Alexander Hamilton Anticipates Me by 200 Years

Damn that guy was smart.

I’ve been taking a good deal of heat over on Hit and Run lately — talking about neo-Keynesian finance and MMT —  from libertarians who are 100% sure that what they think to be true about debt and deficits is actually true, and that therefore “I am living in an obvious fantasy world.”

In a couple of posts, which I’m not going to bother to link here (you can always search for Draco), I argued that it was completely unnecessary to ever “pay down” the US debt, and that those who stayed awake at night worried about our inability to do so were fools. I was, of course, dismissed as an utter crank. A couple of them actually went so far as to read my post about eternal deficits before pronouncing me a madman. I suppose that’s progress of a sort.

Tonight, I wandered over to Warren Mosler’s blog and found this very enlightening, and very radical, post. In it, Mosler dissects the thinking of many well meaning but ill-informed economists and public servants (like John Boehner) and answers them in ways that would only make sense to those educated in the operational realities of US deficit finance and the federal reserve system, and would seem radical or just plain crazy to everyone else. It’s very educational, and even amusing in a depressing sort of way, when coupled with the mandatory readings at

In that post, Mosler quotes a Business Week article by David Lynch, which, in part, talks about Alexander Hamilton’s intention regarding the US debt in the early days of the Republic:

Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”

Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.

So, founding father Alexander Hamilton never had any intention of actually paying down the principle on the US debt. Was he crazy, or crazy like a fox?


Ever Growing Debt! Yes, Please!

Ever-growing debt! Sounds a like tea-party sign… a warning of what faces us if we don’t soon mend our profligate ways.

I’d like to state a startling conclusion which follows from MMT: in a growing economy (an economy that continues to add more goods and services over time), the debt will need to grow to keep pace with that economic growth in order to provide enough money to purchase those goods and services. So, if you want the economy to grow more or less continuously, the debt will need to grow more or less continuously, to infinity. It should never be paid down, and attempting to do so would be at best contractionary and at worst disastrous.

How then will our proverbial grandchildren ever pay down our debt?  They won’t, hopefully. Just as our grandparents left us a federal debt, we’ll leave an even larger one to our grandchildren. But if that debt grows in a measured and proportionate way, in a growing economy, that need not concern us.

As I stated here before: you buy the debt of someone who has a future. It’s the future growth and/or earnings that you care about when you fund someone’s debt. As long as our country has a future, as long as its economy continues to grow year after year, there should be no concern on any debtor’s part or any citizen’s part about a national debt that grows without bound – as long as that growth is measured, and commensurate with the growth in goods and services.

The main policy driver should be economic growth: do whatever it takes to allow continuous growth in the production of goods and services. (Note that I haven’t said anything about making “economic equality” a driver – that’s the egalitarian goal, and one which has been shown time and again through history to be inimical to both human freedom and advances in the standard of living. An essay for another day.) The incoming Republicans, tea-partiers and otherwise, need to understand this before they take measures that may sound good on the surface, but in fact be at best counter-productive. While we need to get the rate of debt growth under control, we don’t need to reverse it.

If you want a quick explanation of why the money supply must grow to allow growth in prosperity, you could do worse than read part 1 of a six part series by the estimable Skeptical Optimist. If you want to see a nice chart showing, historically, what has happened when we’ve tried to pay down the national debt, see part 6 in that series. If you want a quick and easy explanation of fiat currency in a laboratory economy, check out Coupon Clipper’s series at ESM’s blog, here. If you want to learn how debt growth is synonymous with money growth in a fiat currency regime, you should check out the mandatory readings section at

For those who have neither time nor patience for those other readings, here is a brief sketch of the argument I am making:

1) In a fiat currency regime, the money supply is increased by increasing the national debt
2) In order to maximize prosperity in an economy, the money supply must grow commensurately with the growth in the supply of goods and services
3) A growing economy is good for everyone, because it results in more goods and services being available, to increase our standard of living
4) Therefore, if we wish to increase our standard of living without bound we will need to increase our national debt without bound

Yes, I know it sounds weird: but that’s because as individuals, we are not in the position of a national government which issues a fiat currency. Households should not increase their debt without bound.

To check the validity of the premises in this argument, you’ll have to do additional reading.

When will the mutually beneficial curves of increased national debt and increased economic activity come to an end? Well, hopefully never, but in the real world, something will eventually occur to bring an end to the nation and/or civilization. And then we’ll have to learn all of this all over again.

Please tell your incoming congressmen to do what they can to keep the Bush tax cuts in place for all income levels – even though that will result in a temporary increase in the national debt. But please don’t encourage them to make ill-considered attempts to balance the budget, or to pay down the debt. And please don’t blame them when they eventually see the sense in what I am saying and decide to perpetuate deficits and debt – I’m thinking that although few in Congress understand MMT or macroeconomics, they have developed a feel for what happens when you enact contractionary policy. At least I hope so.

Krugman on Getting Mugged by Moralizers

In the NYT today, Paul Krugman, after recounting the birth of the Tea Party movement in the Rick Santelli outburst on CNBC and stating the Keynesian macro position without defense, writes:

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

As a student of Modern Monetary Theory, and someone with a decent respect for the implied neo-Keynesian position, I think the first recommendation is correct — although I doubt Krugman and I want to “spend” in the same way (I’d favor tax cuts, or suitcases full of money dropped in peoples’ backyards, or, if forced to go for real government programs, actual infrastructure spending, including the military infrastructure).

The second recommendation is quite problematic. Apparently, Krugman will attack those who don’t think it meets the standard of justice to ask investors to take a haircut as “moralizers.” The same “moralizers” who have always stood in the way of leftist “progress,” no doubt.

But here’s the thing: we’ve basically accepted, as a people, for decades now, that government has a role in making everyone, on average, better off, even if it means making a few worse off than they would be in a free market with a night watchman state. So, if a thorough analysis could establish that it serves “the common good” to force certain investors to forgive large portions of debt (to avoid a very ugly foreclosure wave), is that just a “sacrifice those people will have to be willing to bear?” After all, there are many scenarios in which Americans have adopted similar policies (we drafted particular men and sent them to die in two world wars to serve some abstract notion of the common good, to take but one example). It’s not like this would be breaking any really new moral ground.

What do you think?

Geithner Believes in Capitalism

Jokes Tunku Varadarajan…

Geithner must be a huge believer in capitalism, because he thinks it can withstand everything he’s throwing at it

Interesting piece, especially the embedded video of Niall Ferguson speaking at the Reboot America conference.

On Banning Gay Marriage and Other Irrationalities

Why shouldn’t men be able to marry other men? Or women marry other women? Who is harmed? How can people be so bigoted? So close-minded? What do they have against gays? How does gay marriage do provable harm to heterosexual marriage? To children? To society? You can’t  demonstrate provable harm, so you have no reasonable basis on which to ban gay marriage.

These have been common rhetorical ricercare in the salons and blogs of the liberals and libertarians in recent years. They take a libertarian principle and carry it to its seemingly logical conclusion. The principle is that you have a right to liberty which can only be legitimately restricted (by the state, or otherwise) when it results in an infringement of my equal right to liberty. This is commonly stated more simply as “your right to swing your fist ends at my nose.” The conclusion is that, since gay marriages can have no such externalities (the economic term for when a freely swinging fist crashes into someone else’s nose, whether intentionally or not), there is no reason for the state to ban them, and no reason except fear or bigotry for the majority of Americans in most states to support such bans (as they evidently do, based on numerous polls over the past few years). In other words, the large majorities who wish to limit marriage to being between one man and one woman have nothing but irrational motivations for that preference.

I have at least one libertarian argument in favor of the proposition that marriage continue to be restricted to being between one man and one woman. But I have no intention of advancing one or more of those arguments in the current essay.

Instead I wish to examine the irrational world of “individual preference” and cultural norms. In order to make my thoughts clear to the reader, I first need to take a quick detour into economic “utility theory.”

People have something they pursue which economists refer to as “utility.” They like to increase their utility over time, or at least avoid any decrease in it. It’s not clear whether utility can be compared interpersonally because of its subjective nature. And it’s certainly not clear that a person’s utility function is anything like what we’d normally call “rational.” Some people like to sing praise to God on Sunday. Some people like to play soccer on the weekends. Some people like to climb mountains. Some people like to watch dog fights. Some people like to torture other human beings. Some people are happy to make lots and lots of money, and the more they make, they happier they get. Some people are happy if they make enough money for a decent living and have little desire to go beyond that.

People try to do what makes them happy (they try to maximize their utility), but since they live in a world where their actions provoke reactions, in both things and people, they must modify their actions to prevent a greater loss in utility via those reactions than that gained in the desired actions. For example, you may like to run dog fights, but your neighbors and fellow citizens may detest animal cruelty and punish you severely for doing so if you are caught. If the expected negative utility of that reaction (adjusted for the probability of being caught) exceeds in absolute terms the expected utility of achieving the desired end, rational people tend to avoid the desired action. They live in a constrained world where they are forced to accept less than that amount of happiness they could acquire in the absence of external impediments — some social and some simply physical.

But why, you may ask, should someone be offended by your wishing to stage dog fights? You may have a very well worked-out theory of property which states that any non-human entity can be property, to be disposed of as the owner sees fit. And you’ll find many to agree with you. Unfortunately for you, in 21st century America you’ll find many more people who will be offended by your actions. They’ll call for laws against dog fights, and may fine or imprison you if you persist in your behavior. They may oppose dog fights because they believe that such fights are cruel to animals, and that an animal’s right to live a life free of coerced pain trumps your right to use your property as you wish. An outside observer may see it differently, and conclude that their wish to avoid mental anguish at the suffering of animals trumps their willingness to let you use your property. I’m not sure the dog fight protesters have a coherent theory of rights, actually. I’m not sure I have a coherent theory of rights for that matter. But what I am fairly sure of is that they don’t wish to live in a society that allows cruelty to animals simply to afford pleasure to people they view as sadistic monsters. Their vision of a culture worth living in — a culture they themselves feel ownership in — does not include legal dog fighting. So they legislate bans on dog fighting.

I hope I’ve been able to establish an example wherein people have their (admittedly irrational and despicable) desires thwarted by a greater number of people acting in a democratic polity who wish to enforce their own cultural norms.

I’d now like to move on to another aspect of culture: sexual relations and their formalization in law and society.

Some men don’t ever want to be married. Some men have no greater desire than to marry one woman and settle down. Some men might like the idea of having a wife so much that they decide one is not enough and they’d like to practice polygyny.

Polygyny is illegal in the US by statute, as it is in most modern Western societies. From an economic perspective, this probably reflects the realization that polygyny would severely disadvantage most men (for every man who has four wives, there are three other men without wives). But the economic argument is considered and understood by few. Instead, monogamy is simply the accepted and enforced cultural norm. Norms like this evolved in the religious backgrounds and traditions of the people who created common law and the laws of these fifty states. People know what kind of culture they want. Strike that: it’s probably more accurate to say that they can tell you what kind of changes to their culture they don’t want, and won’t tolerate. And economic rationality often has little to do with it.

Regardless of the desire of a small minority to practice polygamy, the rest of us “like things the way they are, thank you very much.” We blithely pass and sustain laws that brutally repress those whose greatest desire in life is to marry multiple people. And most of us are perfectly happy to live with that.

A good friend of mine once described what he called the “Pat Buchanan position” in politics and culture: We like the culture to be a certain way. We may say that’s because it’s more beautiful, or satisfying, than some other cultural configuration. We like it the way it is. It’s ours. It’s evolved in an organic way over the centuries or millennia. It’s probably not perfect. But it’s worth preserving, maybe even worth dying for. I’d surmise that this in fact has been the position of 99.999999% of humans since civilization began, and probably even before. This Pat Buchanan model of culture and politics describes what amounts to an irrational bias. It explains things like patriotism and nationalism. It makes no appeal to economics.

Nor does modern economics or philosophy really present a challenge to this. We more and more accept that people are at their core irrational, in terms of what they pursue with their lives. Where rationality comes in is to provide a means to pursue those irrational goals. At least that’s my current view.

So, it’s quite simply the case that you can’t say whether someone is wrong or right, virtuous or villainous, in preferring a culture of monogamy to one of polygamy. They just do. In practice, then, they care about things that other people do, even if it doesn’t affect them directly, so long as it somehow affects the culture. And much as in the case of banning dog fights, they are more than happy to ban polygamy.

People like what marriage means in their culture, who’s allowed to participate in it, and under what conditions, and most have little enthusiasm about changing it.

Note that many, if not most, of these same cultural conservatives (which most people in history have been, overwhelmingly — for good or ill) would be in favor of the establishment of legal civil unions between same sex partners (or other people where warranted, such as two adult brothers uniting to care for a severely disabled younger orphaned sibling) so that common rights which married couples have can be shared by certain classes of unmarried people. They just don’t want what they think of as marriage to be redefined in the culture.

Where we’ve made great progress in the West is in finding ways for people to be relatively free even where they come up against cultural barriers. Compare the majority American attitude toward gays as reflected in their government and their laws and their entertainments to that in modern Iran. In America, we more often than not say that gays can create civil unions, and certainly do whatever they like in the privacy of their homes. In the theocracy of Iran, the government refuses to accept that gays exist (you may remember Ahmadinejad telling an audience at Columbia University that there are no gays in Iran).

“We” don’t like polygamy. “We” don’t like gay marriage. “We” don’t like public nudity. None of these three practices would mean the end of the human race if practiced widely. But they would change the prevailing culture in ways most people would prefer it not be changed. And this is because these are by their nature public things, rather than private things. This is the ingrained cultural conservatism we saw in the Hispanic and Black populations in California who voted overwhelmingly for Prop 8, even while voting in similarly overwhelming numbers for welfare state progressivism. Is this irrational? Yes. But so is all preference, including cultural preference.

Nick Gillespie Should Be For It Too

Nick Gillespie posts a sharp rejoinder to the latest Jonathan Chait attack on him here.

(Of course, Chait, in the attack article, shows his ignorance of macroeconomics and modern monetary theory after ridiculing those who don’t understand economics. But I’ll just mention that in passing here.)

In the comments section, someone named Don said:

Also, totally dishonest to characterize Gillespie as an apologist for “deficit financed” tax cuts. I don’t think Gillespie’s proposal for “financing” tax cuts is by increasing the deficit? Did anybody read it that way? This guy is a total crank.

I will restate my reply to Don here:

I’m an apologist for deficit financed tax cuts to boost aggregate demand during a recession even if Nick is not. And I believe that if Nick were fully informed and thinking clearly about it, he would be too.

One reason I post here ( is to get more libertarians to see the light on this issue.

When 10% of people are unemployed, it means the country isn’t producing all it could. That is a disaster that holds back standard of living increases and compounds forever in the future (anti-compounds, if you will). And thanks to the fiat money system, it’s easy to get people to be more productive in a recession and boost aggregate demand. And the best way to do that is to deficit spend by taking less money in taxes until the economy no longer has excess capacity.

I’ll be attacked (as always) for stating this truth, but I figure it’s worth it if just a few intelligent people check it out or think it through on their own.

Social Security is not a Ponzi Scheme

I hang out quite a bit on the Hit & Run blog. Recently, in the comments on a post about the controversy created by Alan Simpson’s comparing Social Security to a “milk cow with 310 million tits” I posted a very brief explanation of Social Security. This was in response to those who thought it was either a Ponzi scheme or just a really bad “investment” because it had a lousy “rate of return.” I thought I’d spruce it up just a little bit and repost the explanation here.

Social Security is neither a Ponzi scheme (strictly) nor a retirement program on which a “rate of return” can be calculated.

Social Security is an inter-generational financial asset transfer program. (I’m being a bit pedantic – an intergenerational wealth transfer program would more succinct but not quite as accurate).

The program arose in deception, and is mainly propagated in deception, that deception being that you are “paying in” so that some day you can “get your share.” Nothing of the kind is happening here.

What’s happening is that money is being transferred from young wage earners to older people. If the program functions as intended this will allow those older people to claim an increased share of the real goods and services being produced in the economy.

Congress sets both the level of payments to the older people, and the level of taxation associated with the program (notice I didn’t say ‘funds the program.’) Either of these can be changed at any time, and they bear no necessary connection to each other.

What’s really happening is that the govt is creating money (it prints paper checks or makes electronic credits in the recipient’s bank account) and doling it out. This is legal tender, so merchants have to honor it. In order to prevent the massive inflation that would otherwise occur, the government also takes in (or more accurately destroys) money in the form of FICA taxes on wages (along with many other taxes, the selling of Treasury securities, etc.), thus removing it from the private sector. The net effect amounts to a transfer of financial assets from one segment of the population to another.

The only real problems with the system are 1) ensuring that enough excess real goods and services are created by the relatively young “producers” to be consumed by the older people and 2) the morality of involuntarily transferring wealth from one person or group to another. I am very interested in problem (2) and intend to explore it in this blog at a later date.

Comparing the system to an individual retirement plan is fundamentally mistaken. It makes no sense at all to calculate a rate of return on your lifetime of “investment” since the money you “pay into the system” over your lifetime of work bears no relation to the payouts you may or may not receive. There is no “lock box” with your name on it containing your money and the interest you’ve earned over the years! By trusting to the Congress to set the payments and other terms (such as the age at which benefits begin) Americans are simply hoping that our elected representatives will come up with a benefit level that neither beggars older people nor sends the nation into an inflationary spiral (people usually say “bankrupting the nation” which is not strictly possible and is therefore incorrect). I leave it up to you to decide whether this is a sane way to solve the problem of providing retirement income.

If these ideas interest you, I’d recommend going to Warren Mosler’s blog at and checking out the Mandatory Readings section there.

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