Public Deficit or Private Surplus? - University of Ottawa

Public Deficit or Private Surplus? - University of Ottawa

THE REAL LIMITS OF FISCAL POLICY ANSWER THE FOLLOWING QUESTION QUESTION What might fiscal policy look like if the policy world was comprised of modern monetary theorists? ANSWER It dependsbut will sketch one possible path DISCUSSION ROADMAP 1. Introduction An assumption

2. Metaphors and Truth Some stylized evidence 3. Measuring the MMT Constraint Three approaches 4. Identifying Progressive Principles Five shared objectives 5. The

Public Goods Campaign Some immodest proposals 6. Marketing MMT A short, medium and long term strategy I. INTRODUCTION: AN ASSUMPTION FIVE-STEP LEARNING PROCESS 1. Ignorance 2. Denial/Ridicule 3. Intrigue/Testing 4.

Logical conversion 5. Emotional conversion YOU ARE HERE II. METAPHORS AND TRUTH THE POWER OF METAPHOR Countries

High are Like Households Debt High Default Risk High Interest Rates Solution: Reduce spending, raise taxes, generate surpluses, pay down debt Portugal, Ireland, Greece Borrowing Costs: 2011-2012 Portuga l Irelan

d Greece Percent of GDP Japan: The Flow 6 4 2 0 -2 -4 -6 -8 -10 -12

Japanese Deficit/GDP Ratio Japan: The Stock Japanese government gross financial liabilities - as a percentage of GDP 200 180 160 2011: New Debt Issuance = 50% of GDP! 140 120 100 80 60 40 20 0

70 71 72 73 74 75 76 77 78 79 8 0 81 82 83 84 85 86 87 88 89 90 91 92 9 3 94 95 9 6 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1 9 1 9 1 9 1 9 19 1 9 19 19 19 19 19 1 9 1 9 1 9 1 9 1 9 19 1 9 19 19 19 19 19 19 19 1 9 19 1 9 1 9 1 9 2 0 2 0 2 0 2 0 20 20 20 20 20 20 20 Japan: An Inconvenient Truth NEWS FLASH 2002: MOODYS Downgrades Japanese Debt (below Botswana/Estonia 25 Inflation Monetary base/GDP 20 15 10 5

0 -5 30-Year Bond Yield USA Inconvenient Truth, Circa 2011 18 April 2011: Standard & Poor's downgrade warning Yield on 10-Year U.S. Bond 3.45% 3.40% 3.35% 3.30% 3.25% 3.20% 3.15% 3.10% 3.05%

18 April 19 April 20 April 21 April 25 April 26 April 27 April 28 April 29 April 2 May 3 May 4 May 5 May 6 May Iceland Inconvenient Truth (Treasury note maturing May 17th 2013) 20.00% 18.00% 16.00%

Surpluses/ low public debt Deficits / high public debt 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2008 Financial crisis 2.00% 0.00% 2 2 2 3 3 3 3 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 1 1 -0 g-0 v-0 r-0 n-0 p-0 c-0 r-0 l-0 t-0 n-0 r-0 l-0 t-0 n-0 r-0 g-0 v-0 b-0 y-0 g-0 v-0 b-0 n-0 p-0 c-0 r-0 n-0 p-0 c-0 r-1 l-1 t-1 n-1 r-1

y a u o a u e e a u c a p u c a p u o e a u o e u e e a u e e a u c a p M 9 -A -N -M 8 -J 8-S 8-D -M 6-J 6- O 0 -J 4 -A 0 -J 0 -O 3-J 8 -A 2 -A -N 7 -F - M 0 -A - N 6 -F 4 -J 5 -S 5 -D -M 4 -J 4 -S 8 -D -M 9 -J 1 -O 2 -J 3 -A 2 7 2 2 8 0 7 1 1 1 26 0 0 1 1 2 2 2 2 0 02 0 16 2 19 2 0 0 0 13 2 2 2 31 0 1 1 1 SOME TAKE-AWAYS 1. Household budget metaphor not applicable to sovereign nations 2. Quantitative easing does not cause inflation 3. Because we worry about being the next

Greece, we will be next Japan III. Measuring the Constraint PRINCIPLES 1. Taxes do not fund sovereign spending but are used to ground moneys value and incentivize behaviours 2. Macro policy should be set based on real constraints 3. Three broad types of constraints Capacity constraint Financial balances constraint

Political constraint Capacity Constraints: Okuns Law Okuns Law Y = GDP Growth; k = natural growth rate c = coefficient relating changes in unemployment (U) to GDP growth rate. Capacity Constraints: Okuns Law Values k = 2% (popn growth = 1% + 1% productivity growth) c = 2 (previous estimates) Objective: drop unemployment rate by 4

percentage points to 3.5% Capacity Constraints: Okuns Law Calculation ) = 10% 2010 GDP = $1.6 trillion so increase GDP by $160 billion to hit 3.5% Assume Multiplier = 1.5 Implies $106 billion fiscal expansion $117 billion if k= 3% Capacity Constraints: Okuns Law HOW BIG IS $106 BILLION? Current spending (program + interest costs) = $275

billion so 39% increase Deficit implications One-Shot Expenditure 2011-12 deficit of $146.1 billion or 9% of GDP. Less than USA. Spread over 5 years = additional $21.2 billion/year of deficit spending (4% of GDP in 2011-12 and declining thereafter) Financial Balance Constraint 15% 1 0.9 10% 0.8

Surplus 0.7 (% of Gross Domestic Product) 5% 0.6 0% 0.5 0.4 -5% 0.3 Deficit -10%

0.2 Recession Household Corporate Government Foreign 0.1 0 1961 1963 1965

1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

2003 2005 2007 2009 -15% 2010 Financial Balance Constraint: In Nominal Terms 2010 Inflows 2010 Outflows Corporations : +$63 billion Net exports : +$56 billion Households : -$31 billion Governments: -$89 billion

SUM OF BALANCES = 0 POLITICAL CONSTRAINT 1. Communication constraints (how to overcome the media wall) 2. Expectations constraints (how to generate a vigorous political discussion) 3. Federalism constraints (how to manage federal/provincial relations)

IV. Progressive Policy Principles 1. Job creation 2. Flattening the income distribution; 3. Respecting ecological constraints; 4. Empowering local decision-making; 5.

Concern for social justice (race, gender, housing, education, health) V. The Public Goods Campaign 1. JOB GUARANTEE 2. INFRASTRUCTURE EXPANSION 3. HEALTH/EDUCATION GUARANTEES 4.

TAX POLICY CHANGES 1. JOB GUARANTEE Objective: Good job to anyone willing and able to work April 2011: 1.4 million unemployed workers Offer Wage: $10/hour Cost Estimate: $29 billion for Year1 2. INFRASTRUCTURE EXPANSION Share of Gov't Gross Fixed Capital Expenditure in GDP 0.06 Public investment strategy Target 5% and hold to 2015 = $200 billion in spending

0.05 0.04 0.03 0.02 Average Government Gross Fixed Capital Expenditure, 1984 - 2008 = 2.7% 0.01 0 Implied back to normal trajectory

$200 BILLION BUYS A LOT OF INFRASTRUCTURE IN Transportation: mass transit, high-speed rail, broadband strategy, roads, bridges, bicycle lanes Public health: improved water works, sewage treatment, parks Community/Cultural spaces: arenas, curling rinks, skateboard parks, tennis courts, theatres, public art Environment: housing retrofits, new building materials, transportation strategies (see above) 3. EDUCATION/HEALTH-CARE INITIATIVES Free public education / expand

college/university hiring Universal drug coverage Fund urban design based on health considerations Rethink food/agriculture policy 4. TAX POLICY CHANGES Reduce income taxation; reduce GST, maintain or increase GST tax credit Eliminate regressive payroll taxes and related fictions (EI account) Eliminate CPP deductions and convert into pay-as-you-go plan funded by federal government. Get rid of CPPIB

Increase sin taxes, capital gains taxes, dividend taxes, taxes on energy Cap or reduce tax-preferred plans (TFSA, RRSPs, RESPs) V. COMMUNICATING CHANGE Short term concrete policies, Aikido and the household borrowing metaphor. Target = general public/populist Medium term Build institutional capacity. Target = young economists/social scientists Long term Wall of messaging. Target = policy elite.

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