Quote: Original post by Prefect
In any case, even if one believes that credit is a crucial issue, my approach of looking at capacity still makes sense. We could then agree that there is a gap between potential capacity (as per my approach) and realized output.

If any factor of production missing before this supposed potential capacity can be realized, then one has to wonder in what sense it is actually potential capacity, any more than a rusty cog lying in the gutter. Perhaps what you mean by potential capacity is a bundle of factors of production that is big relative to the missing pieces needed to set it back into motion?

Quote: The difference is that I would suggest a stimulus of demand as the best approach to reduce that gap, whereas you might suggest that the way to reduce the gap is by encouraging lending or something optimism-related, perhaps.

At this point, I would then remind you that the approach of encouraging lending has been tried for the last two years or so without success

No need to remind me of that. The idea of the government creating optimism by warping the meaning of consentual contracts sounds like complete madness to me. Id sooner believe a politician is going to create golden mountains by saying so.

Thats not to say I think there isnt such a thing as an optimal monetary policy; I think an optimal monetary policy is one where long term inflation is maximally predictable, such that money can serve its function as a denomination of value over extended periods of time effectively.

Quote: which hints strongly that a different approach (e.g. mine) may be better. Not to mention that stimulating demand is a good way of promoting optimism among those who work in the real economy ;)

All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

Quote: Uh, what? The "price of fiat money" is that 1$ costs 1$. Unless you want to talk about the "price of fiat money" in terms of other goods, then clearly this price is just the inverse of the price of those things. Your confusion is confusing. These things should be self-evident.

They dont seem to be to you. Indeed, fiat currency is just another item in the exchange matrix, and yes, this matrix has a diagonal of ones. If doubling the supply of wheat lowers its value in terms of all other items, how are dollars any different?

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Quote: If demand rises too much for the economy to adjust the amount of supplies, then the price will go up.

Price elasticity is never infinite; given higher demand in a sector, it is safe to assume prices will go up, the question is, how much. The notion of there being several regimes in this regard, where you can inflate some undefined amount without consequences, is nothing but a political fiction.

Thank you for repeating what I just said, though it's a bit annoying that you are using less precise vocabulary.

Not quite. Your wording in these discussions and others seeks to subvert the relation between the supply of money and its value. You continually seek to imply that the relation is absent except under special circumstances.

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Quote: That's a central tenet of Modern Monetary Theory: the budget deficit has to have roughly the "right" size. If the deficit is significantly smaller, there will be underutilization of the economy, and in particular there will be unemployment with all its economic and social problems. If the deficit is significantly bigger, there will be inflation.

You should add to that that MMT is a fringe theory; rightly so, because the nominal size of the money supply doesnt matter a thing. Its a friggin token, the only thing that matters about its size is its rate of change.

Are you taking the dadaist approach to discussion?

Where on earth have I said that the money supply matters at all (whether nominal or real)? May I remind you that it was you, some time back and in a different thread, who was harping on about the relationship between money supply and inflation.

You seem confused over the terms 'size of the money supply' and 'change in the size of the money supply'. They are very different things, the former irrelevant, the latter not, which is what I have consistently been arguing. Indeed, you seem to at least downplay the importance of both.

Quote: MMT understands inflation as being caused by price changes reacting to supply and demand as well as producer prices. MMTers recognize that you sometimes can observe correlations between the money supply and inflation, though as a simultaneous symptom of the same underlying effects. There is no causality involved, and Goodhart's law says Hi.

Yup, they are confused.

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As far as the perception of reality of your so-called "real economists", I beg to differ, at least as far as their public appearances go. They have been crying wolf, I mean, hyperinflation, pretty much since the beginning of this financial and now economic crisis. And yet, despite all the loose monetary policy of central banks that were predicted to cause inflation, nothing much has happened - and nothing much will happen, unless some other factors (like fiscal policy, or oil prices, or whatever) suddenly change drastically.

Of course you can get away with quite some credit expansion without direct inflation in a recession, with the velocity of money being temporarily depressed and all, but that money will still be around once V returns to its long term average. As for nothing much happening: stock and commodity prices jumped like clockwork with the recent QE. Was real value created that moment, or nominal value manipulated? If creating real value is that easy, why dont we do it every day? There has been some pathetic talk by the central bankers how this will not affect the CPI because busineses will not be able to pass on the cost to the consumer in the present economic climate, but who are they fooling with that free-lunch scenario? Either consumer prices will go up, jobs will be lost, or ROI's will decline. Either way, good job guys.

Quote: Original post by Eelco

Quote: Original post by Prefect
In any case, even if one believes that credit is a crucial issue, my approach of looking at capacity still makes sense. We could then agree that there is a gap between potential capacity (as per my approach) and realized output.

If any factor of production missing before this supposed potential capacity can be realized, then one has to wonder in what sense it is actually potential capacity, any more than a rusty cog lying in the gutter. Perhaps what you mean by potential capacity is a bundle of factors of production that is big relative to the missing pieces needed to set it back into motion?

The crucial difference is that assembly lines and rusty cogs are real things with real qualities, unlike credit and money which are social constructs.

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The idea of the government creating optimism by warping the meaning of consentual contracts sounds like complete madness to me. Id sooner believe a politician is going to create golden mountains by saying so.

Talk to people running retail stores or factories. Their optimism - as far as it affects their business decisions - is directly related to their ability to sell things at a profit. In other words, it is directly related to the demand that reaches them.

Your theories really don't affect their decisions one iota.

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All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

Out of curiosity: would you say that a lower level of taxes can encourage the creation of wealth?

This is a typical statement made by people from your general political direction, and it is logically inconsistent with the statement that you just wrote.

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Indeed, fiat currency is just another item in the exchange matrix, and yes, this matrix has a diagonal of ones. If doubling the supply of wheat lowers its value in terms of all other items, how are dollars any different?

Neither wheat nor dollars have a simple relation between "amount" and value. The market for wheat is much simpler than the "market" for dollars - which equals the entire economy - so naturally the relation for wheat is simpler than that for money. And by the way: How many times do I have to make it clear to you that I am not saying that excessive government spending cannot create inflation!

What I (and MMT) am saying, and this follows from the simplest macro-economic accounting identities, is that the inflation/deflation/unemployment-neutral size of the deficit is rarely 0, but usually positive.

Quote: Original post by Eelco
You seem confused over the terms 'size of the money supply' and 'change in the size of the money supply'. They are very different things, the former irrelevant, the latter not, which is what I have consistently been arguing.

Here you say that the size of the money supply doesn't matter. A few paragraphs below that, you write:

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Of course you can get away with quite some credit expansion without direct inflation in a recession, with the velocity of money being temporarily depressed and all, but that money will still be around once V returns to its long term average.

Here you are saying that the size of the money supply (= money still being around at a later point) does matter. Which way do you want to have it?

The bottom line is really very simple. Inflation means price changes. Why don't you just try to understand the causes of those price changes - supply and demand, producer prices, and perhaps a psychological factor here and there? Those things are perfectly sufficient to explain everything you want to know about inflation, no money supply fairytales are necessary.

Quote: Original post by Eelco
All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

That sure didn't create any wealth......

[Edited by - HostileExpanse on November 10, 2010 1:28:26 PM]

GOP-Tea Party campaign on no earmarks... only to say now that they want earmarks.

I wonder how Fox News will spin this..?

GOP .... Tea Party .... Dems .... just different shades of gray.

At this rate, soon I won't be bothering to differentiate TP from GOP

Quote: Original post by HostileExpanse

Quote: Original post by Eelco
All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

That sure didn't create any wealth......

Arpanet isn't an awesome example as it was made through government contracting of BBN.

Of course that opens up another bag of fish where you have to argue if government spending internally is better or worse than the government contracting work to private corporations and whatnot. But the internet could be seen as a success of both the public and private sectors.

Also interesting is that all your examples are government successes in infrastructure, which most people believe to be best handled by government.

Quote: Original post by way2lazy2care
Of course that opens up another bag of fish where you have to argue if government spending internally is better or worse than the government contracting work to private corporations and whatnot.

That's fairly wildly besides the point, which is simply that government "transfers of wealth" almost certainly can, in many cases, contribute to wealth creation, in contradiction to Eelco's claim above.

Quote: Original post by way2lazy2care
Also interesting is that all your examples are government successes in infrastructure, which most people believe to be best handled by government.

There are plenty of examples, many outside of the arena of infrastructure ... those are the ones that I could find good pictures for, in the 3 minutes that I dedicated to the task.

Quote: Original post by Prefect
The crucial difference is that assembly lines and rusty cogs are real things with real qualities, unlike credit and money which are social constructs.

I dont see how that is a relevant difference at all. Value is subjective, and can be found on cogs, love, or whatever people get into their heads.

To get back to the original point: If some input of value is missing in order to arrive at some form of output, then that implies that these other inputs being idle need not be an inefficient outcome. Your efforts to 'utilize idle capacity' probably destroy wealth. If they didnt, they would likely have come about in non-coercive ways.

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The idea of the government creating optimism by warping the meaning of consentual contracts sounds like complete madness to me. Id sooner believe a politician is going to create golden mountains by saying so.

Talk to people running retail stores or factories. Their optimism - as far as it affects their business decisions - is directly related to their ability to sell things at a profit. In other words, it is directly related to the demand that reaches them.

Your theories really don't affect their decisions one iota.

How is the not adressed by the point I made below? I dont doubt widget-makers will be thrilled if everyone gets a widget-credit from the government. If its any good for the economy as a whole is rather more questionable.

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All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

Out of curiosity: would you say that a lower level of taxes can encourage the creation of wealth?

This is a typical statement made by people from your general political direction, and it is logically inconsistent with the statement that you just wrote.

No; your interpretation of my words is just completely unhinged from common usage; a sign you are grasping at straws. Of course the government can destroy wealth, and can stop doing so. And it can indeed provide value-creating services, such as law and infrastructure. What I am disputing is your attempts to confuse redistribution of wealth with creation of wealth.

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What I (and MMT) am saying, and this follows from the simplest macro-economic accounting identities, is that the inflation/deflation/unemployment-neutral size of the deficit is rarely 0, but usually positive.

The phillips curve is empirically determined, and not a fundamental law, but rather something that happens to be true under present circumstances.

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Quote: Original post by Eelco
You seem confused over the terms 'size of the money supply' and 'change in the size of the money supply'. They are very different things, the former irrelevant, the latter not, which is what I have consistently been arguing.

Here you say that the size of the money supply doesn't matter. A few paragraphs below that, you write:

Quote:
Of course you can get away with quite some credit expansion without direct inflation in a recession, with the velocity of money being temporarily depressed and all, but that money will still be around once V returns to its long term average.

Here you are saying that the size of the money supply (= money still being around at a later point) does matter. Which way do you want to have it?

Please stop the grasping at straws; you are making a public fool of yourself. Money being around that didnt use to be there some time ago represents a rate of change.

Quote: The bottom line is really very simple. Inflation means price changes. Why don't you just try to understand the causes of those price changes - supply and demand, producer prices, and perhaps a psychological factor here and there? Those things are perfectly sufficient to explain everything you want to know about inflation, no money supply fairytales are necessary.

This is just another way of looking at the same issue. Does the apple fall from the tree because it follows a geodesic in spacetime or because the gradient in time-dialation?

Given fixed prices, more money in peoples pockets means higher demand. Higher demand leads to higher prices, barring some exceptional goods and fairy-economies. As we discussed earlier, if the inflation is uniform, there is no real effect. If the inflation is not uniform, wealth is redistributed, which does have a real effect; maybe even raises economic activity in the short run if the transfer is generally towards people with a higher time preference.

Quote: Original post by trzy

Quote: Original post by LessBread

Bubbles indicate market failure.

Ok. But that isn't saying anything. Government intervention can create bubbles and lead to market failures. The sub-prime mortgage crisis is an excellent recent example of this.

On the contrary, bubbles arise when markets are left to their own devices. Remember "tulip mania"? The sub-prime mortgage crisis is an excellent example of what happens when government deregulates the financial sector, that is, when there isn't sufficient government intervention. It wasn't government that directed the financial industry to bundle sub-prime mortgages together so they could be split into shares and traded in secret. It wasn't government that forced the financial industry to take out credit default swaps on those mortgage packages. It wasn't government that forced the financial industry to bet against those packages so they could profit from their collapse. And that leaves out derivatives and other shady dealings. But if you insist in blaming government, remember that sub-prime was Bush's baby: Flashback: In 2004 Bush Campaigned For Re-Election On The Backs Of Subprime Mortgages.

And if you really want to look into the dark arts of selling sub-prime mortgages, check this out: The Monster: How a Gang of Predatory Lenders and Bankers Fleeced America, and Launched a Global Crisis.

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...
Glover and the other twentysomethings who filled the sales force at the downtown L.A. branch worked the phones hour after hour, calling strangers and trying to talk them into refinancing their homes with high-priced "subprime" mortgages. It was 2003, subprime was on the rise, and Ameriquest was leading the way. The company's owner, Roland Arnall, had in many ways been the founding father of subprime, the business of lending money to home owners with modest incomes or blemished credit histories. He had pioneered this risky segment of the mortgage market amid the wreckage of the savings and loan disaster and helped transform his company's headquarters, Orange County, California, into the capital of the subprime industry. Now, with the housing market booming and Wall Street clamoring to invest in subprime, Ameriquest was growing with startling velocity.
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The wayward behavior didn't stop with drugs. Glover learned that his colleague's art work wasn't a matter of saving a borrower the hassle of coming in to supply a missed signature. The guy was forging borrowers' signatures on government-required disclosure forms, the ones that were supposed to help consumers understand how much cash they'd be getting out of the loan and how much they'd be paying in interest and fees. Ameriquest's deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. "Every closing that we had really was a bait and switch," a loan officer who worked for Ameriquest in Tampa, Florida, recalled. " 'Cause you could never get them to the table if you were honest." At companywide gatherings, Ameriquest's managers and sales reps loosened up with free alcohol and swapped tips for fooling borrowers and cooking up phony paperwork. What if a customer insisted he wanted a fixed-rate loan, but you could make more money by selling him an adjustable-rate one? No problem. Many Ameriquest salespeople learned to position a few fixed-rate loan documents at the top of the stack of paperwork to be signed by the borrower. They buried the real documents -- the ones indicating the loan had an adjustable rate that would rocket upward in two or three years -- near the bottom of the pile. Then, after the borrower had flipped from signature line to signature line, scribbling his consent across the entire stack, and gone home, it was easy enough to peel the fixed-rate documents off the top and throw them in the trash.
...

Quote: Original post by trzy

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Central planning worked well during WWII. It's a question of conditions and your one size hates all government approach is ill informed. You can't have a big economy without a big government because big economies make big demands on government.

"Big" in absolute or relative terms? Stating that "big" economies require proportionally larger governments, rather than governments larger in absolute terms, is an opinion, not a fact.

Big in both absolute and relative terms. If it wasn't a fact you would be able to point to contrary examples instead of dismissing the assertion as opinion. Name one big economy that didn't come with a big government.

Quote: Original post by trzy

Quote: Japan went about building infrastructure through a series of half measures, so it never got the immediate impact necessary to kick start it's economy.

Sounds like Obama's stimulus program. What would have been an appropriate level of activity for the Japanese government? More infrastructure? Was economic growth in Japan constrained by infrastructure? Should they have created a guaranteed annual income (probably impossible to fund)?

What would have "kick-started" its economy? What was wrong with its economy in the first place?

Yes, it does sound like Obama's stimulus program and likewise we're heading into a lost decade too. Check out this "deflation" graph: Barbarous Relic Watch. Get a load of what we've got in store: Japan Goes From Dynamic to Disheartened. For answers to your questions, check out: Things Could Be Worse.

Quote: Original post by trzy
It's hard to say whether government spending on education is having a "multiplier effect". Multiplying Americans' student loan burden, perhaps, but I don't think that's what you meant. If you believe that we need more engineers now, then government spending might be creating a multiplier of less than 1.0. The other day, I attended a talk by Stanford's president, who lamented the declining proportion of US graduate students in STEM disciplines. It's a sad state of affairs.

On the flip side, it might be that we don't actually need more engineers, but that seems difficult to argue when taking the long view of things.

I can see how you would respond that way after I pointed to multipliers to answer the question of how to calculate the impact of government spending, but you've missed the point of the correction I initially made, which was to point out the apples and oranges nature of tstrimp's earlier statement. The example doesn't have to be education, it just happend to be education. It could have been the drug war or the war on terror or the vestigal cold war. It could have been health care spending or any other government spending. Don't take this as a claim that all government spending is equal. Some kinds of government spending stimulates the economy more than other kinds of government spending, and some kinds don't stimulate the economy at all.

As for the notion that government spending on education multiplies American's student loan burden, if it is that way, it doesn't have to be that way. Instead of subsidizing transnational corporations to ship jobs overseas, the government could subsidize tuition. That would free students to spend freely and stimulate the economy. Recent graduates just entering the work force would have fewer debts and more disposable income, again stimulating the economy. If the principle that you subsidize what you want and tax what you don't want is applied, it's pretty clear that America doesn't want college graduates of any kind, not just in engineering etc.

Quote: Original post by trzy
Religious fundamentalists taking their children out of public schools is irrelevant. They can go ahead and continue to do so for all I care. Those kids will most likely end up turning out just fine.

I was tracing the origins of the conservative attack on public schools. So, yes, how those kids turn out is irrelevant to the claims I made.

Quote: Original post by trzy
What is more interesting is that Lexus liberals and the cognitive elite are pulling their children out of school, too. The upper echelons of society are filled with these kinds of people, who benefited more from their parents' ability (or willingness) to spend private money on tutors, private schools, and college tuitions than spending their teenage years locked up in government-funded daycare (under threat of arrest). Rather than trying to build in the flexibility to allow high-achieving students to succeed, the public school system seems hell bent on driving the wealthy away and leaving intelligent but less financially privileged students to languish in classrooms where inclusiveness always trumps intellectual rigor.

As is typical with you, you ignore the origins of the problem in order to launch an ideological attack. Your account ignores 25 years of history, if not more, in order to single out yuppies and attack public schools. You've left out the part where public schools were put on austerity diets.

Quote: Original post by trzy
A lot of those kids then grow up bitter that they couldn't become investment bankers themselves and call for more government regulation (which will end up being designed by that same elite investment banking crowd).

Is that supposed to be another dumb joke?

Quote: Original post by Eelco

Quote: Original post by Prefect
The crucial difference is that assembly lines and rusty cogs are real things with real qualities, unlike credit and money which are social constructs.

I dont see how that is a relevant difference at all. Value is subjective, and can be found on cogs, love, or whatever people get into their heads.

To get back to the original point: If some input of value is missing in order to arrive at some form of output, then that implies that these other inputs being idle need not be an inefficient outcome.

It doesn't necessarily imply that, but then we're back at the difference of micro vs. macro perspective. If a single company cannot find enough buyers to work at full capacity, then it is very reasonable to assume that this company simply isn't doing a good job and needs to adapt its business or go under. This is especially true if a single company is affected while its competitors are doing just fine.

If you have an output gap across the entire economy, you're facing a very different situation.

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The idea of the government creating optimism by warping the meaning of consentual contracts sounds like complete madness to me. Id sooner believe a politician is going to create golden mountains by saying so.

Talk to people running retail stores or factories. Their optimism - as far as it affects their business decisions - is directly related to their ability to sell things at a profit. In other words, it is directly related to the demand that reaches them.

Your theories really don't affect their decisions one iota.

How is the not adressed by the point I made below? I dont doubt widget-makers will be thrilled if everyone gets a widget-credit from the government. If its any good for the economy as a whole is rather more questionable.

So what? Even if it were bad for the economy as a whole - which depends on the circumstances - it doesn't change the fact that people in the real economy become more optimistic if they have better business opportunities. Your original point was that this is somehow not possible (your exact word was "madness").

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All the government can do is shift wealth around. That may be good for the recipients and the sectors of the economy related to them, but it fundamentally remains a transfer of wealth, not a creation thereof.

Out of curiosity: would you say that a lower level of taxes can encourage the creation of wealth?

This is a typical statement made by people from your general political direction, and it is logically inconsistent with the statement that you just wrote.

No; your interpretation of my words is just completely unhinged from common usage; a sign you are grasping at straws. Of course the government can destroy wealth, and can stop doing so. And it can indeed provide value-creating services, such as law and infrastructure. What I am disputing is your attempts to confuse redistribution of wealth with creation of wealth.

Since you totally missed or ignored my point, let me rephrase it in a hopefully clearer way. There are two statements:

A: The government can encourage the creation of net wealth by increased spending (given appropriate circumstances and properly targeted policy).
B: The government can encourage the creation of net wealth by reducing taxes (given appropriate circumstances and properly targeted policy).

Which of these two statements is true? There are four possible answers: True/True, False/True, True/False, False/False.

I would say True/True. Many conservatives would instinctively say False/True; if they have sufficient intellectual integrity, they will eventually agree that there is a contradiction there and grudgingly switch to True/True.

What the hell is your answer to this question? It sounds like you want False/False to be the right answer, but then you seem to be switching to True temporarily when it matters.

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Quote: Original post by Eelco
You seem confused over the terms 'size of the money supply' and 'change in the size of the money supply'. They are very different things, the former irrelevant, the latter not, which is what I have consistently been arguing.

Here you say that the size of the money supply doesn't matter. A few paragraphs below that, you write:

Quote:
Of course you can get away with quite some credit expansion without direct inflation in a recession, with the velocity of money being temporarily depressed and all, but that money will still be around once V returns to its long term average.

Here you are saying that the size of the money supply (= money still being around at a later point) does matter. Which way do you want to have it?

Please stop the grasping at straws; you are making a public fool of yourself. Money being around that didnt use to be there some time ago represents a rate of change.

Oh, cut the transparent rhetoric crap. Quick check: Do you know that the size of Money Supply can change even when the government budget is balanced? (Just making sure, because many people I have talked to use that term pretty wildly without really knowing what's behind it)

But I think this is not where your problem of understanding lies. I think it is the following. It seems we agree that the following scenario of observations can happen:

At point in time A, the money supply increases without much else changing in the economy.

Then, possibly years later, at point in time B, there is inflation without a change in the money supply.

Your conclusion is that the change in money supply at time A caused the inflation at time B. The problem with that conclusion is that it is very tempting if you assume that there is a connection between the money supply and inflation. If you don't make that assumption, then it becomes obvious how far-fetched that conclusion sounds - especially considering the many unrelated changes in the economy that are likely to have happened between A and B. So the example is almost perfectly suited to induce confirmation bias.

Let me give an analogy of an unrelated scenario where a similar false conclusion might be tempting to some.

At point in time A, Martha buys a gun.

Then, possibly years later, at point in time B, Martha goes on a shooting spree and kills a dozen people.

Did the act of buying a gun at time A cause the shooting spree at time B? Definitely not.

Did the fact of owning a gun at time B cause the shooting spree at time B? Almost certainly not.

Without investigating further, we simply do not know what the cause(s) of Martha's shooting spree was. Of course the gun was involved, but it was almost certainly not the cause - if the gun had been the cause, then why didn't Martha already go on a shooting spree at time A?

The fact that Martha had access to a gun might have facilitated the shooting spree. On the other hand, there have been cases where people planned a shooting spree even though they didn't own a gun; they then simply bought the required weapon(s) after making those plans.

It is the same in the economic scenario. Without investigating further, we simply do not know what the cause(s) C of inflation was. Of course money was involved, but it was almost certainly not the cause - if the money had been the cause, then why did inflation not already happen at time A?

The fact that there was a large money supply at time B might have facilitated the inflation. On the other hand, if the money supply hadn't grown at time A, it is quite possible that C would have caused inflation anyway, or that C would have caused the money supply to grow endogenously at time B to accommodate the inflation.

Edit: By the way, MMT explicitly suggests reducing the government deficit (or going into surplus) by raising taxes or reducing spending (or both) when inflation is higher than desired. Kind of like taking the gun away from Martha when it becomes clear that she's going to shoot somebody with it ;)

(Of course there is far more time to react in the case of inflation, so it's easier to deal with that case.)

Quote: Original post by Prefect
That's a central tenet of Modern Monetary Theory: the budget deficit has to have roughly the "right" size. If the deficit is significantly smaller, there will be underutilization of the economy, and in particular there will be unemployment with all its economic and social problems. If the deficit is significantly bigger, there will be inflation.

How well has modern monetary theory matched reality? Looking at the US deficit and debt in the post WWII world, and deficits and debt of others nations, it is hard to discern much consistency. I've heard numerous people argue in the past week that the Fed's QE plans are a bad idea because the nonlinearity of the economy is such that attempting to "prime the pump" might result in an uncontrollable surge in inflation. Another analogy is pounding on the ketchup bottle until all of a sudden, it all plops out at once.

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Before the more serious part of my answer, may I point out again that you seem curiously inconsistent in your ideas? If you are worried that government spending is wasteful and inefficient, then how on earth could you favor a no-strings-attached money handout over a work program? After all, both options cost essentially the same in nominal terms. However, the handout is guaranteed to provide zero benefit of increased government services to the people. The work program option is (almost) guaranteed to increase government services to the people, even if the programs were somehow inefficient.

If the argument is that aggregate demand needs to be boosted, that existing services and products have sufficient demand but consumers lack money, simply giving them money should be more than enough to stimulate the economy.

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As an aside, it need not be government jobs, anyway. To make the administration of the program easier, I would recommend that all local and state governments, as well as non-profit organizations, can offer jobs under the program as long as they follow certain federally-defined rules. As long as the jobs are not in competition with private-sector provided services, that should be fine. Those ELR jobs are then paid for by the federal government.

What kind of jobs should be created and for how long? One criticism of New Deal-era programs is that they created uncertainty as the government shifted its gaze from one work project to the next.

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Now as to your question of why not simply deliver the money directly into peoples' hands. Indeed, if all you wanted to do is stimulate demand, then that's something you could try. However, it lacks all the other benefits of an ELR (employer of last resort) program, which are, to name just some major ones:

- The ELR program is anti-cyclical. It automatically contracts again as the economy recovers, and it automatically expands as the economy shrinks. This will not eliminate the business cycle, but it increases stability.

Handing money directly to people meets this criteria. As business begin to re-hire, people would begin to make wages that exceed the government dole, incentivizing them to go to work. The government can also apply pressure by gradually reducing assistance in a way that is commensurate with economic recovery.

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- Generally, no-strings-attached handouts are being frowned upon. It is more socially accepted that people work for their money.

Maybe this is changing. Recently, the UK has had success giving cash to the homeless for them to spend however they wish. Contrary to expectations, the program seems to have been successful in getting people off the street.

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- ELR provides jobs for the unemployed, which means that they will retain critical skills of employment, even if it's just basics like showing up for work properly, etc. This increase the size of the pool of potential employees for private sector firms, and so ELR can lead to an overall increase of productivity.

What skills? You mentioned work programs should not compete with private industry.

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- If you simply drop money onto people, this can have an inflationary effect because it can indirectly cause the government to buy goods at the top of the price/wage range, thus causing upwards pull on prices. In ELR, government "buys off the bottom" by paying a fixed, minimum livable wage. Because of this, ELR could even have deflationary effects in the long run.

Inflation? Why would working cause less inflation? What I mean is, if you believe people who work for their money will also spend enough to make up for lost demand, then it shouldn't matter how the money is obtained.

Quote: Maybe it isn't. Maybe the US is heading for a Japan-like decade. Have you ever considered that?

I have. I just don't grasp how printing money is going to help us avoid this. The world is undergoing dramatic change -- things are really a lot different today than they were a century ago, or even half a century ago. Some argue that resources today are cheaper than they ever have been in history -- the very long-term trend is deflationary, not inflationary. Productivity may be higher than most people really comprehend. Consider all the time-wasting activities the average company can afford to spend real resources on that would have been unthinkable decades ago. Or how young people can afford to live off of their parents resources, unemployed for years. It's a bit premature to predict the end of work altogether, but it seems equally shortsighted to predict that technology will always generate enough jobs to replace obsolete ones.

Quote: No, it's just the most extreme one. As countries were faced with transitioning from full-time war employment to a post-war economies, many managed to use anti-cyclical Keynesian policies to stay at essentially full employment - despite some recessions - for between 15 and 30 years. This was the case at least for the UK, Australia, Germany, and France, and probably for other countries as well.

In the case of the UK, Germany, and France at least, did they not receive a massive external stimulus from the United States?

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It was only in the 1970s that these policies were abandoned for political reasons, mostly under the cover of the oil shock. You may be interested in this historical perspective: Job Guarantees and social democracy

Thanks! Your posts are most illuminating and I have thoroughly enjoyed reading them. Where (or how, rather) did you pick up your knowledge of economics? I'd be interested in hearing your recommendations for getting a better grip on the technical aspects of modern economic theory. I'll look for a reply here or you can PM me, if you prefer.