KJP

In this context, "related party" is a statutorily defined term that ordinarily would not include a sibling: "The second change would be an inclusion of a related party test when determining whether the taxpayer has acquired substantially identical specified asset. For this purpose, a related party includes the taxpayer’s spouse, dependents, controlled entities and estates and trusts, retirement and savings plans (individual retirement plan, Archer MSA, or health savings plan), Section 529 and Coverdell savings accounts, and other annuity and deferred compensation plans. The related party rule would be a substantial change and could create many traps for the unwary. The expansive listing of related parties would require taxpayers to carefully examine transactions before claiming tax losses on investment assets. It’s often the case that investments of these various related parties are managed by different firms that may not have any transparency into the other holdings, let alone able to coordinate the timing of acquisitions or dispositions. This could create significant headaches for taxpayers." Source: https://www.plantemoran.com/explore-our-thinking/insight/2021/09/build-back-better-act-top-surprises-hidden-impacts-and-implications

As was suggested by Ericopoly, part of the reason may a collapse in transactions arising from supply also being withdrawn as a result of lower prices. Although it addresses a different time period, see on this point pages 39-41 here: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.2.31 In particular, this paragraph: "I have been fond of summarizing these data by saying that for homes, it’s a volume cycle, not a price cycle. This very slow price-discovery occurs because people celebrate investment gains, but deny losses. Owner-occupants of homes can likewise hold onto long-ago valuations and insist on prices that the market cannot support. Because of that denial, there are many fewer transactions, and the transactions that do occur tend to be at the seller’s prices, not equilibrium market prices."

The more conservative way to look at this is via the pipeline owners. Even if the Biden Administration, et al., ease up on new drilling, are they going to permit new interstate pipelines? If not, the owners of existing pipelines seem to be in very good shape, particularly natural gas pipelines.

Some papers that may interest you: Bonizzi, Kaltenbrunner, and Michell, Monetary Sovereignty Is A Spectrum: Modern Monetary Theory and Developing Countries (2020) Tcherneva, Money, Power And Monetary Regimes (2016)

Altice USA June 2023 $15 calls in non-taxable account. After wash-sale period, I will sell Altice USA common in a taxable account for a loss. In the meantime, I've got double the exposure.

I think we discussed this last year. Are people in cities because that's where the jobs are, or are jobs in cities because that's where the people are? To the extent it's mainly the latter, work from home may not have a substantial effect on demand for urban housing. See: https://fred.stlouisfed.org/series/SFXRSA

See slide 22: https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/BullardBipartisanPolicyCenter5June2012Final.pdf LTVs appear to be going down from 1970 to about 1982, but I believe this is for all mortgaged homeowners, which may not be the same as LTV at purchase. Also, what is the exact period you're looking at and what was nominal wage growth during that period?

Between 1890 and 1975, the US population increased from 70 million to 215 million or so. (https://usafacts.org/data/topics/people-society/population-and-demographics/population-data/population/) That big population increase didn't lead to any increase in real housing prices. So, if the driver is population density, that appears only to be a real constraint starting around 1975 or starting at around 215 million people, depending on how you want to look at it. Why is that? From a microeconomic perspective, you have to be right that prices starting rising faster than inflation in certain areas because demand for those houses from people with the ability to pay sharply outstripped supply. But from a macroeconomic perspective, it's hard to understand why 1975/215 million people was some kind of population density tipping point. I can imagine some theories why that might be some tipping point. First, to take your example, your parents were willing to move to a place that was relatively undeveloped, presumably because there was opportunity for them there and it was affordable to live there. I suspect that was historically true throughout 1890-1970. Yes, there were a lot of people around Boston, New York, etc., but there was also a cheaper "frontier" (particularly out West -- Arizona didn't even become a state until 1912) that kept housing prices everywhere in check by reducing demand in expensive places (people left). According to this theory, this "frontier" was used up by 1975, and thus could no longer keep housing prices in check. But an obvious rejoinder to this is that the US has plenty of undeveloped land. Why hasn't that land performed the safety valve function that California provided in 1950? Second, 1890-1975 included a transportation revolution -- horse to car to better car/bus to interstate highways to regional mass transit -- that actually created additional close substitutes to desirable urban land. By 1975, that land was largely filled up, and we haven't had another transportation revolution that would make land further away from cities equivalent substitutes. Third, the aggregate data are misleading me. A real housing price index for Manhattan, San Francisco, etc. would show real housing prices rising faster than inflation throughout the whole period, with additional places starting to rise faster than inflation as they fill up. But that's obscured by other places that are stagnating or losing people and where real housing prices are actually falling. Thus, even thought the aggregate numbers show no real housing price increases from 1890-1975, that's less instructive than looking at places where population has been consistently rising. I haven't found long enough real housing price indices for US cities to test this, but it is inconsistent with the Amsterdam data. Fourth, the US went off the gold standard in the early 1970's. Inflation measures after that point systematically understate inflation, so real housing prices from 1975-2021 haven't increased as much as they appear to have when using CPI to calculate real housing prices. Fifth, there was always upward pressure on real housing prices, but it was counterbalanced by increasing construction labor productivity. Construction labor productivity has gone backwards from 1975, so it's now also pushing housing prices up, rather than counterbalancing other factors and holding them down. [This overlaps with the regulation point you mentioned earlier.] I can't tell which (if any) of these theories are the main drivers.

Yes, your points (and the other factors you noted earlier) make logical sense to me. As I mentioned, your points appear to be consistent with the data from 1975 - today. But the same points appear to be contradicted by the data from 1890-1975. Women's labor force participation increased throughout that period as did GDP per capita (the former presumably related to the latter), yet real housing prices did not increase. Why not? Earlier in the thread I asked GMthebeau to explain 1975-2021, which appear to strongly contradict his/her claim that housing prices only rise with inflation. As far as I could tell, he/she has not taken a crack at that question. Your theory (and I think the near unanimous view on this thread) is that GMthebeau is wrong and housing prices ought to rise faster than inflation, due to, among other things, rising per capita wealth, rising population, and women increasingly entering the workforce. That theory could explain the time period that GMthebeau cannot (or at least has not yet). But that theory appears to be inconsistent with 1890-1975, when those three things were also true (rising population, rising income per capita, and increasing female labor participation), that's is why I'm asking you and the others who believe that housing prices increase faster than inflation specifically about what happened from 1890-1975.

I agree that all of the factors you mention could be relevant and overwhelm the two factors I mentioned. Overall, what surprises me isn't a rising trend in real housing prices over the last 50 or so years; rather, I'm surprised there apparently wasn't a similar trend over the prior 100 years. Without looking at any historical data, I would think that as land where people actually want to live becomes scarce and as where you live becomes relevant to social status, schooling, and so on, people would at least spend a constant percentage of their real income on housing. In that scenario, real housing costs would correlate with real GDP per capita (this ought to capture the software engineer vs lettuce picker example you mention). And so long as GDP per capita has an upward slope, then I would thing that real housing prices ought to as well. But that model doesn't appear to always be correct, because real GDP per capita has been going up for longer than real housing prices have been going up. See: https://fred.stlouisfed.org/series/A939RX0Q048SBEA/ Perhaps rather than asking about 1975 to today, I ought to ask about 1890-1975. Based on the data here, https://valuabl.substack.com/p/housing-market-part-8-a-very-long real housing prices in the US didn't change from 1890 - 1975. But real GDP per capital went up multiples over that period. Populations were also increasing throughout that period. So, the US had rising population and rising real income per capita, but flat real housing prices. Given the effects of increasing wealth and population that you posit, how did that happen? I don't know the answers to any of these questions. It's just interesting that the majority view on this thread (housing prices rise faster than inflation) seems to have trouble with 1890-1975, while the minority view (view of one? -- housing prices rise only with inflation) seems to have trouble with 1975-2021.

I have not read it, but I understand part of the thesis of this book is that second incomes and competition over housing in good schools pushed real house prices above inflation over the last several decades: https://www.amazon.com/Two-Income-Trap-Middle-Class-Parents-Still/dp/0465097707 If the causal claim is correct, how are second incomes still causing rapid real housing price inflation when female labor force participation in the US peaked in 1990 and is down about 4 percentage points since then (60% - 56%)? See: https://fred.stlouisfed.org/series/LNS11300002 Has the essentially continuous fall in interest rates since 1990 done the work? https://fred.stlouisfed.org/series/IRLTLT01USM156N What I'm trying to get at here is whether the last 50 years or so have seen a series of presumably one-time events (e.g., female labor force participation doubling [can't double again] and nominal rates falling 600 bps from 1990 to today [tough to repeat with 10-year rate at 1.5%]) coming one after another, such that the change in real housing prices going forward will, on average, be zero, because these were just one-time changes that affected the level, but not the long-term first derivative of, prices. Or has something fundamentally changed such at the trend of the change in average real housing prices going forward will be greater than zero? I also acknowledge that I'm using national aggregate data that may hide more important long-term trends, e.g., housing in NYC and similar places always rising faster than inflation but other areas rising slower such that averaging them isn't very illuminating. But I couldn't find city-specific charts that were long enough (century+) to look at that issue, other than the Amsterdam chart, which isn't consistent with this theory.

Here's another source documenting a clear rising trend in US real housing prices since 1975: https://calculatedrisk.substack.com/p/real-house-prices-price-to-rent-ratio-897 The very long-term (centuries in one instance) pre-1975 charts I posted earlier show a different picture -- zero long-term real housing price increases with oscillations above and below zero over shorter period of time, and the amplitude of the oscillations were must lower than the movement away from zero we have now (and had in 2006). So, for people who believe the longer-term chart is the signal and the post-1975 chart a temporary aberration that will correct, what changed in 1975? And why will the dynamics reverse and cause the trend line to go the other way to get us back to zero real long-term housing price increases?

Based on the charts in my prior post, the deviation above zero in changes in real housing prices appears to have begun in the US in 1975 and in the UK sometime around 1960. So we appear to have 50+ year trends away from zero real housing price growth. So, are those data series inaccurate in some way? If not, why haven't the forces you note already asserted themselves? Regarding replacement costs, note that the US housing prices appear to have decoupled from inflation around the same time (roughly 1975) as the peak in US construction labor productivity, and have continued to head in opposite directions (real housing prices up; labor productivity down or perhaps flat): https://noahpinion.substack.com/p/what-happened-to-construction-productivity

I took a quick look at this claim, and it certainly seems to have been true for a very long time (centuries). See, for example, the data on US, UK, and Amsterdam real housing prices reproduced here: https://valuabl.substack.com/p/housing-market-part-8-a-very-long Two questions jump out from that long-term data: 1) What caused real housing prices to remain flat for such a long time? For example, if real gdp per capita rises over time, that long-term data implies people spending a smaller percentage of their income on housing over time. What did the percentage of income going to housing fall, rather than remain constant or rise? 2) What has changed (apparently throughout the US, UK, and Western Europe) over the last several decades to send real housing prices off the historical charts? Is the real housing price time series going to mean revert back to zero growth, which would seem to imply either a significant nominal decline or a long period of price growth significantly trailing inflation? If so, why is that going to happen? I don't know the answer to question (1), so I don't know whether the underlying economic relationships that generated it still hold.

The author has also participated in some podcasts about the book: https://acquirersmultiple.com/2021/09/ep-130-the-acquirers-podcast-jeffrey-c-hooke-lbo-myths-private-equity-myths/ https://newbooksnetwork.com/the-myth-of-private-equity

Yes, she acknowledges we're constrained by real resources (I said that in my initial post, but upon rereading it, it's not clear that I'm summarizing what she's saying, rather than my own view). But in my view the back half of the book that talks about all the various programs that Prof. Kelton believes ought to be financed doesn't actually grapple with that constraint. Specifically, she does not explain why she believes the US has sufficient untapped real resources of the necessary kind that it can accomplish all that she claims it can without significant inflation. Quite left-leaning economists have tried to point this out, and I have not seen a direct response from Prof. Kelton or other MMTers. For example, see, e.g., Palley, Macroeconomics v. modern monetary theory: Some unpleasant Keynesian arithmetic and monetary dynamics, in Modern Monetary Theory and its Critics (2020) (Fullbrook & Morgan, eds.) From another review, here's a more eloquent way of saying what I'm getting at: "It is indeed correct to say that when the government is bidding for resources, the risk of inflation is low if those resources are idle. It is also correct that unemployment is an indication of idle resources. But just because some resources are idle does not mean that the government can spend wherever it would like without affecting prices. The government would have to be an especially perspicacious and adroit entrepreneur to advance its priorities while only using idle resources. Kelton does not explain why she believes that those currently without jobs would be a good match for her spending priorities. But without the ability to wave a magic wand to instantly transform the unemployed into teachers, skilled health care workers, and engineers specializing in energy alternatives, more spending in these areas would compete for scarce workers rather than soak up idle ones." Kling, Deficits -- Budgetary and Conceptual, available at https://lawliberty.org/book-review/deficits-budgetary-and-conceptual/ The point is necessarily context dependent. If we had Great Depression-like 25% unemployment, this point would have much less force.

At the risk of drifting dangerously off-topic, I think MMTers agree with you on inflation. I read Prof. Kelton's book and a collection of essays published in book form as Modern Monetary Theory and its Critics (https://www.amazon.com/Modern-Monetary-Theory-its-Critics-ebook/dp/B085632KFL ) But I found more useful an exchange between Tom Palley on the one hand and Randy Wray and Eric Tymoigne on the other that was published in the Review of Political Economy in 2015. In his initial article, Palley uses the simplified construct of a no-growth economy (in the long-run aggregate supply sense, not in the short-run cyclical sense) that is not at full employment. MMTers would advocate using deficit spending to get to full employment. Using Keynesian multiplier analysis, Palley argues that the deficit spending would not pay for itself in increased tax revenue (if it did there would be no multiplier to get the economy back to full employment in first place). So, in this world the government would have to continue running a deficit to maintain full employment, and since by hypotheses it's a no-growth economy, output is stable. In this world, "the money supply would keep growing relative to output, causing inflation that would tend to undermine the value of money." [In a growing economy, I assume he would permit money supply to grow with GDP.] In their response, Wray and Tymoigne say Palley is wrong because "[t]he fiscal balance at full employment depends on the desired net saving of non-government sectors at full employment. If the desired net saving of the domestic private sector is positive at full employment, no inflationary pressures need arise from a fiscal deficit." When I first read this I did not understand what they were saying. But in light of our funds flow discussion here, I believe they are saying that if the deficit spending just piles up in the accounts of people who are content to save it, there will be no inflation, just like cash piling up on your corporate balance sheets wouldn't cause inflation. (I assume that money isn't likely to sit as bank deposits or low yield Treasuries -- instead, it seems to me that it would go toward driving up the price of assets and very scarce goods (Picassos, beachfront real estate, Mariners World Series rings, etc.)) In his reply, Palley asserts that persistent deficits in a no-growth economy imply either inflation or "very special and implausible conditions about money demand." Palley doesn't elaborate on what he means here, but I now assume he means people won't accept a reality of continuing to pile up more and more financial assets and will insist on spending them. But we really don't know how true that is in the sense that wealthy people may well be content to continue (at least for quite awhile) piling up financial assets and occasionally trading them (at progressively higher prices) for scarce assets, particularly if the existing level of output supplies everyone's need for food, clothing, shelter, etc.

I think this is a perfectly reasonable hypothesis, and I think it's consistent with what I said earlier about a one-time increase in deposits not necessarily leading to inflation if they ultimately migrate to low propensity to consume holders, such as the corporations you refer to. I'm also skeptical of any analysis based on velocity -- it seems to me to be just a plug variable for an accounting identity. Without some underlying theory, I don't see how that identity can tell us much of anything. Your high tax theory is interesting. It seems to be the opposite of what MMTers would say because you need government money to pay taxes, so higher taxes ought to increase demand for government money and thereby drive down inflation. Are you saying high taxes would ultimately result in less work and less output, thereby driving down demand for money? (I assume you also think this effect is non-linear and really kicks in at very high rates, not moving a marginal rate from 35% to 37%.) Or are you suggesting very high taxes would push people to black markets in which they use alternatives currencies and pay no taxes, and thus have no need for government money? Also, to expand on your 2020-21 funds flow hypothesis, one of the other ways corporates get deposits off their balance sheets is still below 2019 levels: https://www.yardeni.com/pub/buybackdiv.pdf But even if they had disbursed, that would just convert corporate deposits into the deposits of existing equity owners, who I suspect also have a low propensity to consume good and services (though a high propensity to acquire financial assets).

Yes, I understand this point in the aggregate. But that doesn't get at what's happening on the consumer side within the banking system itself, e.g., how fast are these deposits moving around among depositors, which I believe is the assumed mechanism underlying the belief about inflation. To look at it another way, the reserves are on the asset side of commercial banks' balance sheets, and the increase in that asset has led to a roughly corresponding increase in deposits, which are liabilities on commercial banks' balance sheets. Those commercial bank liabilities are (a portion of) the private sector's assets, which individual actors of the private sector can spend, if they so choose. Of course, when one private sector actor spends on a good or service, that spending (assuming we're not talking about a tax payment) becomes the deposit of another private sector actor. So, to your point, aggregate reserves and deposits don't change. But my act of spending counts towards the consumption section of GDP. If the recipient of my spending decides she doesn't want to hold that money and instead spend it very quickly on some other goods and services, that's more GDP. If we keep going round and round this way and output can't keep up (it's presumably down at the moment as the result of COVID), then the quantity theory of money identity gets you inflation. In other words, if MV must equal PT because it's an accounting identity. Although others can speak for themselves, I believe this is the intuition underlying the colloquial expression that prices must go up if there's more money around. Why is this belief wrong? Put another way, why hasn't the large increase in private sector deposits and the presumably restricted output led to (or going to lead to) inflation, meaning a general increase in that nominal price level?

Is it stuck at the Fed as reserves or are people choosing not to spend their deposits rapidly and choosing not to create new deposits via lending?

So banks have all of these excess reserves that are just sitting there. I assume the corresponding liabilities on their balance sheets are deposits. [Compare change over time in lines 29 and 34 in table 2 https://www.federalreserve.gov/releases/h8/current/ ; see also https://fred.stlouisfed.org/series/WFRBLT01005 and https://fred.stlouisfed.org/series/WFRBLB50086 ] Absent taxation or reverse QE (sale of bonds by the Fed) is there any way to actually lower system-wide deposits? In the first instance, a purchase of a good or service by one depositor winds up as a deposit in the account of the seller (and then deposits in the accounts of the seller's factors of production). Similarly, a purchase of an asset by a depositor winds up as a deposit in the account of the seller. So, putting aside foreign (out-of-the-system) leakages, deposits per person are obviously up and (absent taxation or bond selling) it's not clear how to get them down. From the consumer perspective, when would having more money in your account create inflation? I don't think "when you spend it" is a systemic answer, because then the question becomes does the recipient also spend it? In other words, even if the initial recipient's MPC is high, if the deposits eventually trickle into the hands of people's whose MPC is low, it doesn't seem like a recipe for sustained inflation (in other words, velocity of M2 stays low or may even get lower: https://fred.stlouisfed.org/series/M2V ). What would cause everyone's desire to increase their pace of their consumption? Do we have a better explanation than "expectations," which is my own interpretation of the two distinct trend lines on page 2 here: https://paulromer.net/the-trouble-with-macro/WP-Trouble.pdf ? Similarly, is the structure of the economy likely to push more of these deposits over time to people who have a high MPC or low MPC? See, for example, the trend of labor share of output during and after the 1970's: https://www.bls.gov/opub/mlr/2011/01/art3full.pdf From the investment side, conventional theory suggests that increasing reserves ought to push down rates which ought to spur borrowing to fund investment in capital as more projects become NPV>0 via the lower discount rate. While the first part appears to have happened, the second part seems lacking -- loans outstanding have not increased. [See line 9: https://www.federalreserve.gov/releases/h8/current/ ] So, what is going to spur large-scale investment in new capital in the US? I assume this is the reasoning behind a massive deficit financed infrastructure plan now -- if the private sector won't invest, then the government will! Finally, I put aside foreign leakages earlier, but how many of the deposits could over time leak out via net imports and the sellers (or their factors) using the dollars overseas to facilitate trade ex-US trade? (If there's any merit to this, would the magnitude of the dollar expansion of deposits relative to output have to be looked at relative to broader output base than just US GDP?) Alternatively, if the increased US deposits increase the demand for imports and foreigners don't actually want those dollars (hard to believe given current Treasury rates), would that depreciate the dollar and cause inflation via higher priced imports? And even if it did increase the price of imports, can labor bargain for higher wages or start a cycle of inflation that way, or is going to have to accept a lower (or slowing growing) standard of living? Can any model of the economy actually determine these answers endogenously, or do they turn on structural factors (e.g., union bargaining power) that are exogenous to the models that are generally used? All of this is obviously, arm-chair amateur macroeconomics. But I'm trying to get at the fundamental causality -- what are the underlying real world mechanisms that are going to cause increased government deficit spending to turn into sustained high (more then 2 or 3%) increases in US price levels?

I believe MMT theorists would say that the US monetary system has conformed to MMT since 1971 when gold convertibility of the US dollar ended. At that point, the US obtained full monetary sovereignty and it has maintained that full sovereignty because all of its liabilities are denominated in US dollars and those dollars are not convertible into anything (e.g., gold, some other currency, etc.). MMTers would say that MMT's description is how the world actually works, and it is descriptively accurate regardless of whether the government is spending more or less than it's receiving in taxes. MMTers would also say it's descriptively true regardless of whether the government chooses to exchange IOUs (bonds) for some of the currency it has previously issued. Most MMT theorists then go on to make a contested proposition -- that the US economy runs with a substantial amount of slack. In light of that belief -- which depends on some view about the real world that is independent of the descriptive aspects of MMT -- they believe the US government can ramp up spending without triggering inflation. They then make what are essentially political/ethical/moral arguments about how that "fiscal capacity" should be used. I believe all of MMTers' suggested spending plans hinge on the claim that there is a lot of slack in the system -- we are far from full potential output -- rather than their fairly straightforward description of the relationship between the fiat currency issuer and the currency it issues. Indeed, MMTers admit that if an economy is close to full output, then additional spending will cause inflation. You could perhaps get around that inflation via increased taxation, but that would result in less privately-directed economic activity, rather than additional output, because it's simply reallocating existing output (moving to some other point on the production possibilities curve) rather than employing currently unused resources. To the extent central planning does not allocate capital as efficiently as private markets, that would produce slower growth in the long run due to less capital accumulation.

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Professor of Macroeconomics Stephanie Kelton contains 25 or so pages of useful and cogent description of how the fiscal and monetary systems of a fiat currency issuer work and 225 pages of rather thinly supported arguments in favor of a progressive political agenda on health care, climate change, employment, and so on. Taking the useful description first, the book explains (correctly I think) that a government that has the monopoly power to issue its own currency and has outstanding debt payable only in that currency can never run out of money. The reason for that is simple: The government can always issue more currency to pay any IOUs it has issued and for any present expenditure that it wants to make. The implication of this argument is that such a government does not fund itself by taxes or borrowing. Instead, such a government funds itself by issuing more currency. The primary purposes of taxation are to (i) remove previously issued currency to prevent inflation, (ii) discourage certain activity (e.g., sin taxes), or (iii) limit the economic and political power of the wealthy. Similarly, “borrowing” via the issuance of debt payable in the government’s own currency simply offers a way to swap out excess bank reserves for a different kind of government money (an interest-bearing kind), which helps the government manipulate interest rates (and may provide useful collateral to the private sector to the extent the government debt is more liquid or transferable than bank reserves). In short, MMT’s descriptive aspect is its assertion that the government spends first and taxes and borrows only to address the consequences of that spending, rather than taxing and borrowing first and then spending only the money it can raise by those methods. If this summary sounds familiar to readers of this forum, that’s perhaps because wabuffo has been trying to tell us this for years, and I at least was just too slow to understand what he was saying. If taxing and borrowing aren’t real fiscal limits for such a government, then what is? The real resources of the economy, i.e., the amount of goods and services the population can produce in light of its existing stock of physical and human capital. Again, that also seems true and largely non-controversial – as far as I understand them, that is consistent with classical economics’ vertical long-run aggregate supply curve and concept of the production possibilities curve. And how do we know when we’ve reached the limit of real output? Inflation. Although MMT rejects monetarism, this connection between real output, the money supply and inflation seems to be a straightforward application of the quantity theory of money, namely that the price level is going to rise when the money supply goes up while real output doesn’t. One major implication of MMT is that deficits without inflation shouldn’t matter because there is no such thing as “crowding out.” Under the traditional view, government deficits must be funded by borrowing in the market for loanable funds, thereby shifting the demand curve for loanable funds to the right. (Picture real interest rates on the y axis, the quantity of loanable funds on the x-axis, an upward slowing supply curve and downward sloping demand curve intersecting at some equilibrium point that new government borrowing is changing by shifting the demand curve to intersect the supply curve at a different – and higher -- point.) That would cause an increase in real interest rates, which, in turn, would decrease investment (fewer investments would be profitable at higher real rates), which, in turn, would both decrease current GDP and slow further rightward movements in the long run aggregate supply curve due to the smaller resulting capital stock. MMT rejects this whole approach because it recognizes that deficits can be funded by issuing currency, not borrowing. Government spending in excess of its revenues would increase the private sector’s surplus, which should increase the supply of loanable funds and actually drive down real rates, rather than increase them. The flipside of this, of course, is that government surpluses require private sector deficits, thereby decreasing the supply of loanable funds and driving up real rates. As Kelton puts the point: “The crowding-out story gets it completely backwards. It’s fiscal surpluses, not fiscal deficits, that eat up our financial savings.” (p. 110) Moreover, even if the government chooses to issue bonds equal to the amount of its deficit, that doesn’t change the analysis, because the extra dollars the government spent over its revenues must end up in the private sector as a surplus. So, government spending creates the very private sector dollars that the private sector then chooses to convert into interest bearing notes. Because these amounts are the same, the whole thing has no effect on real interest rates. Again, to quote Kelton, “fiscal deficits – even with government borrowing – can’t leave behind a smaller supply of dollar savings,” and thus there can be no “crowding out.” [Note this discussion is about real rates, rather than the inflation expectations embedded in nominal rates.] This theory is not only interesting, but also actually explains the recent collapse in real rates. For example, the real rate on the 10-year fell from roughly 4% during the Clinton surplus years to about zero today, despite massive deficits during that period. It also suggests to me that the Fed QE program may be counterproductive. If Treasury issuance has the salutary effect of sopping up excess reserves, why is the Fed undoing that by buying the bonds and thereby reinjecting the excess reserves? Moving on to the book's other 225 pages, Kelton repeatedly asserts that, because the government can never run out of money, any claim that the government can’t do something because it lacks the money is false. Thus, we are told at length that the government has the money to provide jobs, health care, clean energy, etc. to everyone, if only we had the political will to issue the money necessary to pay for those things. This part of the book is hard to take too seriously because it’s never squared with the fundamental point that we’re always limited by our real resources. So, unless we have massive untapped resources of physical and human capital, we can’t have everything – we have to choose some point on our production possibilities curve. Kelton never really addresses this point nor explains what we'd have to give up to get all the things she says we can have via money printing. Instead, she sweeps this problem of practical scarcity under the rug with the assertion that, “because we chronically run our economy below its maximum speed limit, there’s almost always room to rev up spending without risking an acceleration in inflation. And that’s what matters.” (p. 257) Kelton also largely ignores two other issues with revving up government spending via currency issuance. First, at bottom, Kelton is advocating that the federal government allocate a greater percentage of the country’s real resources. Taken to the extreme, this approach would get you to a Soviet system, which von Mises attacked as unworkable because there are no price signals to direct capital. [See Economic Calculation in the Socialist Commonwealth] Although Kelton is not advocating total central planning, it seems to me that her approach risks distorting the price signals a market economy uses to allocate capital efficiently, or seeks to ignore price signals altogether in favor of direct central planning and allocation of a much more significant portion of the economy’s overall resources. I am skeptical that that type of program actually making us wealthier in the long run, given the knowledge it assumes on the part of the decision maker, though I would be willing to consider specific large scale spending projects or additional spending on public goods, particularly innovation. One MMT-consistent alternative that might address this issue is more direct redistribution by simply giving the poor money so they can decide for themselves what they value most, rather than have central planners attempt to divine the ideal allocation of resources. Second, is the view of government implied in Kelton’s recommendations too pollyannish? For the reasons described above, the job of a central planner is hard enough, even assuming she’s acting in good faith. But what if she isn’t? What if much government action is mere rent-seeking, which would only further the mis-allocation of resources and leave us all poorer in the long run? That concern may be beyond the scope of Kelton’s book but I think it’s essential to think about before trying to apply the MMT model to our reality. EDIT: After writing this I saw a review from Arnold Kling that explains some of my concerns about Kelton's arguments in a more persuasive and coherent way: https://lawliberty.org/book-review/deficits-budgetary-and-conceptual/

Regarding the effect of ending enhanced UI on employment, the question is, as usual, complicated due to confounding factors like the overlap between the states that ended enhanced UI early and the states that have had high Delta-related COVID rates: https://www.econlib.org/well-that-didnt-take-long/ In February 2020, there were roughly 152.5 million non-farm employees in the US. Now there are roughly 147.2 million. (Source: https://fred.stlouisfed.org/series/PAYEMS ) So, that's about 5 million people who previously worked and now are not. So I think you're asking why these people aren't working. I don't think anyone knows the full answer to that. For example, how many of those "missing" workers are from two-income families that have shifted to one-income families due to childcare needs/reluctance to send children to daycare or school in light of COVID? How many of the "missing" workers are relatively older workers who decided to retire earlier than they otherwise might have because of their view of COVID risks in the workplace or an increased desire to live/consume now rather than later? I don't think anyone knows the answers to these questions. At the end of the day, 5 million out of the February 152.5 million is only about ~3.3%. (The labor force should have grown from February 2020, but I don't the the roughly ~2 million expected increase changes the analysis much. https://www.calculatedriskblog.com/2021/09/the-employment-situation-is-worse-than.html ) So, it's a quite small percentage of the workforce that has gone "missing". But that could ultimately have a big effect on wages because they are determined at the margin, i.e., the prevailing wage in an expansion is going to be what is necessary to coax the marginal worker into the workforce. If wages are rising, as they appear to be, that suggests to me that the preferences of these "missing"/marginal workers have changed, and thus it's going to take more money to coax them off the sidelines. But I don't think we really know whether those preferences have changed because the opportunity cost of working has increased (COVID risk of workplace, lost time with family, childcare duties) or because the oppotunity cost of not working has gone down (increased employment benefits and child tax credit).

This is another way of asking why anyone would invest in a mine, oil well, or other depleting asset. The answer is that there is some price that the electricity/copper/oil can be sold (or other factors, such as tax benefits) such that cash flow generated by the depleting asset over its lifetime generates a sufficient rate of return on the initial capital invested despite full depletion of the initial capital investment. Put another way, during its useful life, you would expect the cap rate of a depleting asset to be higher than the cap rate of a non-depleting asset because a portion of the return of the depleting asset represents a return of capital (depreciation) rather than a return on capital.