by Jonathan Denn
This article was originally published by New Economic Perspectives
This demonstration will work well in the classroom or barroom. There are five levels, the first is designed for someone who knows nothing about sector balances, each level adds a new variable and complexity.
You’ll need three rolls of pennies and three people. One person is the “Government US”, the second is the “Private Sector US”, and the third is the “Foreign Sector.” For the sake of simplicity, G=Government, P=Private Sector, F=Foreign Sector.
The game starts with G having all the money. Why? Because the United States has a monopoly issuing the dollar, or in this case the penny. So, to begin with G buys goods and services from the private sector P, like paying the brave men and women in the armed forces, teachers, buying airplanes, ships, tanks, research, roads, all the things to serve the public purpose. Now some of these purchases go directly to the F, like humanitarian aid, or goods or services that are not available domestically or are cheaper oversees (or politically prudent). For this example, let’s crack open the penny rolls and capitalize the game (our country), and spend 100 to the (P)rivate sector, 10 to (F)oreign sector, and 40 remains with (G)overnment.
Now, each round is a year: (G)overnment buys 2 pennies worth of goods and services from the (P)rivate sector, and 1 from the (F)oreign sector. During this time the P and the F also trade with each other. But, as you know the US has a trade deficit so each round P will have to give 2 pennies to F. So here are the penny (or sectoral) balances per round/year.
Government=150, Private=0, Foreign=0
G=40, P=100, F=10
G=37, P=100, F=13
G=34, P=100, F=16
G=31, P=100, F=19
And ten rounds/years later
G=1, P=100, F=49
Oops, game over, (G)overnment is broke, and the (P)rivate sector is stagnant with zero growth. Now the deficit scolds want to lend G money and get (too) high rates of interest, and not have to do anything to earn it. Is that good or bad? Both, if you are retired and struggling, it’s nice to get a return on your hard-earned savings to live on. But, if you are just rich and lazy, we have ourselves a political or partisan question. The F may want to lend G some pennies (I mean, what else are they going to do with a foreign currency?) but this doesn’t make it into the first five rounds of The Penny Game.
I can hear the critics. They will say as money is drained from the private sector, prices will fall (deflation) to the point that US goods and services will favorably compete with the foreign sector (Hume’s specie flow mechanism, and thanks to Dan Kervick for pointing this out), so less than a penny will be going to F in the later rounds/years, let’s look at that in…
Same three rolls of pennies, and the same three folks.
We’ll start the game again with G=40, P=100, F=10, but we’ve experienced about a 30 to 50% deflation. Now, here are the flows, G spends 2 pennies to P each round (it goes further) but 0 pennies to F, and P still sends 1 penny to F.
G=40, P=100, F=10
G=38, P=101, F=11
G=36, P=102, F=12
And the game ends after 18 rounds/years later with
G=0, P=120, F=30
The Private Sector is doing well, but G is “broke” yet again.
Yes, I know, just like the last round deflation will kick in even more, and maybe even get us to a point that we have no trade deficit. We’ll look at that in the next round. But first, who has the 100 pennies in the Private Sector that we began with?
The following is based on research by Professor Dan Ariely and was the basis of a viral video on wealth in America. To play along, take the 100 pennies and divide them in five equal stacks of 20. This is socialism.
But America is a meritocracy. So, let the three players redistribute the pennies from the lowest 20% to the highest, in five stacks—what they think would be the “ideal” distribution in a free, non-crony-capitalist country.
Now, here is the “actual” distribution of wealth in America. Make the stacks. See if you can get the top one to not fall down.
How does the “ideal” distribution compare with the “actual”?
I came to Modern Monetary Theory through electoral and clean government reform. The duopoly is funded by the top 20%. Wouldn’t you think in a society this large there would be more than two competitive parties? By the way, the first step needed to do that is to Ban Single Mark Ballots. It probably won’t be too much longer before the bottom 60+% come to realize that the system is literally stacked against them. The one thing deficit hawks, doves, and MMTers should be able to agree upon is ending crony capitalism.
But, let’s get back to the example with government “broke” yet again…
Deficit doves say, tax P to keep G at a constant 40 pennies! But then P will be taxed into bankruptcy in 100 years, because every year there is 1 penny of trade deficit. The game’s end looks like this…
G=40, P=0, F=110.
Now deficit hawks say, cut G’s spending in half! Then we’ll finally have a balanced budget. Of course, there is no way to cut government spending in half and remain a civilized, well-protected society.
Isn’t this a fun game?!
Now, speaking of taxes, how in the world can the lower 60% afford to pay more? While P is on its slow road to bankruptcy, it will surely happen (happening) from the bottom up. Not pretty.
So, let’s say, we have had such severe deflation that we no longer have a trade deficit. Government spends 2 pennies each round, and taxes 2 pennies from P, this is the famous balanced budget. So, the game begins and ends with
G=50, P=100, F=0
But in the next decade we will have a 7% population growth. So, let’s estimate that over the next three decades there will be a 20% population increase.
Now the three players need take P’s five penny stacks, and decide how to make them six to accommodate an extra 20% of Americans. Each one represents 16.6% of the population. Since the same 100 pennies remain in the Private sector, the standard of living is dropping for at least the bottom 60%, because they essentially have no savings to draw from, and are maxed out in their borrowing. When you are done, return the pennies to the actual income distribution’s five stacks. This leads us to…
So, how do we keep the standard of living at least the same for all and more Americans? Let’s assume that each year we have stable prices/zero inflation. We start the game with
G=50, P=100, F=0
But now, every decade we have to add 7% more pennies so, hopefully, they find their way to these new Americans starting out in their careers in the bottom 16.6%. So we get
G=43, P=107, F=0
If not, then we have a decreasing standard of living.
But is staying even, enough? Unemployment including the disaffected, those who have dropped out of the workforce or are only working part time are about 15%. If we want to put them back to work then in the first round/year then G needs to provide the 15 pennies. That will raise them up from the bottom of the bottom 20% to the top of the bottom 20%. Doesn’t seem extravagant, does it?
G=28, P=122, F=0
If G gets to 0, then it would have to deficit spend 15 pennies. As MMTers know there is no need to borrow the money, it could just be issued and spent by Congress, if the law was changed. But interest rates presently are near zero anyway.
Oh, by-the-way, a penny is worth, roughly speaking, $500,000,000 in all these examples. I really tried to make each coin be $1 Trillion, but alas, deflation is an ever-present threat.
Now, debt is sort of like the empty paper, penny rolls. The private sector swaps IOUs scribbled on them a promise to refill the penny rolls in the future. It endogenously increases the number of pennies in the private sector, but someday they have to be paid back. So they aren’t real shiny pennies—more like tarnished ones. Remember the real estate bubble?
There is a misnomer about the Private sector creating wealth. It operates within the velocity of pennies (how fast the money changes hands), and within the ranges of asset bubbles and private debt—all the Private sector does is compete with the Foreign sector and itself. For example, Amazon puts mainstreet bookstores out of business. Home Depot is a net serial destroyer of jobs because its staff is way more productive than the now-defunct mainstreet hardware stores were.
What P does well, is innovate to create goods that the Foreign sector wants. P can only get real pennies from G or F. That’s accounting not ideology as MMT and The Penny Game demonstrates.
Now, depending on the amount of pennies in circulation, even the temporary tarnished ones, there may be goods and services chasing pennies, or vice versa. This is also dependent on how much of P’s total coins are in savings and not circulating through society.
Since, as you can see, the top 40% of society must have a lot of pennies in their piggy banks (really, how much stuff can you buy?) so the most likely scenario is more deflation, as no one else can dip into savings, or borrow anymore against their homes, to chase goods and services. Maybe we could work ourselves into a trade surplus. But my $.02 is that’s not going to happen anytime soon or in these first five rounds.
So here’s the final round to put everyone back to work, account for the population increase, and to raise the standard of living of the bottom 60% (without transferring wealth from the top 40%!) from a total of 7 pennies to just 15 pennies which would look like this
Not socialism by any stretch of the imagination.
Government would need to deficit spend approximately 37 pennies, assuming a zero trade deficit.
7 to account for population growth
15 to reach full employment
15 to support the poor and lower middle class
This would have to happen over a few rounds/years or at least a decade, and make sure it is targeted to the bottom 60%, perhaps through payroll tax holidays, guaranteed jobs, infrastructure spending, child care reimbursements, special bonds with higher rates for struggling seniors, and earned income credits or living wage adjustments.
I know some of you deficit hawks and doves are worried about hyperinflation but as MMTers know the deficit is sustainable and even contracts as long as the interest rate on Treasuries is below the growth in GDP rate. [per Scott Fullwiler*] And in case you are wondering, the Fed sets the overnight interest rate not bond vigilantes or foreign governments. So, this is something G or the People can control.
Who knew a few simple rolls of pennies could be so informative to the world economy?
A penny for your thoughts?