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Discussion of debt-agreement effects confined after market correction

The market crash is now officially a stock market correction, a term for a drop of 10 percent or more. I will not add to my last two posts, except to mention that I agree with a statement in Paul Krugman’s column that Bitcoin are a concern of a different order and may be another tulip-bubble-type fiasco in the making. The phenomenon is worth looking into for positive aspects, but people of limited wealth to gamble piling into a high-risk investment tends to be of concern to this analyst.

Columnist Gillian Tett of the Financial Times wrote an interesting and concise analysis, citing three key factors leading to financial instability: 1) high levels of corporate nonfinancial debt; 2) the prospect that central banks are beginning to raise interest rates; and 3) regulators’ difficulties dealing with some aspects of the situation. Dealbook notes the connection with nonfinancial corporate debt, which was not addressed by post-2009 financial changes that stabilized household and financial sector balance sheets. Dealbook’s post mentions the risk premium for non-investment-grade debt, as I did the other day, making for example the point that this yield spread is especially low in inflation-adjusted terms.

Early Friday, Congress agreed to lift 2011 Budget Control Act spending caps by $300 billion over two years and raise a limit on federal debt. The move ended a second federal government closure of the year. A failure to lift limits would have led to spending cuts that were dangerous.

Matias Vernengo, fellow post-Keynesian and blogger, is among those arguing against the deficit reduction position advocated by neoclassical Keynesian Alan Blinder. Such an eminent thinker probably has some influence on some Democratic policymakers, many of whom have remain anti-deficit or at least pro-tightening at this late point in the recovery. I agree that Congress’s move as part of the agreement to stop a closure of the government to lift spending caps is a good one; the caps truly amounted to fiscal austerity, as Matias (and even the New York Times in the headline of this Upshot analysis by Neil Irwin) implies. Increases in domestic spending that result will be about $131 billion. Defense also increases. In the absence of a lifting of legislative spending caps, actual cuts would have occurred.

Matias in his post cites employment population ratios that are still low relative to the past cyclical peak. The New York Times article treats this issue as one that is debated among (mainstream) economists: can the unemployment rate continue to fall without setting off excessive wage growth?

The world’s central banks have kept interest rates low. Many analyses in the press mention crowding out effects that may occur as a result of deficits that will approach a trillion dollars under the combined effect of the tax cut bill and the lifting of the budget caps. This New York Times article to its credit mentions that Japan manages to keep interest rates low despite high borrowing. It implies that some countries manage to do so and that some may not. It does not mention the simple fact from Modern Monetary Theory (MMT) that a government can keep rates low under the following three conditions: 1) its own national currency; 2) a floating exchange rate (which the U.S. has); and 3) payment commitments denominated only in its own currency.*

The Times Upshot post mentions demand fortuitous high demand for U.S. bonds as a special historical factor currently working in favor of low rates. But of course the Fed more or less buys and sells bonds to adjust to demand, and maintain its desired interest rate(s).

Also safe (non-default-prone) assets serve as a financially stabilizing counterweight when private-sector debt is shaky; people’s moves to stabilize their portfolios work at the macroeconomic level to increase the ratio of safe to risky assets—an effect posited by Hyman Minsky and not often mentioned by observers analyzing brooding over rising deficits.

That leaves us with no concern other than reaching over-full employment in the absence of an ELR (employer of last resort) program, the issue taken on by Vernengo.

The Washington Post, in this article, rues the rise in deficits as if they were inherently bad without any careful analysis of pros and cons or appropriate amounts–an unreflective and unquestioning assumption, it would seem.

Paul Krugman here and the Times Upshot analysis argue that rates of growth permitted by real factors such as population growth and technological change will be low relative to recent history. Hence, “long-run” increases in deficits related to as-yet-“unaddressed” entitlements issues may outrun productive capacity. The Times also mentions the long-run implications as a real worry. But immigration and technological change—which determine the rate of increase in the ability to produce real goods and services at the cutting technological edge–are not givens. These technological positive feedbacks remain in the background in mainstream macro.

That brings us to the Administration’s decision to send home people from El Salvador who came to this country in the wake of violence there as well as its victory on the DACA issue, which came as the very major downside of the agreement for many liberal Democrats in Congress. Both are examples of ways the forces determining productive capacity can gradually increase under aggregate-demand pressures or the influence of policy changes. There are numerous unmentioned examples from post-Keynesian growth theory (not counting neoclassical-Keynesian skills atrophy) of routes by which the labor force and its productivity respond to changing rates of resource utilization.

Some of the long-run concerns relate to rising interest payments; one should not gainsay points made by Minskyans and MMT theorists that stable and low interest rates represent the best central bank policy. In the MMT vision, ELR plans then address unemployment and act as alternative inflation breaks to toleration of unemployment. Commodity buffer stocks similarly can stabilize prices. (Blinder has argued that inflation moderation has depended on “good luck” in the avoidance of commodity price shocks.) A “rehabilitation” of more-conventional types of fiscal policy is another inflation-fighting tool consistent with much that is good in post-Keynesian economics.

I continue to work on the follow-up to my work in this blog (example) to look at paths in real time for the debt and deficit when they are always affordable but their amounts matter–more along the lines of novel and unique analysis.

*Additionally, a country can target its exchange rate subject to a running-out-of-reserves constraint. If an very impoverished country with weak investor interest wishes to establish the appropriate conditions to run its policies in this way, a “baby-bond”-type effort might for example generate the wealth needed domestically to have sufficient demand for local-currency bonds. Such a plan would address distributional inequities with grants of financial wealth at birth. Access to the accounts would be restricted during one’s childhood years.

Note: My local vegan food blog, Healthy Vegan Hudson Valley, has moved permanently to Previously, this domain was only a redirect to a subdomain of this site. This site will now be devoted to my economic policy blog. The sharing of the domain was causing problems for readers that may have generated irritating error messages. Having the separate site will allow the use of SSL technology for the food blog site to assure a secure connection. I know some readers—especially people who live in the mid-Hudson valley–may be interested in this other project.


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