Don't get too excited by DeLong's interest in MMT. His latest post shows that he still hasn't read enough to realize that his objections have already been dealt with in many places. So he remains a deficit dove, calling for austerity "later." In addition, it's pretty clear that he doesn't have deep knowledge of monetary economics and is stuck in "old thinking." Disappointing.
Grasping Reality with Both Invisible Hands
Is There Still A Demand For Even More Modern Monetary Theory Weblogging?
J. Bradford DeLong | Professor of Economics, UCAL Berkeley
(h/t y in the comments)
My comment over there:
MMT economists have addressed fiscal sustainability in many places, blog posts papers, books, and even a conference. Two that come to mind are Bill Mitchell's blog post, "The full employment budget deficit condition," and Scott Fullwiler's paper, "Interest Rates and Fiscal Sustainability." To understand the stock flow consistent macro modeling that MMT uses, see Wynne Godley and Marc Lavoie, Monetary Economics (Plagrave MacMillan, 2nd ed., 2012). Now that MMT is gaining purchase, maybe it's time to dig into the lit instead of shooting from the hip?
For Robert Waldmann, see Edward Harrison, "MMT for Austrians" at Credit Writedowns.
For Weimar, see Hyperinflation in Weimar Germany: New Perspective on the “German View” using a Post-Keynesian Flow of Funds Framework" by Joseph Laliberté at Fictional Reserve Banking; L. Randall Wray, "Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 1)," and Edward Harrison, "MMT: Fear of Hyperinflation" at Naked Capitalism, also posted as "Hyperinflation in the USA" at Credit Writedowns. Hyperinflation - It's More than Just a Monetary Phenomenon by Cullen O. Roche shows that historically hyperinflations have been caused exogenously.
Basically, the terms imposed on Germany at the end of WWI resulted in the need to obtain gold or foreign currency in international markets for reparations, which resulted in currency depreciation. This resulted in domestic inflation, which was exacerbated by curtailed supply resulting from the hobbling of Germany's productive capacity due to the terms of settlement. This lead to the Weimar hyperinflation, which Keynes decried in The Economic Consequences of the Peace. "The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance." Weimar was clearly a special case that is unrelated to conditions in the US.
My comment over there:
MMT economists have addressed fiscal sustainability in many places, blog posts papers, books, and even a conference. Two that come to mind are Bill Mitchell's blog post, "The full employment budget deficit condition," and Scott Fullwiler's paper, "Interest Rates and Fiscal Sustainability." To understand the stock flow consistent macro modeling that MMT uses, see Wynne Godley and Marc Lavoie, Monetary Economics (Plagrave MacMillan, 2nd ed., 2012). Now that MMT is gaining purchase, maybe it's time to dig into the lit instead of shooting from the hip?
For Robert Waldmann, see Edward Harrison, "MMT for Austrians" at Credit Writedowns.
For Weimar, see Hyperinflation in Weimar Germany: New Perspective on the “German View” using a Post-Keynesian Flow of Funds Framework" by Joseph Laliberté at Fictional Reserve Banking; L. Randall Wray, "Zimbabwe! Weimar Republic! How Modern Money Theory Replies to Hyperinflation Hyperventilators (Part 1)," and Edward Harrison, "MMT: Fear of Hyperinflation" at Naked Capitalism, also posted as "Hyperinflation in the USA" at Credit Writedowns. Hyperinflation - It's More than Just a Monetary Phenomenon by Cullen O. Roche shows that historically hyperinflations have been caused exogenously.
Basically, the terms imposed on Germany at the end of WWI resulted in the need to obtain gold or foreign currency in international markets for reparations, which resulted in currency depreciation. This resulted in domestic inflation, which was exacerbated by curtailed supply resulting from the hobbling of Germany's productive capacity due to the terms of settlement. This lead to the Weimar hyperinflation, which Keynes decried in The Economic Consequences of the Peace. "The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance." Weimar was clearly a special case that is unrelated to conditions in the US.
18 comments:
If banks create 97% of the money supply then logically they are responsible for 97% of price inflation. No?
You are assuming demand side inflation. Most modern inflations are supply side due to oil price.
While it is true that bank money can create demand side inflation, Paul Volcker showed that the Fed can crunch credit by driving up the interest rate. MMT argues that fiscal policy is more appropriate since it can be tightly targeted. Warren also points out that the Fed can tighten loans standards at banks, e.g., on collateral, thereby reducing bank money creation at the source. So while money is endogenous, there are many exogenous factors of control that come into play.
Problems arise when the authorities treat demand side and supply side inflation as the same and apply demand side remedies to supply side problems, where they don't work as well as addressing the issue from the appropriate side.
Problems also arise when citizens leave ANY process to the presumed process owners.
Systems work by managing inter-dependencies, not by managing channels in isolation.
If we don't all act like owners, all the time, about everything ... we get what we deserve.
No system works without interleaved threshold participation in all feedback channels, in what's called "realtime" - i.e., with whatever agility is required.
I still don't quite understand the argument that budgets must balance in the long run. I tried to draw this out of UK economist Jonathan Portes yesterday on Twitter who also argues for tax hikes/spending cuts medium to long term, but didn't get anywhere. Where is the discretion for a Government to do that? Doesn't it depend on the private and foreign sectors?
I would like to see some commentary here on how the Brits Positive Money theory interacts or complements MMT.
http://www.positivemoney.org/
Positive Money addresses the problem of money being created by private banks usurping the authority of the state as money creator, causing disruption of the control the state should have. MMT doesn't seem to be concerned about this, but it should be. If it was, the state should have less need to print money or tax away money created privately. Please explain.
I still don't quite understand the argument that budgets must balance in the long run. I tried to draw this out of UK economist Jonathan Portes yesterday on Twitter who also argues for tax hikes/spending cuts medium to long term, but didn't get anywhere. Where is the discretion for a Government to do that? Doesn't it depend on the private and foreign sectors?
I still don't quite understand the argument that budgets must balance in the long run.
Barro-Ricardian equivalence.
"In the long run" means time-independence. It's meaning is different from "long-germ," such as over a business cycle.
Deficit doves like Krugman and DeLong argue for balancing the budget over the cycle due to the supposed intertemporal government budget constraint. Scott Fullwiler dispatches that argument in "Interest rates and fiscal sustainability."
Thanks Tom, I get that but I suppose my real question is why they believe in this constraint? When in the last century has the budget been balanced over the cycle, and where are the examples of countries like US, UK or Japan running into difficulties by hitting this constraint?
Elwood, we've discussed that here before. Basically, the MMT position is that the Positive Money approach, Chicago Plan Revised, AMI, etc, don't accomplish what they think because of a flawed understanding of monetary economics and finance.
Really the only way to get to exogenous money, if that is the objective is either to eliminate private banking or prevent the central bank from acting as lender of last resort.
Given the power of the banks, it would be very difficult to accomplish this politically, and it is dubious whether it is even desirable. Simpler to accomplish and quite effective is reforming the present system, e.g., along the lines that Warren Mosler has proposed.
But neither going to exogenous money or reforming the banking system doesn't solve the credit issue, either, due to shadow banking, which is no more of a factor than regular banking. That needs to be addressed too, such as bringing shadow banking onto exchanges and regulating CDS as insurance.
People don't get what you're saying because they are thinking in terms of temporary government debt employed allegedly to give the economy "traction" and to "restart" it. When you guys talk about "deficit spending", you are talking about the government buying stuff with funny money created out of nothing (new net financial assets) with no necessary reference to the amount of taxes collected. As such, there is nothing to "pay back" later after the alleged end of the recession, and according to you guys, the only "constraint" on such funny money creation would be inflation if and when it ever shows up. Right?
See. I get it. It's insane, but I get it.
my real question is why they believe in this constraint?
Beats me. More than one heterodox economist has pointed out that the present-day mainstream has forgotten what economists knew many decades ago before the dominance of now discredited monetarism. BDL and PK are monetarists. They only differ from straight up neoclassical economists in being demand side rather than supply side.
Basically, MMT is contra-monetarism, monetarism is still dominant, and so the objections to it are chiefly monetarist. Folks like BDL and PK haven't read the relevant MMT papers on the subject, or at least don't refer to them, leaving the impression that they don't know them.
So, again, the arguments are straw man, and based on assumptions that MMT economists have addressed professionally, not merely on blogs.
The thing to notice is that the concern is always financial and never about the "reserve army of unemployed and destitute" (Marx). Moreover, the financial concerns are vague and in the uncertain future, whereas the "reserve army of unemployed and destitute" is present all the time under current policy. MMT shows that it doesn't have to be that way. Not only it is more humane, it is also more efficient economically and effective socially, politically, and economically. That goes ignored.
No, Bob, you don't get it yet. See Bill Mitchell, Deficit spending101-Part1, Deficit spending101-Part2, and Deficit spending101-Part3, for example.
But your basic problem with MMT is that you are thinking of money as a thing, and we are not going to convince you otherwise, apparently.
Governments do not spend by “printing money”. They spend by creating deposits in the private banking system. Clearly, some currency is in circulation which is “printed” but that is a separate process from the daily spending and taxing flows;
There has been no mention of where they get the credits and debits come from! The short answer is that the spending comes from no-where.
That's about what I said. Average people will want to hang you guys up by your toenails whether I add the extra step or not.
Not only does govt expenditure "come from nowhere," so does money created by banks through credit extension.
Of course, ordinary folks would be freaked out by this if they were smart enough to figure it out since they think that money is a "thing." But they are not smart enough to figure it out. And those that are smart enough, are also smart enough to know that a return to gold is not in their interest since most people don't own a mine or care to go prospecting, and realize that they have to obtain gold from them that has it.
It's going to take some time, maybe centuries for people to figure this out, let alone economists, most of whom will never be able to fathom it. The result will be ongoing economic catastrophe and exploitation as per usual.
Alittleecon ,
Jonathan Portes is talking rubbish if he thinks budgets have to balance in the long run. He should study some history. Over the last two centuries, while national debts have occasionally declined, e.g. just after WWII, basically, and in the long term, national debts have steadily risen in both dollar and real terms. End of argument.
As for the THEORETICAL REASONS why budgets will never balance in the long, the reasons (if anyone is interested) are thus.
We’ve accepted that the optimum rate of inflation is about 2%. That being the case, the monetary base and national debt will shrink at 2% in real terms unless they are constantly topped up. And there is only one way of topping them up: deficits. Moreover, if the monetary base and national debt are to remain constant relative to real GDP (which in the very long term is a not unreasonable assumption), and real GDP is rising, then even more “topping up” needs to be done.
Elwood Anderson,
Positive Money and MMT have one thing in common: they both claim that fiscal and monetary policy should be merged, i.e. that come a recession, the government / central bank machine should just create new money and spend it into the economy (and/or cut taxes). And conversely, if inflation is excessive, the opposite should be done: money should be withdrawn from the private sector and “unprinted”. PM is explicit about this, whereas MMTers make the point in a more implicit way, far as I can see. Anyway, I agree with the idea, namely that fiscal and monetary policy should be merged.
"The short answer is that the spending comes from no-where."
A dollar note* can be thought of as a loan to the government. By agreeing to accept dollar notes in payment, or by choosing to 'hold' dollar notes, you're essentially "loaning money" to the government.
This is why the government doesn't get funds from taxes. Taxes cancel outstanding government debts. The government "gets funds" when people accept its currency in payment, i.e. accept to take on the government's debt.
At least this is one way of looking at it. Another way is to describe government-issued currency as 'equity'. This is how coins are described.
In this case when you accept currency in payment you're essentially buying a form of equity.
*or electronic reserve credit.
Elwood,
I have always had trouble with the frequent use of the term "usurp" that comes from a lot of the positive money and debt-free money camp. There is a perfectly legitimate argument to have about the role of banks in the monetary system, and about whether various other proposed systems might work better. But the banks did not usurp anything. The present systems were established by law. There was no usurping. Governments are entitled to organize their monetary systems as they see fit, and the decision about the appropriate mix of private and public components in the system, and the architecture of the system, are a matter of public choice guided by judgments of utility.
I think the positive money camp would do better to focus on the ways in which their proposed alternatives would work better rather than banging an ideological drum about supposed violations of the public's right to a purely public monetary system via fictional usurpations.
Also Stephanie Kelton: April 13, 2013 10 AM: Bill Black, Stan Collender, Brad DeLong, and Jay Weisenthal on the Economy
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