Learning standards in economics – Part 2

Today is Part 2 of my little mini-series on “Learning standards in economics”. It might appear to be a break in continuity from yesterday’s blog but when I get around to Part 3, I think you will see the way in which today’s discussion fits well. Last month (January 24, 2013), the Peter Peterson Foundation – which is just a propaganda front for people with too much money and influence designed to advance spurious ideas about the economy – released a statement – College Students Launch Campaigns Across the Country to Activate a New Generation on the Nation’s Fiscal Challenges. When I delved into what it was about the story became very mirky indeed. Teams of students are being assembled under the banner of what we might call the “we are self-important and want to show it” banner and being coaxed into action The essential part of education – the search for knowledge – is the missing part. The myth that the US government is going broke is the starting point not the enquiry.

The PGPF is partnering with the so-called Clinton Global Initiative University (CGI U) to help the youth of America solve the contemporary problems facing their future.

I thought maybe that they would be focusing on the intergenerational vicissitudes of mass unemployment, the increasing income and wealth inequality, the rising poverty rates, the issues surrounding urban degeneration, and, of-course, the climate change and the planet. I could have listed more matters of massive public importance here to add to my suite but you get the drift.

All these things threaten to degrade the future for a growing proportion of Americans and undermine prosperity of the young and the generations that will follow.

I didn’t think they would be focusing on non-issues like the public debt ratio in the US except perhaps to reflect that the practise whereby the US government matches its deficits $-for-$ with debt-issuance to the private sector is redundant and a hang-over from the days when the world operated within a convertible currency, fixed exchange rate world which places financial constraints on the national currencies that participated in that particular monetary system.

They might have also concluded the the current US budget deficit, as are most budget deficits in the advanced world, is too small relative to the size of the economy. The stark evidence for that conclusion is the persistence of mass unemployment. When there is mass unemployment in any nation you know one other thing without question – the budget deficit to GDP ratio is too low.


Considering these issues would be a constructive dialogue for the youth of America to be involved in. To engage students, so that they could learn and acquire knowledge about these important issues for their future, would be an empowering endeavour.

They are also universal issues, impacting on all the peoples of the world, which is why I thought the “Clinton Global Initiative University” would want to be involved.

I also thought they would seek to take an evidence-based approach after articulating a coherent theoretical structure. After all, is that what a “University” is about. Universities deal in knowledge – don’t they?

It seems I am an old-fashioned type of academic. Apparently, the Clinton Global Initiative University not aiming to be a progressive force in the process of knowledge accumulation.

Rather it has now joined the PGPF as its propaganda partner. Propaganda is anti-knowledge. It is part of a bullying strategy designed to manipulate and coerce people without power into acceding to a dominant view that would not be in their best interests to accede to, and, which they would likely resist, if they should ever come to know the facts.

As an aside, I love that word partnering. When two criminals choose to work together to perpetrate a crime it is called consorting or conspiracy.

But when two “foundations” that are endowed by the rich and influential choose to work together to perpetrate a crime it is called a partnership.

In this case, the crime is against intellectual values – where knowledge should be prioritised over lies and against humanity – where the interests of people and our societies should be priortised over the narrow interests of the most wealthy and income-rich individuals in the world.

These partners are consorting to undermine public prosperity and continue the real income grab that has been their main agenda of the neo-liberals for the last 20-30 years.

The other partner is called Net Impact and as far as I can tell is a student networking organisation seeking to recruit students in the course of power elites under the guise of being involved in issues such as “sustainability, corporate responsibility, and social entrepreneurship”.

How we construct realities is important because it influences the way we see the solutions and the implications. The construction that this partnership has determined will form the basis of their “Up-to-Us” challenge for American youth is without a grounding in any reasonable reality.

The “Up-to-Us” initiative is summarised in this way:

With the debate on America’s growing debt and deficits as prominent now as any time in the nation’s history, a first-of-its-kind campaign to take on fiscal issues is being launched today by college students across the country. As part of the Up to Us initiative, student teams at various colleges and universities are kicking off competing campaigns designed to educate their peers on the effects of the nation’s rising debt and motivate action in Washington on fiscal issues. The team with the most effective campaign will be recognized later this spring at a gathering of over 1,000 young Americans discussing solutions to pressing global challenges.

Apparently, there is a prize of $US10,000 for team that “wins” the contest.

Peter G. Peterson, himself, chose to frame the challenge with this piece of fiction:

Today’s young people have the most at stake in our fiscal future. They are the generation that has the most to lose on our current course, and the most to gain by solving America’s long-term fiscal challenges … By the time they’re in the prime of their careers, the national debt is projected to reach staggering levels that will slow growth and crowd out much-needed investments in education, research, and infrastructure …

The more apposite point is how many of them will reach the “prime of their careers” given the deterioration in the labour market and the opportunities that will be continuing if the “current course” of fiscal policy – based on the erroneous belief that the US government is running out of money – is not altered.

Words like “staggering” always alert us to the lack of substance in the argument. There is no public debt problem in the US. Trying to contain public debt is anti-growth not the level of debt itself.

Further, there is no trade-off between government spending on education, research or infrastructural development unless the economy is operating at full capacity.

The government can always purchase anything that is offered for sale in US dollars. Expanding public education to redress the deficiencies caused by decades of neo-liberal antagonism to properly funding that sector does not preclude the government from also providing first-class health services or any other service.

It is a total myth to say otherwise. The only way you can make sense of such a statement if you simultaneously accept some arbitrary limit on the size of the budget deficit. The real question you should then pursue is the validity and motivation for imposing such arbitrary fiscal rules.

The only fiscal rule that makes sense is that the budget should be whatever it takes to achieve full employment. Please read my blog – The full employment budget deficit condition – for more discussion on this point.

At the full capacity point, hard decisions do indeed have to be undertaken because no further real expansion in response to growing nominal spending is possible and the risk of inflation becomes acute. But that is a state that is rarely met and is not remotely on offer in the current environment where mass unemployment and underemployment is the norm.

Back to the challenge. On the so-called “panel of judges” of the challenge is one Erskine Bowles, who was the Co-Chairman of the National Commission on Fiscal Responsibility and Reform and a former cabinet member in the Clinton Administration.

He is also now running the Fix the Debt campaign, which is supported by a host of conservative organisations that demonstrate an advanced lack of understanding of how the economic system operates.

The “Fix the Debt Plan” would drive the US economy back into recession and damage the prospects of millions of Americans in their search for work. It was based on a deeply flawed understanding of what the problems facing the US economy were and remain. It was predicated on the idea that the social security and health care systems would become insolvent in the not too distant future.

Please read my blog – The brightest minds can be so dumb in particular circumstances – for more discussion on Erskine Bowles.

I concluded that anyone who is associated with the “Fix the Debt Plan” are dumb with a capital D.

If you read my assessment of Mr Bowles, I think you will agree with me that it is safe to say that he does not have the qualifications necessary to be a “judge” on a panel, which aims to adjudicate about what is best for the future.

Not content to be a “judge”, which implies some modicum, at least, of impartiality, the press release quotes Mr Bowles:

America’s growing national debt is one of the most pressing issues facing college students today … These teams demonstrate that young people want to have a serious conversation about our nation’s economic future and are eager for results.

Conclusion: he should be on the other side of the “bench” receiving his sentence for lying to the public.

The other judge, is his Co-Chairman at the “Fix the Debt” campaign, one Alan Simpson, a former Republican politician in America. He was quoted as saying that the “The students involved in Up to Us are surely tomorrow’s leaders”, which would suggest that there is not much future for the US.

But it is interesting how these elites train their successors and implant them with the neo-liberal ideology when they are young and lacking in knowledge but respond to invitations to be important and engaged.

The Challenge has identified 10 American universities that will be part of the “competition”. I

The goal of the challenge is to run university campaigns (Source):

… to increase awareness of our federal government’s long-term debt, increase the ability of students to draw personal connections to the federal budget and debt, and increase engagement around the issue of our federal government’s long-term debt.

The – Its up to US – site is starting to publicise its approach. The early signs are not looking good.

We are invited by an – Infographic (click to make bigger) – to meet Cara who likes to run in the park – but clearly from the development of her leg muscles doesn’t do much of that. She reads “novels on the lawn”, which is good. Reading is a source of creativity and knowledge.

Shes likes to “start impromptu dance parties”. Okay. She is apparently slightly concerned about her private debts at present (student loans) but is oblivious to “the country’s debt problems”, which will soon become her problem.

She encounters a graphic that tells her that the US government “regularly runs an annual deficit” and to make up the shortfall the government borrows and adds to its debt stock.

First, regularly is about most of the time in the recorded history. When the non-government sector is not spending enough to ensure nominal demand growth is sufficient to drive growth then the government has to increase its nominal net spending. When the former is draining demand overall (that is, spending less than its income) then the government has to run a deficit to ensure growth continues.

That is the normal situation and so we shouldn’t be surprised that the government runs a deficit. It is a good thing usually and underpins our private saving aspirations and our general prosperity.

The pursuit of surpluses will generally be ill-advised and in historical terms tends to be followed by recessions of various magnitudes.

Second, considering the government has typically run deficits then the catastrophes that are predicted by the likes of the PGPF have had more than enough time to reveal themselves. One might conclude just in frequency terms that the fears are unwarranted. But it is better to rely on a deeper understanding than is provided by meagre empirical frequency.

Modern Monetary Theory (MMT) provides a coherent framework for understanding why continuous deficits are unproblematic in circumstances that are typically met. There are several links provided at the end of this blog to allow you to achieve this understanding.

Third, Cara should be questioning why governments that issue their own currency would issue debt to the private markets. Who gains from that unnecessary activity? The alarm bells for any enquiring mind should be ringing very loudly. A reading of MMT would suggest that such activities are really acts of corporate welfare provision. What is the benefit of providing a guaranteed income and secure asset to bond traders? My answer is none, but the students might want to reflect on why I think that.

Fourth, you will note that Cara’s private debt is compared with the public debt of the US government. A discerning student would ask: How is it possible to compare the liabilities of a currency-issuing government with the liabilities of a currency-using private individual? They would conclude after they sought an understanding of the fundamental differences between these two cohorts that such a comparison is invalid and designed to mislead.

The life and times of Cara then tell us that she “gets a job”. One of the lucky ones. She is not one of the mass unemployed apparently.

She is a thrifty character and decides to suspend her thirst for travel until she retires. Okay.

She is confronted with the data that the US public debt ratio is 70 per cent and some assertions that above 80 per cent is risky. A discerning student would want to know what the risks are? The journey we are taken on just asserts there are risks.

Cara then has a family and wants to buy a house but “because of high interest rates they can’t afford to buy”. He boyfriend also cannot get a “low-interest student loan”.

A discerning student would learn that the central bank sets the short-term interest rate and the structure of longer term rates are then conditioned by that rate. They would learn that at present interest rates are low and in Japan with public debt ratios well above 200 per cent, long-term borrowing rates have been around 1 per cent for decades.

They would conclude that there is no link between national debt levels or the public debt ratio and borrowing rates.

Later in life, Cara has to suspend retirement because she is worried about “being able to afford all of her extra healthcare bills” and is “worried about her kids” – thinking she won’t be able to afford to pay for her kids to go to university.

First, we all worry about our latter years and whether our health will stand up to scrutiny. Cara might have done more exercise in her younger years to insure against future ill-health. Students would learn that smoking, excessive eating and all the rest of it predicate against good health.

They would also learn that the private health industry in the US is a joke and under the control of greedy, rapacious pharmaceutical companies and health servicing companies. They would learn that the government could undermine all of that by introducing a national health care system aimed at providing accessible health care to all.

Please read my blog – The US should have universal public health care – for more discussion on this point.

Second, students might want to explore the advantages of broadening public education and withdrawing any public subsidies to private schools and education.

The point of all this is that this “challenge” is not an exercise in education or exploration. It is an exercise in homogenisation of thinking. It assumes that the public debt ratio is too high – in relation to what? No mention.

It also assumes that deficits are bad. In relation to what? No mention.

What are deficits for? No mention, they are just bad, get over it, and come up with ways we can cut them.

So what would a good answer look like?

Please read the following blogs:


What is “Up to Us” is the endeavour needed to become educated once the resources facilitating that education are made available. If those resources are not forthcoming, then it is Up to Us to lobby for public education at all levels.

It is not Up to Us to become co-opted by the ideological obsessions of billionaires and become pawns in those games.

Tomorrow, as time permits, I will complete this mini-series by focusing on the nature of the learning frameworks that have been proposed to date and outlining a pluralist approach to economics education, which would seek to arrest the narrowing of the discipline into business service courses.

Economics should be part of the broad social sciences within the liberal arts tradition.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    15 Responses to Learning standards in economics – Part 2

    1. Dave says:


      Professor, pls see link for study showing increasing gov’t debt leads to increasing wealth of citizens.

    2. Patricia Smith says:

      This is probably irrelevant to what you have written today, and you have probably written on this before, BUT if a bank creates money when lending by electronically putting money into your account why do they borrow money from foreign lenders at all?

    3. Ben Johannson says:

      @Patricia Smith,

      Nations like the U.S. don’t borrow from foreign entities to fund spending. Countries that run trades surpluses against the U.S. accumulate dollars in exchange for their goods and services. Rather than hold them in a non-interest bearing “checking” account, they often choose to put those dollars into a risk-free savings account which consists of U.S. Treasurys. The checking account is debited and the savings account is credited. Dollars debited from the checking account are not stored in any sense for the Treasury to use as it spends.

    4. Patricia Smith says:

      But I live in New Zealand. Our government borrows like there is no tomorrow – in NZ dollars though. New Zealand alway seems to run a trade deficit. My Bank has now said it is going to issue covered bonds which means of course some lenders are getting preferred treatment over other lenders. What I want to know is why do they have to do this if they can create a deposit electronically. I might just be a bit dim but I am trying to learn from this MMT blog

    5. Senexx says:

      It’s funny, I often look at the US and think if they introduce HECS

      or FEE-HELP as it is now known – half their problems are over.

      Add our (Australian) style of Medicare and three quarters of their problems are over.
      Add our PBS and 90% of their problems are over
      And there’s usually one other thing I put on that list but can’t think what it is for now.

      Cara’s problems would be mostly non-existent. And as you made clear we don’t need to discuss the debt ratio…

    6. sujie says:


      Why is our student debt different to their student debt (besides size)? Doesn’t it still reduce future purchasing power of the students?

      @Patricia Smith

      When a bank issues covered bond, it is probably doing so to boost its capital position in order to satisfy regulatory requirements. When a bank gets a deposit, it appears on the bank’s balance sheet as a liability. As to why they can’t just create a deposit electronically, I’m not sure exactly what you mean by that. Do you mean why can’t they just give themselves free money?

    7. Tony says:

      @Patricia Smith

      I have come to the conclusion that the story about banks creating credit money out of nothing is not entirely correct. When a bank (bank A) lends money, it is true that it just credits the borrower’s account and doesn’t need any real money to do that. But if that borrower then buys something, which it is pretty sure to do, and if it buys from a customer of another bank (bank B), bank A has to part with real money which goes into the reserves of bank B. The credit money, aka endogenous money, disappears. It is easy to demonstrate this with a little example. This means that the bank, in these cases, does have to have money to lend or does have to borrow money to lend.

      I don’t claim originality for this statement.

    8. Patricia Smith says:

      Thank you Sujie and Tony.

      Sujie.. If, as it is said, a Bank creates money when it makes a loan and that is done electronically why can’t it lend money to itself by doing the same thing. It could pay itself interest if it wanted to. I can understand your statement of the covered bonds satisfying regulatory requirements but to whom are they given. And where does that money come from. Is it just electronically created?

      Tony. From what I have read only 3% of all money is Government printed money and the rest is created by the Banks. I can see that some money has to be real because as you say people do use it for smaller transactions. Perhaps the Bank does use it’s deposits in such situations
      But if I borrow say $2m from Bank A and buy a house from someone who banks with Bank B then that will merely be an electronic transaction. But what if that someone wants the cash? I think he would have to wait a few days for that money. I don’t know how that is recorded in accounting terms or Bank regulations though. The other day I wanted a bank cheque for $50,000. When they told me that would be $5.00 I said okay I will have it in cash. They said they didn’t have that much money on site and they would have to get it in! It is all very confusing.

    9. Patricia Smith says:

      I have just found a good explanation of how a bank works. http://www.cnbc.com/id/100497710

    10. Senexx says:

      Our FEE-HELP program is basically an income-contingent loan. Yes effectively it acts as an added tax when a graduate finds the right employment and reduces future income. Imagine a situation where a graduate does not or cannot find the right employment they never have to pay it off. I don’t know enough about the US but we can also defer ours. So really nothing to pay up-front.

    11. Tony says:

      Patricia, in Australia where I am, the banks have zero reserve requirement as I understand it. The article you referred to applies in the US.

      When I said real money, I did not mean notes and coins. I meant money that was not credit money of the bank’s making.

      Let’s look at a little example. We have two banks, A and B. Initially each bank has $100, so that the total assets in the economy are $200, which is deposited in the reserve bank. Now suppose bank A lends $10 to its customer Joe. Joe then has a loan account of $10 and a deposit account of $10, so that the total money in the economy is $210, which includes $10 of credit money created by the loan. Now suppose Joe buys a car from Bill, who is a customer of bank B, using his $10 loan. When Joe gives Bill a cheque for $10, Bill now has a deposit of $10 with bank B, Joe has no deposit and bank A has to give bank B $10 out of its $100. Now bank A has $90, bank B has $100 of its own money plus the $10 deposit of Bill’s. The total money in the economy is now back to the original $200, so that credit money has disappeared and bank A has used $10 of its reserve to fund the loan.

      It is often said that credit money is destroyed only when the loan is repaid, but this example shows that this is not the case, at least not always.

    12. Edgaras says:


      I would like to add a couple of sentences on why you reach such a conclusion, which I is false. When you say that Joe pays for the car to someone who has an account in Bank B, what actually happens is the following:

      1) Joe pays 10$ for the car to someone who own an account at Bank B, which means that deposit gets transferred from Bank A’s balance sheet to Bank B’s balance sheet. Bank A loses 10$ of liabilities (deposits) and Bank B get 10$ of liabilities (deposits).

      2) However, it would not make sense for banks to try to get deposits if the only thing they get is liabilities. What you rightly notice is that Bank A also loses 10$ of its reserves at the central bank, i.e. at the moment a deposit get transferred from Bank A to Bank B, the simultaneous transaction that occurs is that Bank A transfers equal amount of dollars in reserves from its account at the central bank to Bank B’s account at the central bank.

      So you rightly notice that Bank A loses 10$ in its reserves, but what you miss is that Bank B gets these 10$ of reserves! So at the end of the day you have no money being destroyed and the total amount of assets in the economy is still 210$.

      I hope this helps.

    13. Patricia Smith says:

      Oh I love you lot. Now that I understand that the RB is part of the circle I can see what happens. Now explain to me why if the Banks can do all of this why do they need to go off shore for loans and give covered bonds. Why can’t the RB just print the stuff and lend it to the banks. And, if necessary, the Banks can give covered bonds to our very own RB. Keep everything sort of in house. Or am I being dim?

    14. Tony says:

      Edgaras, I guess I have to admit defeat. Although, it must be remembered that the NET financial assets in my example are $200 at all times since none of the transactions change that. It’s true that Bill has a deposit which would not have happened if the bank had not made the initial loan to Joe and thereby created the deposit for him.

      Patricia, I think your question is a good one. The four big banks in Australia all have large borrowings, if I remember correctly at about one third of their total loans.

    15. Neil Wilson says:

      “Why can’t the RB just print the stuff and lend it to the banks.”

      It could, and one of the proposals of MMT is that the inter bank is shut down and all banks just have an overdraft facility at the central bank.

      But that doesn’t happen at the moment. The current prevailing economic theories limit the utility of the ‘discount window’ in an attempt to rely on ‘market discipline’ to fund banks. As we have seen recently that process isn’t following the predictions made by the dominant theory. And that’s because that theory is wrong.

      As to your why do they need ‘covered bonds’. It is because covered bonds are likely regulatory capital, whereas deposits are not. Banks expand their lending capacity by changing ordinary deposits into bank capital.

      Don’t worry about ‘offshore’ and ‘onshore’ btw. That is an artificial distinction. ‘Fear of foreigners’ is another propaganda trick – unless you really believe they will use tanks and invade.

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