Presentation on theme: "Debt, Deficits and Unemployment By Ken Schultz Discussants: Bret Frank and Daniel Wendt."— Presentation transcript:
Debt, Deficits and Unemployment By Ken Schultz Discussants: Bret Frank and Daniel Wendt
Debt, Deficits and Unemployment Question Addressed o Should the priority of the government’s monetary and fiscal policy focus on debt and deficit reduction or reducing unemployment? Thesis Statement o Additional government spending used wisely to stimulate demand will reduce unemployment and increase economic growth without causing higher interest rates, inflation or insolvency.
Outline Background o Modern Money Theory o Basic Principles of Macro Accounting University of Massachusetts Study about Debt Ratio’s and Growth Misconceptions Concerning Deficit Spending and Interest Rates The Reality of Hyperinflation The Job Guarantee/Employer of Last Resort Conclusion
Modern Money Theory Sovereign governments with a fiat money and floating exchange rate have more monetary and fiscal flexibility than they may recognize Governments have the ability to spend whatever is required to revive their economies and restore employment regardless of the amount of taxes collected Governments can borrow without fear of default or insolvency Affordability is not the issue, interest rates, inflation and crowding out private investment.
Basics of Macro Accounting One’s financial asset is another’s financial liability The Three Sector Model Government deficits are more stable than private sector deficits Private + Government + Foreign = 0 Picture Source: Randall Wray, comment on “Recent USA Sectoral Balances: Goldilocks, the Global Crash, and the Perfect Fiscal Storm,” New Economic Perspectives, comment posted June 19, 2011, (accessed April 26, 2013).
Public Debt Levels A 2010 study conducted by Ken Rogoff and Chairman Reinhart showed that growth slowed dramatically when the GDP to debt ratio exceeded 90% A recent study by The University of Massachusetts found a spreadsheet error Growth rates may not be drastically different for economies that exceed the 90% threshold While debt levels and deficit spending are significant, austerity would be counter productive
Misconceptions about Deficit Spending and Interest Rates Deficit spending credits bank deposits increasing reserves Excess reserves lead banks to lend at lower interest rates If the interest rate falls below the target rate government treasuries are sold in order to drain reserves Deficit spending also creates a wealth effect spurring investment
The Reality of Hyperinflation Hyper inflation only occurs in very specific situations Study by Cullen Roche analyzed 10 hyperinflation episodes that occurred after 1900 o In most cases these occurrences happened during a civil war and a majority also occurred with large foreign debts denominated in foreign currency US foreign debt is held in government paper payable in US dollars
The Job Guarantee/Employer of Last Resort (JG/ELR) JG/ELR Basics o Provides a job to anyone willing and able to work o Uniform compensation package o It expands choices without limiting available choices in the private sector Critiques o Increased labor costs may put some employers out of business o Ability to terminate workers o Inefficiency of government programs o May lead to outsourcing/offshoring
JG/ELR Benefits Reduction in poverty while at the same time reducing outlays in welfare and food stamp programs Increased pride and self worth Amelioration of social ills associated with unemployment o Spousal abuse, divorce, drug abuse and crime Improved working conditions Counter cyclical stabilizer
Conclusion While deficits and debt levels are problematic, the move toward austerity, considering current US economic conditions, would be counter productive The priority of government monetary and fiscal policy should be on maintaining high employment and keeping inflation in check and not on debt levels or deficits The JG/ELR program could provide sufficient counter cyclical demand stimulus sufficient enough to protect private sector profits and future profit expectations The greatest threat to our economy today is inaction fueled by fears of inflation and insolvency
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