And it’s important to realize that in orthodox Solow growth models, investment has no effect on the long-run growth rate.

      One is that the definition of saving they are using *includes* investment, so a big part of desired saving is desired investment, so we should still be asking where that desire to invest comes from.

      An important point. Personally, I have come to the conclusion that “saving” is not a concept we should be using at all.

      So much of heterodox economics seems to be about questioning modeling assumptions that are likely to yield equivalent results in most situations anyway

      I’m afraid I agree.

    2. And it’s important to realize that in orthodox Solow growth models, investment has no effect on the long-run growth rate.

      That's not so clear. A plausible source of long run growth is research and the accumulation of knowledge. Research could still be considered the result of investment spending, but the Solow model doesn't model that sort of investment, it is a model of capital goods. My point is, even if you assume investment does matter over the long run, that doesn't logically imply the supply-side-over-the-long-run position.

    3. In the standard Solow model, investment has no effect on growth rates.

      Of course one might believe that technological spillovers from investment are important for growth. That would be a very reasonable thing to believe. But, as you say, it's not in the model.

  4. "So much of heterodox economics seems to be about questioning modeling assumptions that are likely to yield equivalent results in most situations anyway"

    It's not questioning modelling assumptions per se. It is questioning viewpoint.

    The main problem with economics I see coming from a systems background is that you really struggle to look at things from another point of view. Which is strange given the non-intuitive causality relationships in circular patterns the profession is supposed to be discovering.

    Looking at banks from a deposit point of view means that you miss the automatic balance sheet expansion that is obvious looking at it from the opposite point of view. You miss the asynchronous nature of the process. So you miss the fact that the amount of private debt matters.

    It's the same when you're stuck in the 'domestic private sector' and 'external sector' point of view. Abstracting everything to RoW caused people to miss the feedback and external competitive elements that are obvious when your start with the entire world and break it down into currency areas and then into countries or states.

    From my background, which is about gathering as many viewpoints on a problem as possible, I find the attitude bizarre.

    1. Sure. I didn't mean that to entirely dismiss the value of most heterodox economics. In physics it is common for one phenomenon to be described well by multiple theories starting from multiple assumptions, and that doesn't mean there is a need to dispense with most of the theories to find the one true theory, nor does that mean there is any value in dispensing with most of the theories to settle on one conventional theory and dismiss the rest as redundant. Each framework may make different problems easy or hard, or may make different phenomena intuitive to understand. I'd expect the same to be the case in economics. The problem is that many heterodox economists seem to aggressively oversell their theories as reasons the mainstream should be thrown out entirely as just plain wrong, rather than arguing that their theories are useful because they make certain important problems easy to get right where they are difficult to understand within the mainstream framework.

  5. Re: the strangest lacunae
    It's far stranger still to non-economists. Earthquakes aren't "when plate tectonics theory fails us" it's "the best, and sometimes only, way to learn about plate tectonics". Abnormal psychology and brain trauma aren't "where our ideas about the brain don't apply", but rather, "a fantastic chance to learn what is going on."

    The heterodox pose which says: we should try to understand shocks, is a half-measure that seems logically determined to maintain the baseless foundations of the orthodox.

  6. I find heterodox economics to be somewhat disjointed at times. A practical example of the benefits of using Functional Finance as fiscal policy is China and yet there is little recognition that China combines this with the monetary policy of currency rigging which is a Reverse Gold Standard largely hidden from view and discussion in the media. With this "Standard" rather than trying to keep their currency at a high level of exchange the Chinese central bank tries to keep it lower relative to the currency of their main export target countries to maintain their China as "workshop of the world" power strategy which I believe is ultimately a tribal militaristic one by other means. Heterodox economics would therefore do better to highlight not only the benefits of Functional Finance fiscal policy but the disbenefits of Reverse Gold Standard monetary policy.

    1. I'm afraid you may not find this blog very congenial, then. I reject the view that Chinese trade and industrial policy is any different from that followed by today's rich countries at earlier stages of their development. And I also reject the idea that China's exchange rate peg plays any meaningful role in depressing aggregate demand in the US.

    2. Then you reject the idea of political equality since the Chinese people as a whole are not given the opportunity to consider how much of their own production they can consume and increasingly the same argument applies to the people of the developed Western economies who are not given the opportunity even to produce for their own consumption. As Peter Radford has argued you must be an anti-democracy economist since you are unwilling to challenge "the concentration of power within the market":-

      I note also in this regard you give no explanations for your beliefs but simply warn me off your turf!

    3. Sorry, that came off as more hostile than I intended. Please do continue to read and comment here!

      There are two issues here. One is whether China's trade policies violate norms followed by other countries. it seems clear to me that -- exceptional as China may be in other respects -- their policies to manage international trade and financial flows in the interests of national development are consistent with the policies followed by almost every successful industrializer in the past 200 years. I highly recommend Ha-Joon Chang's work on this -- Kicking Away the Ladder is short and accessible. Similarly, I don't think China's exchange-rate peg deprives anyone of their freedom. As Joe Stiglitz likes to say, there is no such thing as a market exchange rate. For developing countries, the only question is whether the exchange rate will be set by the Fed or by their own central bank.

      Second is the question of whtehr China's policies, regardless of their normative status, are in fact harmful to the US. A few years ago I estimated that a 20 percent appreciation of the RMB would boost US GDP by less 0.05 percent, and I don't see any reason to believe a higher number today. The blunt fact is that US imports from China are not that large, they do not appear to be that sensitive to exchange rates, and Chinese goods compete mainly with imports from other low-wage countries, not with US-made goods.

      Believe me, I'm against the concentration of power within the market. I just don't think it's concentrated in Beijing.

  7. It's pretty frustrating to read these great questions and not be able to read any of the answers given by the other roundtable participants... !

  8. These are great questions!
    Re #1, there seems to be widespread desire for at least a rhetorical "bulwark" against "[government] spending out of control" even among those who would like to see higher spending on social welfare and infrastructure. Functional finance sets up a prominent bulwark of Inflation Once Full Employment is Reached, but that's not enough. For example, I can criticize the federal budget under George W. Bush in terms of income distribution, destruction of real wealth (i.e. people and equipment blown up in the Middle East for limited benefits), and economic efficiency (fraudulent no-bid security contracts, bank bailouts), but I need to connect that to some kind of headline number (tax levels, unemployment, inflation, output, national debt) either now or in the future that I can brandish at the voters like a stick, or else they'll continue voting to blow up people and resources in the future. This is the dilemma encountered by people concerned about taxes and government spending of one kind or another, and the reason you see so many attempts to prop back up Budget Balance over the Long Term with hasty arguments about budget deficits compromising future fiscal space, or the national debt causing pass through inflation when other nations decouple from the dollar as reserve currency, etc.

    1. I think this is exactly right. Arguments about the costs of government debt generally turn out to be, once you dig below the surface, 100% political arguments about the need for constraints on (some kinds of) public spending, and 0% economic arguments about public debt. (Obviously I am referring here to debt in a country's own currency -- with foreign borrowing there is a real case for economic costs, though I think this gets exaggerated for the same reasons.) What's interesting is how explicit people re about this as soon as you push them a little.

      Is there a pragmatic political case for bringing up the debt as an argument against defense spending, or tax cuts for the rich, that we really oppose on other grounds? Sure, no question. But I'd prefer to leave those arguments to the political professionals. If you're not actually in the employ of some political campaign, probably better to stick with saying things you think are correct.

    2. OK, "employ of" is too strong. If a hypothetical Elizabeth Warren presidential campaign wanted to argue that expropriating Jamie Dimon was the best way to bring down the national debt, I'd set my scruples aside and try to help them make the case, even if I wasn't getting paid. But there has to be some concrete political project that you're supporting. Making substantively bad arguments on some hypothetical calculation that they could be politically useful, is one of the sillier things that intellectuals do.