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The Bad Economics of PAYGO Swamp Any Strategic Gain From Adopting It

#1

The Bad Economics of PAYGO Swamp Any Strategic Gain From Adopting It

Josh Bivens

The obscure Congressional budget rule known as PAYGO (“pay as you go”) has burst into the news lately. A PAYGO rule means that any tax cut or spending increase passed into law needs to be offset in the same spending cycle with tax increases or spending cuts elsewhere in the budget. Incoming House Speaker Nancy Pelosi has indicated that the House of Representatives will abide by PAYGO in the next Congress, and this decision has sparked much controversy.

#2

First of all the military has to figure out their own lies and not be av=able to receive any funding until they do.
Secondly cut the money to Israel, as this has been going on for 70 years and that’s just stupid to ignore American children, the ill and veterans who are not being taken care of either.
What are the Congress people afraid of? That the military will make a “Michael Hastings” out of them too ?
Third, no one can become a general until that person has a doctorate in economics, and understands DEBT.Instead of AI weapons , maybe we should have AI bookkeepers and auditors—and maybe even Generals! .

#3

PAYGO and austerity are horrific economics. Makes no logical sense, and keep in mind that Pelosi paid tribute (didn’t have to) to Pete freaking Peterson on the House floor. Attended his functions, bought his lies and ignorance on deficits and what is called public debt. Peterson spent the last decades of his life lying to people about the solvency of programs like Social Security.

And let’s be clear anyway, spending is determined in the political process independent of taxes coming in. Spending doesn’t need taxes or the issuance of bonds, and spending comes before taxes are paid and bonds are issued. The spending is thereafter used to pay taxes and bonds, and there are no limits as to how much the federal government can spend, other than the limits to productive capacity, which can cause inflation. And we only issue bonds after the creation of deficits because the Federal Reserve Act requires us to, it was created in the gold standard era, which no longer exists. That debt is not expected to be paid back, it isn’t like public debt, but even if it was expected to be paid back, the government could do it. It would just create paper money, which doesn’t accrue interest, and it would exchange that for bonds that do accrue interest.

There is zero justification for cutting and social programs. Us doing so is a choice, we choose to cut it, and the politicians have created stupid rules like PAYGO in part because of ignorance and in part because of corruption.

Positive Money did a poll of British politicians and it found that well over 80% of those polled didn’t know how the state creates money. The results would be the same here. To look at our massive infrastructure gap, the decades long macroeconomic decline in the country, the lack of investment in poor communities and the environmental crisis and to think of cutting BACK investment is insane. Fucking bonkers.

#4

Wow Thank you JoanRobinson, as I guess myself and other people think of debt as what they have to pay back as in rent, because if you don’t do that, you are on the street. So if I were a government, I would decide to spend and not it worry immediately where the money was? But we the People know that if we don’t know where the money is that we’d better not spend. So---- it seems that people’s debt is different the government debt—and often we the people don’t realize that.
BUT-- what happens when other nations, who were tied to the U.S. dollar, decide that they are tired of America’s rules , and these people form their own money system minus the dollar? Does that put America into a situation where they are really like a person—and if they don’t have the cash they can’t have a war? ( That would be nice : )

#5

PAYGO is the repug’s way of stopping any progressive legislation in it’s tracks. The fact that Pelosi and other dem’s have endorsed it proves they are repug lite. Don’t need to discuss the mechanics of it, Joan covers it very well above

#6

Republican Lite = Vichy Democrat.

#7

In our system, spending is determined in the political process at the federal level. We elect people, they go into government, and they determine spending. They can decide to spend more than tax receipts. The government is the only entity that can create our physical currency (most money in the system is created by private banks, but that is another issue all together). The Fed with dollars, the Treasury with coins, although the Treasury can also create, and has in the past created, paper money. So, does the government need to borrow a currency that only it can create? Does that make an ounce of logical sense? Does JP Morgan create US dollars, or the Fed? Does Wells Fargo create coins? No, the Treasury does. So, does the federal government need to borrow a currency it only creates? Of course not.

The spending is determined independent of tax receipts, and the spending occurs before taxes are paid and bonds are issued. In fact, if we didn’t know the size of the deficits first, we wouldn’t know how many bonds to issue thereafter, and the spending itself is used to buy those bonds and to pay taxes.
Think of it this way, if we formed a government today, this second, could the state issue bonds or ask you to pay taxes? Of course not, because there is no money in the economy to buy those bonds and to pay those taxes. The state needs to first spend that money before you can pay taxes and buy those bonds. That is the case now. Huge implications, as it becomes clear that issuing bonds thereafter is a choice and that the federal government isn’t really borrowing money in the way we think it is. It isn’t tax and spend, it is spend and then tax. When there is a deficit, the Federal Reserve Act requires the federal government to issue bonds, that is why we do it. We don’t have to issue bonds; it is a way we have chosen to manage the money supply. Many MMT economists like Randal Wray want the federal government to stop issuing bonds all together, and to manage the money supply basically through taxes. But what is called public debt is actually the amount of money that the federal government has created since the early 19th century that remains out there in the economy. So, a part of the national debt can be traced back to the 19th century. It does get rolled over, and the state could pay it off if it wanted to, but I don’t see any logical reason why it would or why people would want to trade in US bonds, which accrue interest and are the safest investments in the world, for something that doesn’t like cash.

Local and state governments are constrained in ways that the federal government isn’t, because the state of California cannot create US dollars and coins like the federal government can, and neither can the city of Los Angeles. And there are obviously limits to how much money the federal government can create. If too much money is created and not enough stuff is being produced to match that, then high amounts of inflation will likely follow. The issue is how much stuff can be produced to match the increase in dollars, whether we are at full employment and full productive capacity, which we are not.

“BUT-- what happens when other nations, who were tied to the U.S. dollar, decide that they are tired of America’s rules , and these people form their own money system minus the dollar?”

Well, the British Pound used to be what the dollar is now. The dollar took over as the dominant currency. Did the British Pound thereafter collapse in value? No, it did require the Brits to wind their empire down, and to make changes, but that is inevitable anyway as is the changes coming for us. The Euro isn’t the world’s reserve currency, but it is still a powerful currency and is still accepted basically everywhere. We will still have things people want to buy (goods, resources, land, buildings, all that), and so there will always be some demand for the US dollar in the same way people still demand Pounds, Euros and RMB, even though they aren’t THE dominant currencies. And the value of dollars will also be maintained as well in part by the fact that we need to obtain dollars to pay taxes. There are other things to consider too, like the role of the Fed in being the buyer of last resort of US bonds on the secondary market, and it being required by law to work with the Treasury to make sure there are no issues, but I won’t go on. Read Stephanie Kelton, Sanders’ old economic adviser. She’s an expert on this stuff.

#8

Important to understand: The Federal Reserve, a ‘bank’ that is essentially separate from the federal government, is the buyer of last resort for American debt and other ‘assets’ that are deemed likely to default. That means that out of all those bonds the US government issues every business day to people and nations willing to lend us money to finance our annual deficits and overall debt, our own central bank buys most of them. They currently hold trillions of dollars worth. Same with many of the defaulting mortgages Fannie and Freddie were saddled with during the Great Recession. The Federal Reserve bought them and took those losses.

Also important: The Federal Reserve has been pursuing multiple strategies to goose the economy, which has been growing slowly by historic standards. First, they’ve kept interest rates low for a long time – they are finally raising them a bit as of late. Second, they have been putting more money into the system through something called Quantitative Easing (QA). This process puts money on the books of 18 big banks (and pays them to take it!) out of thin air, so those banks can make credit widely available (and make even more money). The fact that all of that borrowed money has been used for questionable purposes is a story for another time…

Most important: as JoanRobinson has stated, there is absolutely no similarity between your household debt and US government debt. The entire concept of PAYGO is a public relations gimmick. Case in point: Trump’s recent tax cut, which is adding trillions to the national debt, and you didn’t hear Republicans utter a peep about that.

#9

Just wanted to add that the Federal Reserve has modified its Quantitative Easing policy and has been pursuing Quantitative Tightening for 14 months. That means they have been reducing the US government bonds and mortgages they hold. Of course, the amount of those they hold is still well over $4 trillion…

#10

HI JoanRobinson, thank you for spending so much time explaining this. My education has severely lacked any sense of this at all. I will take your advice and look int the writings of Stephanie Kelton. : )

#11

HI SkepticTank, and thank you too. I am am completely lacking in any of this knowledge, and so, I will have a lot of reading to do here too. Federal Reserve will be another place to read about too. : )

#12

Thank you for that too! I have a lot of vocabulary building to do. : ).

#13

"The Government is not like a household. A government is like a bank. And a government running a balanced budget is like a bank that simply lends back as much as it gets in repayments, therefore the money supply never grows and without that, you don’t have a growing economy.

It’s one of two ways to create money, and if you don’t let government create money by spending more than they take back in taxation (fiscal policy), you have to rely on the private banking system to create the money in the form of credit (monetary policy) and you therefore get private debt bubbles." ~ Prof. Steve Keen

#14

The 40-yr. Wall St/capitalist revolt:

"The bank strategy continues: “If we can privatize the economy, we can turn the whole public sector into a monopoly. We can treat what used to be the government sector as a financial monopoly. Instead of providing free or subsidized schooling, we can make people pay $50,000 to get a college education, or $50,000 just to get a grade school education if families choose to go to New York private schools. We can turn the roads into toll roads. We can charge people for water, and we can charge for what used to be given for free under the old style of Roosevelt capitalism and social democracy.”

This idea that governments should not create money implies that they shouldn’t act like governments. Instead, the de facto government should be Wall Street. Instead of governments allocating resources to help the economy grow, Wall Street should be the allocator of resources – and should starve the government to “save taxpayers” (or at least the wealthy). Tea Party promoters want to starve the government to a point where it can be “drowned in the bathtub.”

But if you don’t have a government that can fund itself, then who is going to govern, and on whose terms? The obvious answer is, the class with the money: Wall Street and the corporate sector. They clamor for a balanced budget, saying, “We don’t want the government to fund public infrastructure. We want it to be privatized in a way that will generate profits for the new owners, along with interest for the bondholders and the banks that fund it; and also, management fees. Most of all, the privatized enterprises should generate capital gains for the stockholders as they jack up prices for hitherto public services.

You can see how to demoralize a country if you can stop the government from spending money into the economy. That will cause austerity, lower living standards and really put the class war in business. So what Trump is suggesting is to put the class war in business, financially, with an exclamation point."

“Government exists to spend. The purpose of government is to serve the general welfare of the citizens, not just the military-industrial complex and the financial class. Didn’t we have a stimulus, oh, eight years ago? It was tiny and has not been entirely spent. As Yellen implied, we need more spending of the non-military kind (what Barney Frank memorably called “weaponized Keynesianism” doesn’t stimulate).”