A trillion here, a trillion there, pretty soon you’re talking real money (creation)

by John Quiggin on July 18, 2020

As with most really neat sayings, the original (with billions, instead of trillions) is misattributed, in this case to the late Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act. The saying can be traced back to an unsigned New York Times article in 1938, which said ““Well, now, about this new budget. It’s a billion here and a billion there, and by and by it begins to mount up into money”. This in turn improved on earlier versions going back at least to 1917
US GDP today (Over $20 trillion) is around 250 times as high, in dollar terms, as it was in 1938, so replacing billions with trillions isn’t much of a stretch.

With that in mind, what should we think about the $2.4 trillion pandemic relief package, and the likelihood of huge demands for public expenditure stretching well into the future? And how much of this analysis is applicable to the world as a whole, where large scale government responses have been the norm rather than the exception.

The simplest way to finance a public expenditure program is to “print money”, or, more usually in a modern economy, to create monetary reserves that can be used to buy government bonds or other financial assets (so-called “quantitative easing”). That in turn means the government can spend, or lend, money without a net increase in the debt owed to the public (or to overseas bondholders). The magnitude can be measured by the monetary base.

The scope to expand the monetary base is limited, but more than enough to cover the immediate needs of the pandemic response. The response to the GFC led to an expansions of the monetary base from $1 trillion to $4 trillion between 2009 and 2015, after which it was wound back by about $1 trillion. It’s grown by nearly $2 trillion (about 10 per cent of GDP) in response to the pandemic, and more is likely to come

The ultimate constraint on money creation is inflation. That hasn’t been a problem lately and (as I’ll argue in more detail later) the world is in need of a fair bit of inflation, probably at an annual rate of about 4 per cent for the foreseeable future. It’s unclear how much expansion of the monetary base would generate this outcome, while avoiding the risk of a resurgence of inflation like that of the 1970s. But looking at the scale of the response that’s going to be needed for a meaningful Green New Deal (I’d estimate at least 5 per cent of GDP every year for the next decade at least), the amount that can be financed through money creation will be nowhere near enough. Substantial reductions in private consumption and investment will be needed to make room for the required public expenditure, and that can only be achieved through a combination of taxation and debt. More on this, and on global response soon, I hope.

{ 25 comments }

1

Lee A. Arnold 07.18.20 at 8:07 am

What are the details in your estimate of the Green New Deal? Which parts of it put extra demand on real (i.e. nonfinancial) resources that are currently being used?

2

Tim Worstall 07.18.20 at 8:55 am

“Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act.”

Nonetheless is doing quite a bit of work there. It tended to be Southern Ds – rather the majority of the Southern politicos – who were most opposed. It is worth recalling that the political poles switched on this issue in the US.

3

Larry Hamelin 07.18.20 at 9:37 am

The MMTers reading your article will take umbrage at your use of finance.

According to MMT, all government spending is financed by creating money. The problem of where to get the money is a non-problem.

Once the government has spent money into existence, the real problem is how to distribute the social opportunity cost of the spending, especially if the government has spent money to allocate real resources away from the production of private goods and services.

MMT makes this distinction precisely because they (we?) want to eliminate the rich as a veto point for spending. We don’t need to get their money in order to spend it, and they cannot (or we should not let them) essentially restrict spending by obstructing the government’s taxation of their wealth.

If we want to get the money belonging to the rich (and we do!), we want to do so because we don’t want them to have it, for whatever reason.

There’s another reason to be explicit about the difference between financing and distributing opportunity costs. If the rich have a lot of money that is not in circulation (in the national economy), and the government taxing that money to “pay for” its spending will do nothing to control inflation or distribute opportunity costs. Removing money that is not circulating has no effect on prices. It seems theoretically possible to balance the budget financially but still see price-level inflation.

I haven’t done any specific investigation into the GND, but it seems uncontroversial that it will involve allocating substantial real resources to the creation of a nonpolluting power, transportation, and agricultural infrastructure. However, the effect on the real economy and the price level seems uncontroversially complicated. Some of the real resources will be previously unallocated, and we will simply be transferring demand from welfare-supported to work-supported, with no effect on the price level. Some of the demand created will indirectly cause an increase in private production, putting unused industrial capacity to work; the increase in circulating money will cause a corresponding increase in real private production, and again have no net effect on the price level. And some of the real resources will indeed be transferred from private production with no corresponding offset; taxes, “enforced” borrowing, and other monetary interventions will be needed to keep price inflation manageable.

I don’t know of (and, like Lee A. Arnold above, would very much like to see) a model showing what effect something like the GND would have on the real economy. Under normal circumstances, the fiscal impact is a good proxy for the real impact. But circumstances are far from normal, so think that the fiscal impact is no longer a valuable proxy for modeling the real impact.

4

MisterMr 07.18.20 at 10:11 am

“The ultimate constraint on money creation is inflation. That hasn’t been a problem lately and (as I’ll argue in more detail later) the world is in need of a fair bit of inflation, probably at an annual rate of about 4 per cent for the foreseeable future. It’s unclear how much expansion of the monetary base would generate this outcome, while avoiding the risk of a resurgence of inflation like that of the 1970s”

I don’t agree that this is the problem: IMO the direct cause of [keynesian] inflation is the wage-price spiral, and not money creation per se (this also implies a problem, which is that if we want an high level of employment because we want an higer bargaining power for workers we can’t really avoid wage-price spirals and therefore inflation).

Money creation by itself creates wealth, not income, and the kind of economic policies we had in recent decades caused an increase in the wealth/income ratio (or in other words the creation of a lot of fictitious capital) more than inflation.
So the real problem of “money creation” today is that it generates financial bubbles, rather than inflation.
The difference between money printing and government debt, from this point of view, is just that money is a 0% interest financial asset, whereas bonds bear at least some interest, so money creation pushes the general interest rate down more than bond creation, but this again is a consequence of the increase of the wealth/income ratio (since more wealth extracts profits from the same quantity of income).

“Substantial reductions in private consumption and investment will be needed to make room for the required public expenditure, and that can only be achieved through a combination of taxation and debt.”
In my view the problem is that taxation is needed to avoid bubbles, and therefore what we need is to tax income from wealth and wealth itself (in order to push down the wealth/income ratio).
To put it in more familiar keynesian terms, the problem is that the ex-ante saving rate is too high, so that currently we need an increase in debt levels (bubbles) to ricycle ex-ante savings into consumption; we need taxation to push down the ex-ante saving rate.

But, the problem is, is it possible to have a capitalist economy running without economic crises while the wealth/income ratio goes down (which means that a lot of people see their relative wealth go down)?
IMO this is really difficult, and also explains the political problem for policieswhose purpose is to push down the wealth/income ratio, since these policies look like just some way to be mean against wealth owners, without an immediate economic reason, and when the bubble pops everyone blames the banks and the financial sector, not the excessively high ex-ante saving rate, that is instead perceived as a virtue.

5

Bradley C Kuszmaul 07.18.20 at 10:38 am

Recent quantitative easing of only 2% of GDP doesn’t provide much of a bound on how much can be tolerated without causing too much inflation. Inflation is still up against the zero lower bound, and it seems plausible that we could get more than a factor of two more money creation. Which does get us into the green new deal range.

6

John Quiggin 07.18.20 at 10:40 am

@1 The Green part is (comparatively) easy and low cost. It’s the New Deal (free college tuition, Job Guarantee, single-payer health etc) that will require a bit transfer of resources.

7

Lee A. Arnold 07.18.20 at 11:27 am

@6 Transfers of real resources or financial resources? Single-payer requires an expansion of suppliers in the healthcare sector to meet the uncovered demand, and those suppliers will be new taxpayers. College learning will be going more on-line, a tendency accelerated by this pandemic and anticipating the next pandemic, so we need, not many more buildings, but more professors, but they too will be new taxpayers. The jobs guarantee could be structured to generate sector expansions, not merely makework. So couldn’t all of these eventuate in expanded sectors, ergo more taxes? Government investment at rock-bottom interest rates?

8

bob mcmanus 07.18.20 at 11:50 am

How much is enough (to pay for our policy goals)?

Only too much is enough, we want to print and spend enough to change expectations.

Currently, the dollar is the reserve currency I think largely for “safe haven” reasons, i.e. the oligarchs who have all the assets believe the US will be the last place to inflate, devalue, or elect an expropriating left-wing gov’t.

After 40+ years of capital share gains and worker immiseration in terms of real and social wages and labour solidarity, and assuming we have under President S Kelton control only of printing and spending but no ability to raise progressive redistributive taxes how much MMT financed spending will it take to have the average worker believe that her real wages, social wages, standard of living, opportunities etc will improve relative to capital and the rich for the next forty years? And have the oligarchs also believe it?

That’s how much.

9

nastywoman 07.18.20 at 3:11 pm

@6
The Green part is (comparatively) easy and low cost. It’s the New Deal (free college tuition, Job Guarantee, single-payer health etc) that will require a bit transfer of resources.

From the Green part!

10

marcel proust 07.18.20 at 3:55 pm

@MisterMr: (this also implies a problem, which is that if we want an high level of employment because we want an higer bargaining power for workers we can’t really avoid wage-price spirals and therefore inflation).

Perhaps, perhaps not. It is important to recall what preceded the treaty of Detroit. Ultimately it was corporate truculence in negotiating with labor, and perhaps surrender what were believed to be managerial prerogatives, that led to the wage-price spiral.

11

Tm 07.18.20 at 6:47 pm

There used to be a lot of debate about a financial transaction tax (Tobin tax). What happened to those debates?

12

Jon W 07.18.20 at 9:48 pm

@Tim Worstall: The political poles shifted, but less than you might think. Southern pols were overwhelmingly opposed, and nearly all of them were D (the entire old Confederacy had only 11 R Reps and only 1 R Senator). Northern pols, including Dirksen, were overwhelmingly in favor, and they were split between the two parties. But if you break it down by party and region, a larger percentage of Ds than Rs voted for the bill within each region. https://www.theguardian.com/commentisfree/2013/aug/28/republicans-party-of-civil-rights

13

Alan White 07.19.20 at 1:21 am

John, what say you about US/global military spending, which if cut and reallocated in the low double digits could transform society? Do you think it’s just politically untouchable? If the US cut its military budget by say 25% it would still be formidable, especially given its nuclear deterrent. For the life of me I can never understand why military budgets are sacrosanct. Is it just WW2 and Cold War hangover? Couldn’t the obvious effects of climate change and the fragility of the economy subject to natural threats like the pandemic change attitudes about overfunding the military (like the debacle of the F-35 program)?

14

J-D 07.19.20 at 2:03 am

@Tim Worstall: The political poles shifted, but less than you might think. Southern pols were overwhelmingly opposed, and nearly all of them were D (the entire old Confederacy had only 11 R Reps and only 1 R Senator). Northern pols, including Dirksen, were overwhelmingly in favor, and they were split between the two parties. But if you break it down by party and region, a larger percentage of Ds than Rs voted for the bill within each region. https://www.theguardian.com/commentisfree/2013/aug/28/republicans-party-of-civil-rights

An interesting example of Simpson’s paradox.

I don’t know about the Democratic Party, but there was an important shift in the Republican Party: the thing is, that shift took place in the nineteenth century, not the twentieth. At the end of the Civil War, the Republican Party really was the party of civil rights, with champions of equality prominent within it; after the end of the Reconstruction this ceased to be true. Of course the Republican Party has changed further since then, because everything changes; but it hasn’t changed as rapidly since the late nineteenth century as it did after the Civil War.

15

John Quiggin 07.19.20 at 3:50 am

Alan White @13 Military spending is about 3.4 per cent of US GDP, compared to 2 per cent or less most places. So that’s a significant and unproductive use of resources that could be redirected to better effect. But the income of the top 1 per cent is around 20 per cent of total income. If that was cut in half, there would be little or no reduction in the productive services supplied by this group. If you want big change, that’s where you need to look.

16

eg 07.19.20 at 4:08 am

@Alan White #13

I think some of the reluctance to cut military spending in the US is the extent to which it acts as a politically unassailable source of fiscal stimulus and “welfare” in a country where such things are otherwise anathema. Well, that and all of the grift it represents for the donor class.

17

likbez 07.19.20 at 10:18 am

@John Quiggin 07.19.20 at 3:50 am *15)

Alan White @13 Military spending is about 3.4 per cent of US GDP, compared to 2 per cent or less most places.

GDP is a fake metric in general (due to the size of FIRE sector in the US economy) and especially when we are discussing military spending.

Military spending is 53% of discretionary spending which put the USA in the category of the most militarized countries.

18

likbez 07.19.20 at 10:23 am

19

MisterMr 07.19.20 at 10:53 am

@marcel proust 10

I only skimmed your links, however for what I can understand we are speaking of rising wages with contemporaneously a cap on sale prices.

While it is possible (it just means an increase on the wage share, which arter all is the whole point of the story), it is also difficult to put a price cap on everything, and likely problematic because the market has to set the relative price of stuff (though not the relative price of labor, that is the wage share).

The idea of having a very high level of employment is that, among other things, wages increase faster than prices (the wage share rises), but I think it is unlikely that this happens without prices increasing at all, because these high levels of employment are reached by the government deficit spending, that increases aggregate demand and thus gives reason to capitalist to hire more people, but also to increase prices.

So IMHO keynesian policies can increase both the level of employment and the wage share, but I think this can happen only in a situation of (relatively) high inflation, because capitalists have to be lured into investing.

20

Ebenezer Scrooge 07.19.20 at 1:13 pm

US military spending is certainly much higher than it needs to be for US defense needs. But the US military is not primarily defending the US. It is defending Asia from China, NATO from Russia, and a number of countries from Iran, not to speak of Norkland.

IOW, the US military is defending US global hegemony, and is priced accordingly. What you think of US military spending depends on what you think of the US as a hegemon.

21

Alan White 07.19.20 at 2:15 pm

Thanks John that’s very helpful—I thought those two figures would be much closer together. Reading CT is always instructive in one way or another.

22

James Wimberley 07.19.20 at 5:02 pm

Long comment on the cross-post, on the cost of the energy transition part of the GND:
https://johnquiggin.com/2020/07/18/a-trillion-here-a-trillion-there-pretty-soon-youre-talking-real-money-creation/#comment-226012

23

Tom 07.20.20 at 1:37 pm

As a share of GDP, military spending today is half of what it was in 1986. Data here:

https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?locations=US

I am not a fan of military spending – following an excellent post by John about Eisenhower’s famous speech (more tanks or more hospitals), I often use it as an example opportunity cost when teaching. One can certainly claim that the budget should be lower but, as a share of overall economic resources, the budget has been cut substantially in the last 30 years.

24

john halasz 07.20.20 at 11:39 pm

25

likbez 07.22.20 at 3:46 am

@Tom 07.20.20 at 1:37 pm

Funny but “not a fan of military spending” for some reason sounds like a military contractor or, worse, MIC lobbyist ;-)

If you are not fun of military spending how do you explain

https://data.worldbank.org/indicator/MS.MIL.XPND.CD?end=2018&locations=US&start=1960&view=chart

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