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

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.

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

  1. Dear John, I have been interested in Economics for 5-6 years now ,mainly to find out what truth is massacred by the mainstream branch of economics. It is a big gap to the truth and Now i class myself as a follower of MMT, much in the news now. The damage done by the mainstream classical line that dominates the field is in urgent need of redress It is positively evil, spreading misery all around.

    The current efforts by the government have been surprisingly pertinent, but the future risks all with descent into austerity. exactly contrary to the need today.We have guard against such a relapse.

    MMT says money creation is only limited to available resources..It has Zero to do with borrowing or lending That is just the mainstream trying to cream off assets for itself, Borrowing means paying it back, an endless treadmill and totally not required.
    Consider the GFC. The actual sum expended to bail out the sector between 2008 and 2010 was $29TRILLION! .Nobody batted an eyelid, Here we have a situation an order of magnitude greater, so it is more than feasible the cost will be an order of magnitude beyond $29 Trillion.
    Falling short by even a little will just leave an unholy mess and a total collapse , end of empire. Not fun!

  2. ‘Substantial reductions in private consumption and investment’ + renewed inflation does not sound like utopia to me.

    In fact it sounds like stagflation redux apart from a booming sector of certain types of public projects. A green dystopia of reduced living standards (as conventionally measured). Hence, politically unsustainable.

  3. JQ: “I’d estimate at least 5 per cent of GDP every year for the next decade at least ..”
    This looks awfully high. Clemens Hoffman’s team at Fraunhofer IWES in Kassel did a simulation of the cost of a full Energiewende hack in 2016. Pdf : https://www.herkulesprojekt.de/content/dam/herkulesprojekt/en/documents/2016_BUSINESS%20MODEL%20FOR%20THE%20ENERGIEWENDE%20_web.pdf
    This involved net additional investment of €310 bn, over the next 15 years to 2031, annual average €20.7 bn, or 0.6% of German 2019 GDP. After that the cash savings outweigh the outlays, modeled at a flat €40bn a year.

    One problem here is that the savings in fuel costs accrue essentially to private actors, while the investment is partly supported by the state. Take a worst-case scenario where the investment is all public. It peaks at €45bn a year, or 1.3% of GDP. Pessimistically, at most half will need public support, or peak 0.6% again. Examples: EVs are selling fine just now in Europe with subsidies below 20% of the purchase price. The Indian government’s subsidy scheme for electric buses found plenty of takers at around $50,000 per bus, say 17% of $300,000.

    Note that this exercise dates from 2016. Whatever assumptions Hoffmann was using on renewable and battery prices were too conservative. The “net cost nothing” consensus has shifted to “large net savings over time”, on a cash GDP basis, ignoring health and climate benefits. The problems are (a) the front-loading in time (b) capturing some of the private savings to finance the increased public investment, without killing the egg-laying entrepreneurial goose. Germany does nor really have any of the former problem as its 10-year public debt has a zero yield. They should issue Energieconsols for 1.5%.

  4. @James W The Green part is 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.

  5. I agree with J.Q. Spend up to the necessary limit and generate about 4% inflation. Some caution should be used or we could generate more inflation than intended. It is also vitally important to do the spending where it is necessary. To quote J.Q from a much earlier post (IIRC); “Give poor people money.” That means targeted spending to the poorest in the form of welfare, health spending and job creation via a UBI (Universal Basic Income) and a JG (Job Guarantee).

    Given ultimate spending limits, the corollary of “Give poor people money” is “Stop giving rich people money”. Vast subsidies are given to corporations, the rich and to the middle class as middle class welfare. The first two, at least, of the list should have their subsidies withdrawn and be compelled to pay much higher taxes. Before this crisis, corporate and rich person welfare (in the form of subsidies, tax breaks etc.) was higher than welfare to the poor.

    In addition, we need to withdraw the subsidies from fossil fuels and redirect them to the renewable energy build-outs plus environmental sustainability projects. It’s not rocket science… it’s the human, ecological and earth sciences! We have all the tools to hand, meaning democracy, science and technology. All we have to do if fund them properly and use them properly. Or is there some deep, dark desire in our elites, and even in our own hearts, to send humanity extinct? Has Thanatos come to dominate Eros? One has to wonder. There is something willfully perverse about our pursuit of collapse and disaster; something nihilistic and deeply despairing about it.

  6. I dont know where i heard it ,or if its true ,but it was claimed all our govt pandemic spending so far could be ‘paid’ for simply by delaying the 3rd round of tax cuts (top end of town cuts) by 5 years .

    Worst case scenario – the virus has permanent health consequences ,there is no effective vaccine ,there is no immunity . You could get it again and again ,worsening your chronic condition each time. It could be just something like cancer that humanity has to live with ,it becomes just a normal part of the human ageing process. The major infectious killers have been with us for thousands of years ,since we started farming animals , those of us alive today are descended from the survivors. More recently Indigenous people were wiped out en masse by those. We may need more than a new economic model. Hopefully the next virus will affect babies ,there should be less denial in that case.

  7. Serious diseases which hit young people and children are terrible and heartbreaking. Once the full impact of COVID-19, even on young people, and including its sequalae, are fully known we may well yer become ever more highly motivated to eradicate the disease. Even knowing its current level of destructiveness, living with it is not really an option.

    People are mostly dying after breeding age so it is hard to see much selection pressure in that. Some kids without back-up grandparents might suffer enough in their upbringing to not reproduce for one reason or another. In any case, well-heeled people in their 40s and beyond won’t want to live with it. Political pressure could well rise in favor of complete eradication. It will be well within the developed nations’ interests to give very safe, effective and cheap vaccines to the rest of the world.

  8. Alan Kohler was on the main ABC news bulletin tonight talking up MMT. It was heartening to see an economics journalist spending so much time in such a prime spot pushing back against the “economy as a family” picture, and pooh-poohing the idea that the government is at risk of going broke. Now if only every news story about economics would do the same for the next 57 years, we might have a chance of getting somewhere

  9. I have difficulties imagining there is one “New Deal” policy recommendation that fits ‘the global economy’. For example, the issue of universal health care and the issue of university and other higher education applies to the USA but not to the EU, setting aside maintenance or updating matters (there is a difference between introducing a new policy and changing a parameter value on an existing policy function). Universal health care is not a new policy issue in Australia, although the review of the allocation of public funds to private health insurance might be. But the funding of higher education has become a major issue in Australia.
    To the best of my knowledge, the New Green Deal (NGD) that is talked about in the EU aims to address, among others, the issue addressed in the paper linked by James Wimberley. When taken together with other papers and public policy discussions, the NGD aims to address simultaneously the de-carbonisation of the economies and labour markets, including skill developments, and digitalisation. Due to the pandemic, the issue of supply chains and self-sufficiency on the EU level of essential products is added.
    No matter how I look at it I reach the same conclusion regarding universal basic income. IMHO, if one wishes to avoid a more or less permanent underclass of people who exist on the universal basic income, then a call for a universal basic income is a call for higher unemployment benefits that are high enough to provide a floor such that outright labour exploitation is avoided.
    The jobkeeper arrangement introduced in Australia in response to the pandemic looks to me like a version of ‘Kurzarbeiter’ (shortwork) payments. The shortwork system is quite widely established in EU countries. In contrast to jobkeeper payments, which are payed by the federal government (fiscal expenditure), in the EU (for sure in Germany) employers and employees pay into a fund – a type of insurance. In the case of Germany (I can’t keep track of 27 countries), the accumulated funds for Kurzarbeitergeld were substantial but not sufficient for the pandemic. So the system changed partly into that introduced in Australia. To the best of my knowledge, the USA doesn’t have anything like that.
    To the best of my knowledge, the individual EU member countries and the EU plan from the bottom up, subject to national and EU-wide agreed rules, rather than starting with macro-models. I have no idea how policy formation proceeds in the USA. But I am reasonably confident that the pressing issues in the USA are different from those in the EU and in Australia.

  10. Ernestine Gross,

    Your point is correct in itself but has anyone in this thread or elsewhere proposed “one “New Deal” policy recommendation that fits ‘the global economy’”. I don’t think so but please correct me if I am wrong. James Wimberley writes in his article, “The GND in the United States (it’s not likely to work as a meme elsewhere) is a manifesto not a plan.”

    Even plans and lists have optional parts. I mean as in “Execute the following policies and tasks, unless you have already done them or unless you have the substantive intent or outcome of the policy or task covered in a different way. Tailor the plan to your circumstances but achieve the necessary outcomes to play your part in the global struggle against climate change and poverty and for sustainability.”

    That kind of thing would make sense, I think.

  11. Record private debt levels seem to this lay person to be a crucial factor limiting our ability to respond .Despite all the talk of ‘flexibility’ we built a rigid economic system .Debt fueled asset price bubbles are a ball and chain now. Labor has hardly been in power, and has been forced to the right to accommodate such policy anyway ,so the Coalition must bear the big majority of blame, things were without doubt (almost) just the way they wanted them .They stuffed it ,they should get out of the way now. There must be some panicked back room meetings and business lunches going on .Young people are programmed to think everything is unprecedented so its not surprising to hear so many of them saying something is going to change now. Everyone else remembers feeling like that more than once but this is a really big crisis so I feel extra hopeful this time. Pressure builds up as each new crisis piles on top of the others over the years. Change before apocalypse would be good.

  12. sunshine,

    You are absolutely correct when you say “Despite all the talk of ‘flexibility’ we built a rigid economic system”. I have termed it a “sclerotic and maladaptive” system. My motto is “Change or Die” meaning that we have to change or Mother Nature will kill us all, by the natural operation of the universal fundamental laws discovered (and still yet undiscovered) by the hard sciences. Our destruction is “hard coded” into events if we don’t change radically.

  13. Ikonoclast, my post relates to JQ’s question “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” and to James Wimberley’s post as well as JQ’s reply to JW.

  14. JQ you present data on the behaviour of the monetary base of the US Fed during the period 2000 to 2020 and you argue that the limit to the growth of the monetary base is inflation.

    Your concern about inflation, given the behaviour of the monetary base, relies on the Monetarists assertion that the velocity of money is constant. The assumption of a constant velocity of money was a reasonable assumption for many juristictions (‘countries’) prior to the deregulation of the financial system.

    The Reserve Bank of St Louis, which published the monetary base graph, publishes 3 measures of ‘Stock of Money’ (M1, M2, and MZM – also known as monetary aggregates) and the corresponding velocities. https://fred.stlouisfed.org/categories/32242. The graph of the velocity of money for the period Jan 1960 to Jan 2020 can be generated by clicking on the monetary aggregate in question. As can be seen from the graphs, there has been a declining trend in the velocity of money since financial deregulation.

    You argue in favour of a 4% annual inflation. (In a Keynesian model, a positive rate of inflation would help to pay off government debt, assuming the Fisher condition between interest rates and inflation doesn’t hold more or less at all times). Setting aside the awkward question of what is money and working within what we have – monetary aggregates – and setting aside how we measure inflation (asset or goods and services or both?), then it will be extremely difficult to get any positive inflation rate, as measured by the conventional measure of CPI (or wages) via growth in the monetary base.

    If the Fed continues to buy up government and privately issued ‘paper’ (financial securities; I understand from one press report, they also buy shares) then a possible outcome is that a substantial segment of Corporate America will be ‘socialised’.

  15. As I have suggested once before the government’s spending is governed by its budget constraint. It can print money (DM) and sell bonds (DB) to fund its fiscal deficit (spending less taxes, G-T) plus its interest payments r*B.

    Using lower case letters to denote real magnitudes Dm+Db = g-t +rb -p(m+b) where p is the inflation rate. If it doesn’t issue more debt then, in the long run, it’s real spending (inclusive of interest on already issued debt) g+rb must equal the real taxes it raises on income/consumption t plus the inflation tax it levies on real money and bond holdings p(m+b).

    If there is no steady-state inflation, so p=0, then its total spending is limited by the real taxes it collects t.

    This roughly formalises what the Reserve Bank Governor said today. In my view, MMT is a tautological repeat of what is implied by the government budget constraint recognized in macroeconomics 50 years ago. If the government wants to fund its spending by non-inflationary money creation without increasing debt it must rely on conventional taxes. If it doesn’t want to increase conventional taxes and doesn’t want to (or can’t) borrow it needs to rely on inflation to generate enough taxes on asset holdings to fund spending. Fortunately, Australia is not in the position of being a “banana republic” that needs to rely on inflation to fund its deficits.

    If there will be the need for increased government spending as a consequence of Covid-19 this can be funded through increased conventional taxes, increased borrowings (subject to intertemporal budget constraints) and, stealthily, though dishonest inflation taxes.


  16. My reading of The Age article is a little different to that by Harry Clarke.

    Yes, the Dr Lowe, RBA Governor, rejects the MMT on the grounds that unlimited printing of money has historically resulted in inflation and the milder MMT version of printing money until the unemployment and inflation targets were met on the grounds that this is extremely difficult to achieve and to sustain.

    But, Dr Lowe also revealed the RBA has bought $60 billion State government debt and has made available $90 billion credit to commercial banks and businesses. (I assume this is related to the mortgage payment temporary suspension program and business support policies announced in response to the pandemic.)

    Moreover, Dr Lowe does allow for what one may consider short to medium term money printing support to finance government expenditure: “It certainly is possible for the central bank to change when and how the spending is paid for, but it is not possible to put aside the government’s budget constraint permanently.” (cited in The Age article).

    Now, this reads more like a Keynesian type fiscal and monetary policy setting – or as JQ puts it “over the cycle”, allowing for extreme events (unusual and high uncertainty) such as a pandemic. It is not the Monetarist hypothetical steady state long run story as represented by some symbolic arithmetic that abstracts from time.

    Furthermore, Dr Lowe does not talk about taxes only but taxes and government revenue. There is a difference. The profits of public enterprises can also be used to finance government expenditure – this is normal financial management.

    According to a published source, Australia has the highest known gold reserves in the world. Is there a publicly owned gold mine? The variability of the traded gold price should look after intergenerational budget constraints – according to the long run models.

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