Debt, Deficits and Unemployment By Ken Schultz

Transcript:Debt, Deficits and Unemployment By Ken Schultz:
Debt, Deficits and Unemployment By Ken Schultz Discussants: Bret Frank and Daniel Wendt Debt, Deficits and Unemployment Question Addressed Should the priority of the government’s monetary and fiscal policy focus on debt and deficit reduction or reducing unemployment? Thesis Statement 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 Modern Money Theory 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). 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 US Debt to GDP Ratio’s 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