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Why Are Moderates Trying to Blow Up Biden’s Centrist Economic Plan? [ungated] – “In attacking the Build Back Better Act, they are working against their own purported aims.”

“This is why America as an experiment — the building of a society that is both diverse and free — is so important. Without that experiment, the story of America would be just another boring example of conquest and ethnonationalism. I believe that this, ultimately, is the source of America’s fundamental divide. The question of whether this nation is an ethnostate whose right to existence is based on nothing but the legacy of brute force, or whether it is a creedal nation that stands for something greater.”[1] –@Noahpinion

Over the past few weeks, however, centrists in Mr. Biden’s own party have been chiseling away at his signature legislative proposal, the $3.5 trillion Build Back Better Act, to the point where the bill’s future is in jeopardy. It is not unheard-of for politicians to disagree with members of their own party, but the recent Democratic attacks on the plan have been remarkable for their incoherence.

The president’s critics have explained their opposition by invoking the supposed sanctity of arcane House procedure, telling constituents that their votes for or against certain parts of the plan are meaningless and issuing economic critiques that make no sense. Writing in The Wall Street Journal, Senator Joe Manchin of West Virginia upbraided Democratic leadership for running up the “crippling” national debt — even though Mr. Biden has said that the plan will include enough tax increases to make it budget neutral.

This is not to say Mr. Biden’s agenda lacks ambition. It seeks to refit the American economy as an engine of green growth, reassert American geopolitical leadership and support families who want to work. These are lofty aims, but they constitute a thoroughly centrist agenda. None of the left’s priorities from the 2020 presidential primary — Medicare for All, decriminalized border crossings, a tax on wealth — appear in Mr. Biden’s plan. Nor has the president embraced any of the structural reforms that progressive Democrats have been calling for, such as eliminating the Electoral College, reforming the filibuster or expanding the number of seats on the Supreme Court. Mr. Biden is offering recovery and reform in lieu of Senator Bernie Sanders of Vermont’s political revolution.

Mr. Manchin’s critique demands particular attention. In addition to his phantom debt fears, Mr. Manchin has accused his Democratic colleagues of using the bill to fan the flames of an “overheating” economy that he insists is already imposing “a costly ‘inflation tax'” on working families.

It’s true that prices have increased unexpectedly this year, and true again that policymakers should be taking reasonable precautions against further increases. But in attacking the Build Back Better plan, Mr. Manchin is working against his purported aims. The law is designed not only to support employment but also to reduce inflationary pressure.

Anyone worried about inflation covertly “taxing” household income — an idea developed by Keynes, incidentally — should be looking for ways to reduce the cost of major items in family budgets. Americans pay far more for prescription drugs than people in many other developed nations, and a key plank of Mr. Biden’s program would allow Medicare to negotiate lower costs with pharmaceutical companies.

And yet last week, Democratic Representatives Kurt Schrader, Scott Peters and Kathleen Rice teamed up with Republicans to scuttle that plan. (House leadership can reintroduce the prescription drug overhaul later in the legislative process, but every Democratic senator will eventually have to approve the deal for it to be enacted.) In a letter explaining her vote, Ms. Rice claimed to have concerns about the “fiscal responsibility” of Build Back Better — but allowing Medicare to negotiate with drug companies reduces the government’s costs.

FDR Needed Two Global Crises to Reshape the Economy. Will Biden? – “Centrist Democrats threatened FDR’s transformative agenda until WWII came along. Social unrest and China weigh in the balance if Biden can’t crush a similar revolt.”

Like FDR, Biden came into office in the middle of a crisis and immediately launched into a flurry of activity. And like FDR, his approach focused both on combatting the threat of the moment and on transforming the U.S. economy in ways that were long overdue. The U.S. needs bold action to transition to clean energy, and it needs to curb inequality and economic insecurity in order to tamp down social unrest. It also needs industrial policy to meet the competitive threat from China — something that so far has only been pursued to a very modest degree.[*]

Biden’s agenda would accomplish all of these things. His Covid relief bill largely continued the approach that had been taken in 2020 under Donald Trump, while adding a large child tax credit that, if made permanent, would change the U.S. welfare state into something simpler and more efficient. Biden then crafted a bipartisan infrastructure bill with many smart and forward-looking provisions, such as cleaning up lead pipes and building electric-vehicle charging stations.

But if Biden has made progress on his campaign pledge to persuade Republicans, he’s having trouble managing the same trick with some Democrats. The powerful West Virginia Senator Joe Manchin has declared that he will only support $1.5 trillion in a reconciliation bill — far less than the $3.5 trillion now being proposed. Arizona Senator Kyrsten Sinema has also stated her opposition. Various provisions of the bill are already being killed by concerted pockets of Democratic opposition, including a proposal to repeal the step-up basis for estate tax. Sinema is attempting to axe Biden’s plan to allow Medicare to negotiate down drug prices.

If centrists like Manchin and Sinema manage to block Biden’s agenda this year, it’s likely that any hope of a transformative Biden presidency will be dashed. The GOP is favored to take back at least one of Congress’ two chambers in the 2022 midterms, after which they’re unlikely to give Biden any big legislative victories. The possibility of Democrats regaining unified control would come after the urgency imparted by the Covid pandemic has passed. In other words, the U.S. could now be looking at another decade or more of gridlock and business-as-usual…

But there’s one major difference between this Democratic revolt and the one against FDR. The latter came in the President’s second term, when the New Deal had already unleashed major transformations on the American economy, including Social Security, unemployment insurance, financial regulation, labor law and rural electrification. If Biden’s agenda is halted, it will be in his first term. A Covid relief bill and a bipartisan infrastructure package, while very welcome, will not yet add up to a major transformation of the economy.

Which would be very bad news, because the status quo isn’t working. Excessive costs for health care and construction are still weighing the economy down, exacerbating the housing shortage and crippling the health insurance system. Climate change is starting to unleash its effects, and decarbonization is not proceeding quickly enough. Inequality and social unrest remain at high levels. And the U.S. doesn’t yet appear to be recovering the competitive ground it lost to China over the past 20 years. Doing nothing, and muddling along with a slightly modified version of the status quo, is simply not an option; the U.S. needs a new FDR, not another four or 10 or 20 years of the same old, same old.

Our Best Tool For Predicting Midterm Elections Doesn’t Show A Republican Wave — But History Is On The GOP’s Side – “So, if Republicans outperform their early polling to a similar degree as they did in 2010 and 2014, they could win the House popular vote by 5 to 7 percentage points, which would very likely hand them control of the House (and probably the Senate too, since almost everyone votes a straight party-line ticket these days). Of course, though, that’s a big if; there has been a lot of variability in these historical trends, so a wide range of outcomes is still possible. But even if Republicans only improve their standing a little bit — something that is likely to happen, if history is any guide — it would probably still be enough to flip the House, considering that their control of the redistricting process in a plurality of states is likely to reinforce the GOP’s structural advantage in House races. Past trends don’t always hold true, but the smart money, at this point, remains on the president’s party losing control of Congress next year.”

Covering Congress right now: This $5 trillion debate ‘deals with every issue under the sun’ – “What’s at stake? ‘Just about everything’… Lawmakers are grappling with a government funding deadline, multiple infrastructure bill votes, a debt ceiling fight that shouldn’t be a fight at all, and more. If you’re anything like me, you’re wondering, ‘What the heck is going on?'”

Democrats Are at War Over Joe Biden’s Agenda. Here’s One Big Idea That Could Save It. – ” When it comes to climate, Democrats should concentrate less on spending and more on lending and investing. Lawmakers ought to think of themselves less like parents trying to cram everything they want into a family budget and more like financiers trying to leverage up their cash.” (UK’s first green gilt draws record $137 billion demand)

another way?
Modern Monetary Theory Has a New Friend in Congress [ungated] – “John Yarmuth is a big fiscal deal. He says we should be open to deficit spending.”

If you happened to be watching C-SPAN’s “Washington Journal” on June 17, you saw a remarkable display of Modern Monetary Theory’s political influence. Representative John Yarmuth, Democrat of Kentucky, who is the chair of the House Budget Committee, gave a full-throated defense of the deficit-friendly theory to Washington’s sometimes skeptical viewership.

“Historically, what we have done is said, ‘What can we afford to do?’ The right question is, ‘What do the American people need us to do?'” he said. He added, “If we relied on taxation, purely on taxation, to fund the government, then a lot of people would suffer very seriously, because we could not provide nearly the services that the American people want us to provide.”

I am surprised that Yarmuth’s appearance hasn’t gotten more attention. He is not some anonymous backbencher. He runs the House committee that, in collaboration with its counterpart in the Senate, prepares an annual framework for the federal government’s revenue and spending levels. He is a big fiscal deal and he is on board with Stephanie Kelton, a Stony Brook University economics and public policy professor who has become a leading voice for Modern Monetary Theory. She told me that Yarmuth’s C-SPAN appearance was “pretty remarkable.”

…

Yarmuth said his conversion began in 2010 when Representative Paul Ryan, Republican of Wisconsin, was the ranking member of the Budget Committee. (Ryan later became chairman and eventually House speaker and a candidate for vice president.) “He would come up with all these same things” that deficit hawks are talking about now, Yarmuth says, such as that federal budget deficits would consume national savings and crowd out investment by the private sector. “And yadda yadda yadda. I realized as time went by that none of the things he predicted were happening.”

Congress has tried to tie its hands on deficits by requiring that new legislation not increase the federal budget. The rule is honored more in the breach than the observance, and Yarmuth is not a big fan of it. “Paygo,” as it’s called, “is a scam anyway,” he told me. He called it “kind of fraudulent.”

…

Representative Alexandria Ocasio-Cortez, Democrat of New York, has spoken positively about M.M.T., as have several of her fellow House progressives. Senator Brian Schatz, Democrat of Hawaii, has also expressed sympathy with Modern Monetary Theory and its cousin, the Green New Deal. The Times has reported that Kelton has been a regular participant in conference calls on pandemic relief organized by Senate majority leader Charles Schumer, Democrat of New York.

more re: MMT, SRW on MMT stabilization policy — some comments & critiques[2] and a proper accounting: Translating “net financial assets”[3] 😛

oh and: “To be short of money when there’s work to get done is like not having enough inches to build a house. We have the materials, the tools, the space, the time, the skills and the intent to build… but we have no inches today? Why be short of inches? Why be short of money?”

the memory bank:

The idea of money as a source of social memory was also crucial for John Locke who figures prominently in our story as the philosopher who inaugurated the modern age of democratic revolutions. Locke was obsessed with money’s role both in establishing a progressive social order and in subverting it as its criminal antithesis. Indeed he believed that money launched humanity from the state of nature onto the road to civil government. As long as men’s possessions were limited to perishable products, the scope for property was restricted. Money, by offering a durable store of value convertible against all useful things, unleashed the potential for property accumulation and for the intergenerational transmission of inequality. For Locke then, money was indispensable to that development of cultural memory on which civilisation depends.

also btw!
Who Needs the Government Securities Market?

The sheer quantity of bond purchases necessary to stabilize the Treasury market in early 2020 (along with the ongoing QE purchases thereafter) led to a common complaint in the financial sector that the “the church-and-state separation” between fiscal and monetary policy had broken down. The hallowed institution of central bank independence was crumbling as the Fed experimented with “debt monetization“—”printing money” to finance government deficits, rather than allowing the forces of supply and demand in the bond market to keep deficits in check.

What this (possibly disingenuous) line of criticism glosses over, however, is the fact that the debt was already monetized well before the crisis, whether it was on the Fed’s balance sheet or not. Indeed, one reason it was so crucial for the Fed to perform the equivalence of Treasuries and cash in March 2020 is that Treasury securities of all maturities have functioned for decades as a kind of money in the shadow banking system. Much as commercial banks operate by issuing short-term deposit liabilities against long-term assets, shadow banks today finance Treasury holdings by posting them as collateral in short-term repurchase agreements. Because of this, even long-term Treasury bonds have effectively become a money market instrument, a form of shadow money that circulates among financial institutions. So when the Fed rescued the government securities market, it was not simply bailing out the fiscal state. Rather, it was stabilizing the architecture of the shadow banking sector—a sector which cannot function without an implicit (now explicit) guarantee that Treasury bonds will remain convertible to short-term cash in repo markets…

Who benefits from this arrangement? To be sure, the global reputation of the U.S. dollar is probably enhanced by maintaining the appearance (however misleading) that the private sector, and not the Fed, is the ultimate wellspring of demand for Treasury debt. And most mainstream economists would likely point out that depth and liquidity of the government securities is a boon for the U.S. taxpayer, as the high liquidity premium on Treasuries makes for lower financing costs. Still, once you read a bit of Modern Monetary Theory, these arguments start to ring hollow. Yes, there is a liquidity premium on Treasury bonds. But there is much higher liquidity premium on actual cash. If fiscal deficits were monetized directly, say with a trillion-dollar coin, the idea of liquidity premia marginally reducing yields becomes moot.

Much more directly than it benefits “the taxpayer,” guaranteed liquidity in government security markets benefits finance capital, and—to risk redundancy—the very, very wealthy.[4] In the 2010s, the top 1% of U.S. households owned 55% of the domestic household share of public debt. The domestic corporate share of public debt, for its part, has long been dominated by the financial sector, which has held roughly 97% since the 1980s. Older generations might still have an image of lower- and middle-income Americans stashing savings bonds in filing cabinets or safe-deposit boxes. But today, the humble and relatively egalitarian savings bond accounts for an ever-diminishing fraction of the public debt. The lion’s share is in the form of marketable securities, traded among Wall Street firms and high net worth individuals. (This is all documented in Sandy Brian Hager’s excellent book on the subject)…

Perhaps there is another way. For the past 70 years, since the Treasury-Federal Reserve Accord of 1951, the institution of central bank independence in the United States has been defined by the Federal Reserve’s informal mandate to “minimize the monetization of the public debt.” Today, the new standing repo facilities make clear that the Fed is more committed than ever to keeping the debt monetized—not necessarily to provide cheap financing to the Treasury, but rather to maintain private sector financial stability. So, what if, instead of keeping monetization behind the scenes for the purpose of backstopping shadow banks and financial elites, the Fed publicly embraced debt monetization and channeled it to a broader public purpose?

One idea is mandating that the Fed provide accessible, interest-bearing checking accounts (“FedAccounts“) for the general public.[5] This would involve a huge expansion of Federal Reserve liabilities as it opened new checking accounts for millions of Americans, and correspondingly huge purchases of Treasury securities. Aside from eliminating banking deserts, streamlining the payments system, and putting predatory check cashing services out of business, one benefit of the FedAccounts proposal is that it would displace the engine of private debt monetization that propels much of the shadow banking sector. Consider government money market funds (MMFs), for example. This is a $4 trillion sector whose sole purpose is to convert U.S. Treasuries (and Treasury repo) into cash equivalents. Why should private firms be allowed to profit from this activity when the Fed is already guaranteeing the moneyness of Treasuries? What service do they provide? FedAccounts would displace these funds by offering to pay all depositors the same rate of interest that the Fed currently pays to commercial banks—known as the interest-on-reserves, or IOR, rate. At 0.15%, the current IOR rate is significantly higher than the 0.01% average return on government MMFs over the past year. What’s more, where MMFs issue cash equivalents (technically equity shares whose value is stabilized at $1), FedAccounts would offer fully guaranteed government money. Essentially, they would cut out the middleman, delivering higher yields directly to consumers.

More ambitiously, the Federal Reserve could leverage its debt monetization powers to fuel a green transition. The legal scholar Saule Omarova has proposed the creation of a National Investment Authority—a kind of public asset manager whose sole purpose would be directing investment capital toward green development. Omarova suggests that the Fed could support the liquidity of debt issued by the NIA in the same way that it currently supports the liquidity of Treasury and Agency securities. Building on Omarova’s proposal, we could imagine the Fed promoting widespread participation in such a National Investment Authority by marketing investment accounts to consumers that offered higher yields than FedAccounts but had more time restrictions or penalties for withdrawals. To incentivize participation, these public investment accounts could be made risk-free—guaranteed against nominal loss—much as the possibility of redemption guarantees holders of savings bonds against nominal capital loss today.

These are just a few of the more developed and (with a bit of political imagination) eminently attainable reform programs. But the main thing I want to elicit here is a sense of possibility. There is no law mandating that the Treasury and Federal Reserve coordinate to provide interest-bearing, high-denomination money for the shadow banking sector. Nor, as Nathan Tankus points out, is there any necessary financing purpose to the Treasury issuing a range of maturities paying different interest rates. Issuing and stabilizing Treasury bonds is subsidizing private finance. The clearer we can make that, the better we can demand that the Fed subsidize the things that really matter.

The Economic Mistake the Left Is Finally Confronting [ungted] – “The left needs to think as much about supply as it does about demand.”

The Exponential Age will transform economics forever – “It’s hard for us to fathom exponential change – but our inability to do so could tear apart businesses, economies and the fabric of society.”

The Stacey Abrams tour – “Stacey Abrams this week launched an ambitious national tour that will stretch across months and many swing states ahead of the 2022 midterms — and potentially elevate her standing in the Democratic Party in the process. Abrams kicked off the tour Tuesday in San Antonio, where she told one local journalist ‘unequivocally, yes’ she’d like to run for president one day.”

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[*] China’s high-tech push seeks to reassert global factory dominance – “Beijing’s pivot puts the focus on advanced manufacturing, rather than the services sector, to steer the world’s second-largest economy past the so-called ‘middle income trap’, where countries lose productivity and stagnate in lower-value economic output… Manufacturing’s share of China’s GDP fell to 26.2% in 2020 from 32.5% in 2006, while the services sector has lifted its contribution to 54.5% from 41.8%, according to the World Bank. Officials worry too rapid a shift towards services, which employs more people but is less productive than manufacturing, could undermine long-term growth, as it did in some Latin American economies. Beijing does not want manufacturing to dip below 25% of GDP, roughly in line with South Korea’s economic profile, government advisers said… From 2021 to 2025, China aims to boost R&D spending by over 7% annually, focusing on ‘frontier’ technologies such as artificial intelligence, quantum computing and semi-conductors. The plan, which broadly supersedes ‘Made In China 2025’ initiative from 2015, targets nine emerging industries: new-generation information technology, biotech, new energy, new materials, high-end equipment, new-energy vehicles, environmental protection, aerospace and marine equipment. The central bank has channelled more credit into manufacturing, especially high-tech firms, at the expense of the property sector, which faces fresh curbs against speculative investment.”

“Real estate — including construction, finance, and local government — is the system by which China has redistributed the vast wealth created by its manufacturing success.”[6,7] –@Noahpinion