By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives
AOC# drives Republicans berserk. Booing her, and only her, at the ceremony admitting the members of Congress, raging at her for dancing – yes dancing – in a college video, and attacking her for having a nickname (“Sandy”) in high school demonstrate the degree of derangement and the pathetic ammunition they have found in their failing efforts to discredit her. MMT has become an indirect beneficiary of this derangement. AOC# has expressed support for MMT – so the right is now eager to reach the famous second stage of opposition to good ideas (‘first they ignore them, then they attack them’). It is far better for the right to attack our good ideas, than ignore them. As with the right’s attacks on AOC#, the nature of their attacks on MMT is laughably extreme and nonsensical. When they attack MMT, they spread our views.
The AEI is a hard right non-think tank, witness their treatment of David Frum. The AEI, in league with Brookings’ now disgraced Robert Litan, led the catastrophic assault on financial regulation that created the criminogenic environment that produced the Great Financial Crisis (GFC).
Michael Strain was briefly a junior economist with the NY Fed, but his CV shows that he does not write about macroeconomics. His specialty is labor economics. Stan Veuger, a more junior AEI economist, does not write about macroeconomics. He focuses on public finance.
While I write periodically about macroeconomics, it is not my specialty. I channel my current and former colleagues at UMKC with the greatest expertise in MMT – Mathew Forstater, Scott Fullwiler, Stephanie Kelton, and Randy Wray.
Strain makes few substantive points in his fervid attack on MMT, which makes his rhetorical rage particularly strange. His title and subtitle indicate the problem. “Modern Monetary Theory’ Is a Joke That’s Not Funny.” “Yes, a government that issues its own currency can pay its bills. But piling up debt for no urgent reason is lunacy.”
Strain characterizes his rivals’ theories as a “joke” and “lunacy.” That means he has assigned himself an extraordinary burden of proof. He must prove MMT is “lunacy” of such a degree that it represents “a joke.” That means it has no validity and that anyone who advances the theory is delusional – that the theory rests on defects in logic so basic that no rational person could believe the theory. To be “a joke,” any reputable economist must be able to point out easily MMT’s purportedly gaping failures of logic.
Strain and Veuger never try to meet the burden they set for themselves with their frenzied rhetoric. The key test of a theory’s validity is its predictive ability. A theory that is so weak that it is a “joke” made by “luna[tics]” should collapse as soon as its predictive ability is tested. What predictive failures do Strain and Veuger demonstrate MMT scholars have made? None. What predictive failures do they attempt to show MMT scholars have made? None. That failure even to attempt to show MMT scholars’ predictive errors is extraordinarily telling. First, you know they would have attacked even a minor predictive error by MMT scholars – if they could find such an example. Second, that means they could not find even a minor predictive failure by MMT scholars. Third, the AEI’s failure to find any predictive failure by MMT scholars is fatal to their assertion that the MMT – the basis for MMT scholars’ macroeconomics predictions – is such a “joke” that it invariably produces “lunacy.”
What does Strain rail about given his understandable failure to tell his readers that MMT scholars have a superb predictive record on macroeconomic topics? “Modern macroeconomics” models, by contrast to MMT, have horrific predictive records. Paul Romer, the newest Nobel Laureate whose thesis adviser, Robert Lucas, is the father of ‘modern macro,’ has a justly famous destruction of ‘modern macro’ as worse than a pseudo-science. Romer literally describes modern macro as a joke and combines withering sarcasm with logic throughout to drive home that point. If AEI economists want to alert readers to failed macroeconomic theory that produces terrible policies and predictive failures, they would be excoriating ‘modern macro.’
Instead, Strain begins his assault on MMT with an admission that it is, at its core, correct.
The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills.
MMT scholars would add two additional constraints, a freely floating currency and national borrowing only in the sovereign currency to produce what I call a “fully sovereign currency.” Strain’s admission that the “bedrock” of MMT “is correct” is also fatal to AEI’s rant attacking MMT.
Strain’s next concession is also fatal to his rhetoric.
In the years immediately after the Great Recession, which started in December 2007, this aspect of MMT stood in favorable contrast to the position of fiscal-policy centrists and many Republican politicians who called for significant reductions in the deficit at a
time of very high unemployment.
That passage is a veiled concession that MMT scholars supported fiscal stimulus and correctly predicted that it would aid the recovery from the Great Financial Crisis (GFC) without producing harmful inflation. It is also a veiled confession that “fiscal policy centrists and many Republican politicians” who pushed for austerity and predicted that fiscal stimulus would fail to stimulate the economy and produce harmful inflation were wrong about the most important macroeconomic issue of our lives.
As in the card game Bridge, let us review the bidding at this juncture in Strain’s rant. He admits that MMT’s ‘bedrock’ understanding of sovereign money “is correct.” He admits that MMT scholars used their theories to get the appropriate response to the GFC correct, while their opponents got it dead wrong because of their flawed “centrist” theories favoring austerity. This means that MMT scholars got right, and “centrist” economists got wrong, the most important macroeconomic policy issue of their lives and ours. Strain repeatedly admits facts that falsify his rant – but his rant is impervious to facts.
Strain continues this pattern. He concedes that MMT “is growing in prominence.” It cannot do so if it is such a facial “joke’ that any economist recognizes MMT’s obvious “lunacy.”
Strain then makes another fatal admission. MMT “is growing in prominence” because of increasing support by “many solid economists.”
[T]he thrust of MMT — the deficits matter a lot less than its critics would have you believe — is attractive to many solid economists. (Though I am not yet sold on their arguments.)
Why is Strain “not yet sold on their arguments?” He does not say. He provides no basis for rejecting the “growing” number of “many solid economists” supporting MMT. Again, this is fatal to his rhetoric.
Strain finally begins presenting his supposed clinching argument against MMT – in his twelfth paragraph. His clinching argument, however, not only buries the lead, it buries his thesis.
But it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe.
The theory understands that the economy is constrained by real limits on its inputs to production. If you push its advocates hardenough they will admitthat at some point all that spending could send the economy into a bout of damaging inflation.
Strain’s clinching argument begins with the fatal admission that MMT scholars correctly“understand that the economy is constrained by real limits on its inputs to production.” Given my long association with Mat, Scott, Stephanie, and Randy, I can testify from repeated, first-hand experience that each of them stresses the critical importance of real resource constraints in the talks they give on MMT. No one has to “push” them to “admit” that creating severe shortages of key real resources can produce high levels of inflation. MMT cannot be “fringe” (much less “a joke” and “lunacy”) because it correctly notes the importance of real resource limitations in potentially producing substantial inflation. If there is a global shortage of cadmium because of high private sector demand, and the government launches a program, such as a large expansion of military spending that creates a substantial increase in demand for cadmium, the price of cadmium will increase substantially.
Strain admits that MMT is (again) correct in its understanding of the importance of real resource limitations because of their potential to increase inflation. Implicitly, Strain concedes the opposite point that MMT scholars make – tax revenues cannot be the “shortage” when we have a fully sovereign currency. The important potential restraint we must focus on and address is real resources. Strain’s clinching argument against MMT turns out to be another fatal admission of its validity.
Strain also makes a political argument against MMT that implicitly concedes its economic validity.
Political progressives like Ocasio-Cortez who are showing sympathy for MMT are also being short-sighted. If we further loosen the shackles tax revenue has placed on federal spending, then Democrats may get Medicare for All the next time they control the government. But, in turn, when the GOP is next in the White House, what might it do with its newfound fiscal freedom?
The situation Strain envisions is not one where he postulates that society lacks the real resources to undertake the governmental program. He uses the revealing phrase “the shackles tax revenue has placed on federal spending.” His ‘shackles’ metaphor implicitly admits the validity of a key MMT precept. Public officials and economists who do not understand how a fully sovereign currency works apply a fake constraint – “tax revenue” – rather than what Strain admits is the actual constraints we need to consider and address, which are real resources. It is immensely harmful to “shackle” legislators such that they cannot implement useful government programs when they would not cause any substantial shortage of real resources. It is economically illiterate and obscene to “shackle” legislators to prevent such useful programs based on a phony fiscal limitation that is a holdover of thinking from the days of gold standards. Again, Strain concedes that MMT scholars are correct as to phony nature of the tax “shackle” and the potentially real nature of serious shortages of real resources.
#AOC, and Democrats as a whole, should not fail to adopt useful federal programs consistent with MMT theory because of fears of what Republicans will do. Republicans are the party in the modern era dedicated to huge tax cuts for the wealthy regardless of real resource restraints. They are not doing so because the Democrats correctly used fiscal stimulus in response to the Great Financial Crisis (GFC). It is insane for the Democrats to place economically illiterate “shackles” on themselves while knowing that Republicans are total hypocrites about budget deficits. #AOC was urging sound economics and policy when she urged Democrats not to self-‘shackle’ themselves to budget offset rules.
Strain’s final attacks on MMT are also political science arguments in which (I hope you sense a theme) he implicitly concedes that MMT scholars recommend appropriategovernmental economic responses to potential crises. Strain and Veuger’s complaint about MMT is that Congress might not actually implement those appropriate economic policies. That is not a logical complaint against an economic theory. Congress or the Fed may not implement appropriate economic policies. That is true of any economic policy. All the economist can do is recommend the right economic policies and encourage legislators and central bankers to implement those policies. That means that #AOC is doing exactly the right thing in getting excellent economic advice about marginal tax rates and MMT.
Strain finishes with a point that MMT scholars also make. Stephanie Kelton made the same point in my presence. Economists, including MMT scholars, warn about “cost-push” inflation when there are sudden actions such as successful oil boycotts.
We typically think of inflation as being generated from an overheating economy with excess demand. But prices can also rise because it has become more expensive for businesses to produce goods and services. For example, this situation could occur if the price of oil were to increase rapidly — the economy could experience stagnation and inflation at the same time.
Once more, Strain ends up agreeing with MMT scholars. Strain points out that if the government raises taxes to counter stagflation it could prompt a recession. We do not have to guess what raising interest rates would do because that was Paul Volcker’s strategy beginning in 1979. That strategy produced a recession. There is no great economic policy against stagflation, particularly when a major international boycott drives it.
After all his concessions about MMT theory and scholars, Strain ends by tripling down on his rhetoric – and divorcing it from even a sham of making a logical argument.
Modern monetary theory is seductive in its promises and, occasionally, in its observations. But if enacted it could cause great harm to the U.S. economy. Like Medusa, it may seem beautiful. But if you look it in the eye you will turn to stone.
Medusa? When exactly did #AOC “turn to stone?” It is fitting that Strain rests his rhetoric on a fable that he cannot present any logical basis for raising in this context. The fable is that Medusa blinded her victims and left them incapable of action because she turned them to stone. MMT does the opposite. It opens policymakers’ eyes and galvanizes them to action. MMT allows legislators to focus on the real resource constraints, which typically are not present. MMT frees them from the economically illiterate “shackles” based on phony currency constraints, allowing the adoption of programs that help the public.
Strain does not show how MMT policies “could cause great harm to the U.S. economy.” He does not show how they would cause any harm. Instead, he implicitly concedes that MMT policies, fiscal stimulus in response to the GFC, produced great benefits to the U.S. economy. His only example of a potential harm arising from MMT is a political science argument that while MMT economists propose the correct economic policies that will aid the economy, Congress might not follow the policy advice of MMT economists. That is a nonsensical criticism of an economic policy.
Strain’s only example of harm arises from what he assumes would be MMT policy recommendations to respond to stagflation. As I have explained, there is no magic macroeconomic policy against stagflation produced by a massive international oil boycott. The conventional macroeconomic response, the Fed forcing the economy into a serious recession, produces precisely the harm that Strain ascribes to MMT.
Strain’s closing use of the Medusa myth illustrates the failure of his rant. The metaphor only makes sense against the critics of MMT. Medusa blinded and turned to stone those looked at her. The metaphor is that she effectively blinds anyone who opens his eyes to learn and that she makes it impossible for her victims to act to protect themselves and the public. This is a metaphor describing MMT opponents. They are the ones that admit their propagation of economic fables. Randy Wray made this point in his April 30, 2010 NEP blog (“Paul Samuelson on Deficit Myths”).
[Randy Wray referred to] “an interview Nobel winner Paul Samuelson gave to Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995”). There Samuelson said:”
I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.
MMT frees legislators of that blinding “superstition” and “myth.” Note that Samuelson was admitting the core truth of MMT theory and admitting the efforts of economists to keep legislators ignorant of the economic illiteracy of the “shackles.”
Given the fact that the Medusa metaphor is the opposite of the reality of who is blinding and incapacitating our elected representatives and the facts that Strain never attempts to explain any reason why the Medusa fable is remotely analogous to MMT proponents the question that arises is why Strain used it as his rant’s defining smear. There is only one reason that emerges from Strain’s text. His first sentence stresses that Alexandria Ocasio-Cortez supports MMT. The only other MMT proponent he identifies is Stephanie Kelton. The far right is obsessed with #AOC – and with her looks. Stephanie Kelton receives large numbers of comments, even in student course ratings, that focus on her looks rather than her prowess as an economist and teacher. This pattern is a common manifestation of misogyny, particularly against female economists. The variant of the Medusa myth that Strain explicitly uses emphasizes Medusa’s “beaut[y].” Strain’s variant of the Medusa myth is the one that combines female beauty and female rage into a ‘monster’ that destroys men. Strain’s Medusa metaphor and myth is another sad example of the far right’s obsession with #AOC in particular and strong women in general.
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MMT is contrary to what most educated professionals just “know,” that balanced budgets are a sign of moral rectitude, and that you can’t be a high-minded, serious and thoughtful good-thinker unless you believe that and repeat it often.
So it goes to form that Strain makes arguments that go to the self-evidence of MMT’s lack of merit. It contradicts what everyone has been told.
MMT aside for a moment-
How does that square with their Very Serious Person belief that as a household, the first thing gov should do is lower revenue (aka cut taxes)?
Try advocating that in a run for CEO of anything. “The first thing I will do is cut top line growth!”
It’s just another of the glaring inconsistencies within what passes for conventional wisdom.
This is the first and most difficult hurdle for #MMT. The problem is that the collective consciousness conflates the constraints at the micro level (individuals and businesses) with constraints at the macro level (government of a monopoly currency issuer). People struggle to get over the fact that the government is not like a household or business. The following is a (sarcastic) response to me by someone on Twitter when I tried to explain this:
“Spending without income is irrisponsible in a person, it’s a lack of financial accountability.
But that’s ok from government…”
#QED
For a very long time the public’s national Treasuries managed the flow of monies in-and-out so that the cash on hand stayed about the same, hence the economy ignored the small amounts not flowing out immediately (as I recall the cash on hand was under $80 Billion or so normally, though someone could get the precise number if needed).
The point is that this money flow on the incoming side came from borrowings and from collections stemming from a variety of ways and means. The MMT group, as I say too, point out that the public’s government can Spend as they chose, and we could be more demand oriented in our Spending, especially during economic slow-periods.
But MMT does not face the incoming side and question why borrowings or ways-and-means are chosen, offering views about when we should increase or decrease borrowings, or legislate more revenue producing ways and means regimes. And why.
MMT invites sophists to point out that under the main MMT theoretic we need neither borrowings or ways and means (at least for the current US), we just produce the currency to pay all bills.
The point on the incoming side of things, recognizing that the stable cash on hand normality we have had for decades, means all incoming flows then flow right back out immediately into the economy. When we borrow apparently over 40 percent is the money of foreigners, so one might wisely use borrowing to get more flow immediately into the economy. But taxes too just flow right back out too. So when and why?
In my opinion, with a net wealth of $100 Trillion, there is no reason not to have a lot of incoming from ways and means since it is true that the wealthy idle a lot of flow compared to the non-wealthy who are flowing their incoming right back out into the econmy with high degree of freedom too, in comparison. So while the economy is doing well, raise taxes to move towrd balance but do not hamstring wise public choices about Spending for public goods and to support solid demand everywhere in the US, with some borrowing ok.
During times of economic slowdown the Spending by the public’s government should increase via the countercyclical programs, but the composition of the incoming side could be adjusted.
So MMT, like much that it highlights, especially the Spending and demand support policies it emphasizes, but it needs more articulation about the incoming side.
JF
“When we borrow apparently over 40 percent is the money of foreigners, so one might wisely use borrowing to get more flow immediately into the economy. But taxes too just flow right back out too. So when and why?”
If I could wave my magic wand, I’d completely remove the word borrow from everyone’s brain when they were trying to express how a government like that of the US finances.
The US is the monopoly issuer of US dollars. Period.
Foreign governments don’t lend the US dollars. They purchase US Treasuries with US Dollars they already have by virtue of exporting goods to the US.
See my comment below to Roberto.
So what are you trying to say?
A foreigner organizes the collection of monies somehiw and turns it over to Treasury. Surely some of that money was outside the US, and when the bill or bond is purchased and the monies received turnstiled immediately back out by Treasury within the US, that supports more flow.
And to make it clear, I did not say borrow all the monies, or get all the momey from taxing residents, while I also did not say we should just print it up to some degree (though elsewhere I have said we could just print it to pay lawful claims on the Treasury).
What are you saying?
He is saying they don’t “borrow” anything. They have US dollars which they acquire through selling goods to the US. They exchange these dollars for interest bearing US treasuries. In other words they deposit their savings in to an interest bearing account at the fed rather than hoarding the non interest paying dollars under the metaphorical bed. Since the US as a currency sovereign can create money at will, the interest in dollars will always be paid,
Agree. Unlike QE where the ‘money printing’ got soaked up into financial asset price inflation, any major uptick in government spending on procuring actual goods and services will eventually bump up against resource constraints. When that happens, there are three options (1) accept the higher inflation and carry on, (2) borrow to soak up private spending power, and/or (3) tax to soak up private spending power. Which option will MMT’ers choose (or put greatest weight) and why? This doesn’t seem to be as well articulated as it should be.
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Buybacks have totaled over $4T since 2009 (roughly the same size as the Fed’s QE program).
ZeroHedge is ramping up an anti-MMT campaign, which I respond to with the following comment.
2008 – “How did that happen?”
It was so big it had to be something fundamental and the “black swan” explanation just didn’t cut it.
I started to work it out.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
2008 was not a black swan, if you knew where to look.
1929 – Inflating the US stock market with debt (margin lending)
2008 – Inflating the US real estate market with debt (mortgage lending)
Bankers inflating asset prices with the money they create from loans.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Most of the money supply is created by bank loans and repayments destroy money.
The IMF predicted Greek GDP would have recovered by 2015 with austerity.
By 2015 Greek GDP was down 27% and still falling.
The money supply ≈ public debt + private debt
The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation.
Richard Koo explains.
https://www.youtube.com/watch?v=8YTyJzmiHGk
Now we have the full picture.
The money supply ≈ public debt + private debt
When you’ve got that far you’ll find MMT makes sense and Government created money will be essential to get us out of the current mess.
Adair Turner has come to the same conclusion.
Adair Turner has looked at the situation prior to the crisis where advanced economies were growing by 4 – 5%, but the debt was rising at 10 – 15%.
This always was an unsustainable growth model; it had no long term future.
https://www.youtube.com/watch?v=LCX3qPq0JDA
After 2008, the emerging markets adopted the unsustainable growth model and they too have now reached the end of the line.
Government created money is the only way out.
Well hold on a minute … in the form of QE, the government via the Fed did create trillions of dollars. Why didn’t that fix things? There’s a difference between direct fiscal stimulus and QE because the QE money never entered the real economy. Bank reserves got created to purchase securities, and that money never made it to Main Street as real income.
https://fred.stlouisfed.org/series/BASE
That is the same reason the tax cut has been largely ineffective at anything but increasing the deficit, increasing corporate earnings, and increasing the savings of the wealthy. Pretty much every economic justification for the tax cut passage has been shown to be flawed at best, and in most cases flight out wrong.
If we want to stimulate the economy using debt (either Fed monetary creation or fiscal like tax cuts), then we need to target the debt created to fund people who will quickly spend a high percentage of it. That is the bottom 90% of the population. The expansion of the standard deduction is probably the one significant thing in the tax cut bill that helps with this. The massive Fed infusion starting in the Financial Crisis gave some benefit, but since much of it was targeted to the banks and the wealthy, the general economic benefit was muted.
This is also why the rants about Social Security are way off base. Every dollar paid to a Social Security recipient gets recycled immediately back into the economy. A major cutback in Social Security will just create a lot of poor old and disabled people and a slower economy. The past Social Security premiums paid into the trust fund are going to be a big flywheel for the economy over the 15 years as that money comes out of the trust fund and steadily drips back into the economy. That is why the 2034 depletion is so critical, because it will likely require either a large increase in premiums or a large reduction in benefits, either of which could trigger a recession at that time.
The US health care system is a completely different animal because it is very inefficient and wasteful. So a quarter of more of health care spending is being diverted into unproductive purposes that increase wealth at the top end but doesn’t produce other social benefits. So single payer or other more efficient systems than we currently have can pay for universal coverage simply bey having a more efficient health care system.
#Concur – stimulus-from-bottom-up >> stimulus-from-top-down
And we have even more evidence with the government shut down having a measured inpact on GDP.
Agree with most but do not like the first mention about tax cuts. Yes, during downturns we can adjust the composition of the incoming side, but do not cut taxes on the wealthy, they could actually go up even in a downturn to a degree.
You did not say you support tax cuts for the wealthy, but I just felt it was important to add this caution to what you said. Every time this wealthy group sees the words ‘tax cut,” theory and common sense goes out the window and their lobby power reaches out to use the public’s government to enrich themselves again in unearned manners (and I think it hard to see that the 90 percent of people had much of the causative mantle for the major downturns).
JF
It’s funny. Actual resources like clean air and water, economists have no concept of limits. But something you can print and put a leader’s picture on, now you have “real constraints”.
Ha! Never thought about that. It takes an economics PhD to scramble one’s brain that severely. What is self-evident to the lay person becomes perverted to the point it’s completely backwards. Austerity as a virtue, and ‘Shareholder Value’. The two most orthodox and pernicious economic dogmas of our time. May they soon perish!
In some ways it doesn’t matter that Strain and Veuger have no basis for their attacks on the MMT, since that will never come to light when AEI people get interviewed in the corporate, mainstream media. The bought-and-paid talking-head “news journalists will never ask them to back up their opinions with facts. We have two worlds that run simultaneously in the US (and the world). One is what the powerful interests do to protect their interests and how they control a false reality narrative to keep it hidden; the other is reality itself. Very few guests who question the narrative and those who support it ever get a second chance on the mainstream media platforms.
AOC, Sanders, Gabbard and others who are presenting policy more in line with reality will naturally be attacked mercilessly in an attempt to keep reality out of the public sphere. The elite are threatened, and they will use and do use every means at their disposal.
I think he is admitting that his beliefs are bought and sold. He is a professional propagandist (i.e. think tank ‘scholar’), after all. It sounds like the article starts off as Denial but moves very quickly to Bargaining. Is this article intentionally subverting its brief? Will those who paid for it realize that? If not, they may eventually spring for new beliefs for Strain and his ilk.
A couple of noob questions about MMT.
What are some examples of “real resource limitations” that can lead to inflation?
Why does the govt go to all the trouble of borrowing money (auctions, debt markets, etc.) if its purchases can be paid for by printing? What purpose does borrowing accomplish?
If federal taxes are not used for funding govt expentitures what purpose other than diminishing the money supply does taxation accomplish?
Remember the movie Dumb & Dumber, where the duo goes to the bother of writing IOU’s that’ll never get paid as they spend somebody else’s money willy-nilly?
We’re not that far off, really.
Question for the MMT crowd from an OMT type…
How would the U.S. $ not being the world’s reserve currency-alter your stance?
If and when the US $ is no longer the reserve currency it will become more stable, less prone to fluctuations and probably nobody will even notice. Chances are it will always be one of the reserve currencies of choice. It was never designed for that anyway. And dumb as we have been, we will still be clever enough to write those IOUs to ourselves. Note to self: gosh, I couldn’t resist – just bought another pair of shoes. Or better things ;-)
When might the US not be the issuer of the world’s reserve currency any longer?
1. Losing a war in Asia with China, over, say, Taiwan?
2. Enough Americans leaving for other countries, with only 50% of the GDP left?
3. Under a new Chinese Tianxia World Order, we have to peg our currency to the Yuan?
4. Any other concurrent conditions or causes?
There is a great example (from Kelton?) of the congress deciding to offer a pony to any citizen who wants one, and the program will begin everywhere in the country in one week. At this point, the laws of supply and demand kick in, because there are only so many ponies, and they keep turning into horses and stuff… So the price of ponies, pony tack, etc. increases very rapidly. This type of inflation due to govt. spending does not require MMT, of course; it is due to an expansion of demand in some quantity-constrained commodity.
The purpose of borrowing is to give the lenders a no-risk way to earn interest on their wealth. It is not part of MMT, but part of the capture of the republic by finance elites.
If no-risk-funding-for-lenders is the reason for govt borrowing then why would our govt lend to Chinese govt and others that we presumably do not want to favor? It seems that there must be some other reason(s).
We don’t lend to the Chinese. The Chinese already have dollars by benefit of US imports from China. These dollars are held in a non-interest-bearing (reserve) account at the Fed. If the Chinese would like to earn interest on those dollars, they purchase treasuries which moves the relevant dollar holdings to an interest-bearing (securities) account at the Fed.
See Warren Mosler’s “Aren’t We Financial Slaves To China?!?!”
Yes, I meant to say “why would our govt borrow from the Chinese govt …but I see your point and your comments elsewhere regarding that usage. Thanks for the references.
#Concur … I would only add that the term “borrowing” is a terrible euphemism for monetary sovereign issuers. It’s exactly as you said – satisfying the need for risk-free interest bearing assets. Such governments don’t need to borrow to finance.
Regarding your last question: “If federal taxes are not used for funding govt expentitures what purpose other than diminishing the money supply does taxation accomplish?”
Please read Beardsley Ruml’s “Taxes For Revenue Are Obsolete” – specifically the section titled “What Taxes Are Really For”.
Excerpt:
“Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:
As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
To express public policy in subsidizing or in penalizing various industries and economic groups;
To isolate and assess directly the costs of certain national benefits, such as highways and social security.”
Taxes are not for distributional purposes. Polemicists narrate stories using retrospective accounting studies that characterize the mathematical results in such terms, polemic terms.
Taxes have existed to raise revenues so the lawful claims for payments can be met. We normally borrow some of the revenues too. But the default view of the cash management has been that incoming should cover the outlays in a period.
Let me note here that the advocates for tax cuttings of benefit to the wealthy will always argue for the increased opportunity to lend to the public rather than pay a tax bill (it is a trade, one t-bill for another, with the wealthy lender gaining in assets when their tax bill is cut).
We need to stay with the default view, imo.
You are wrong. Beardsley Ruml was Chairman of the New York Federal Reserve Bank, not an Econ Masters student with six credit to go before getting his degree like I am. Stop perpetuating dangerous fallacies that pertain to the time that the US was on a gold standard. Taxes can be distributional when marginal tax rates like the ones that existed post great depression up to post World War II are used to take disproportionally more disposable income from the wealthy while leaving lower income brackets with more to spend and save. The US government is not like an individual or a household because the US is the monopoly issuer of dollars. There is no valid purpose for income to cover outlays whatsoever. From the macroeconomic point of view, the economy is represented by this identity:
(I – S) + (G – T) + (X – M) = 0
This represent the three sectors of the economy: Businesses & Households, the Government, and the External Sector (exports and imports)
All three sectors cannot be in surplus (I – S being negative, savings greater than investment). If you want the households and businesses to run a surplus, then one of the other two must be positive. The US already has a trade deficit which makes X -M negative. Only solution to bring net negative back to zero is for government to run a deficit, G – T (government spending – taxes) to be positive.
What would be the problem if:
I – S = 100
Gs – T = 0
X – M = -100
x+y+z=0 so no need to run G deficits?
It would be mean that (whatever the unit is):
– The Household & Business sector had a net loss of 100
– The government balanced the budget
– The US had a trade deficit of 100
What does it mean for the household & business sector to run a loss? It means a contraction in what they got to keep as savings. Net loss of financial assets. Let’s play a game with numbers and assume that the government runs a deficit of 150:
I – S = -50
G – T = 150
X – M = -100
Is it not better that households & businesses now get to retain a net surplus of 50?
PS: Pretty much a tax cut, right?
Chris,
You said “The US already has a trade deficit which makes X -M negative”
So I assumed that having a negative value there meant deficit.
Maybe this is where I am confused.
You also say (referring to my example) that “The Household & Business sector had a net *loss* of 100”
Therefor I would have thought that my +100 example for I-S would have indicated a net *Gain* for I-S.
What am I missing?
I(nvestment) – S(avings) is negative when in surplus. That’s the somewhat confusing part.
Does this mean that there is inconsistency in characterizing the 3 functions in this formula/accounting identity?
i-j>0 deficit
k-l>0 surplus
m-n>0 surplus
Can you elaborate on “I(nvestment) – S(avings) is negative when in surplus”?
It’s basically derived from looking at how GDP relates to income and consumption. See here, from Bill Mitchell. You can view the private sector as net-saving (surplus) or net-spending (deficit).
Thank you for the Bill Mitchell reference. It would also be great to ‘hear’ it in your own words.
“when in surplus” means that in order for that sector (households & businesses) to net-save, then Savings must be greater than Investment. The surplus refers to the state of that sector not to any government surplus. It’s just the math given the order of the parameters. S > I means that (I – S) will be a negative number.
A better way to ask my question might be:
You said when X-M is negative it indicates a trade deficit
You said when I-S is positive (referring to my example) it indicates a loss
How do I resolve these two seemingly mutually exclusive statements?
“How do I resolve these two seemingly mutually exclusive statements?”
By looking at the way the equation was derived. I think it’s confusing because the tendency is to assume the thing on the left in (A – B) must always be the greater than the thing on the right so surplus as represented by the outcome of (A – B) must always be +ve. In reality, it’s not that way because the equation is derived by placing expenditures (including I) on one side and incomes (including S) on the other side. See the Bill Mitchell link. I first learned about the derivation of sectoral balances from Bill … ;-)
Thanks again for the help! It’s good to chat with someone who is rock solid on MMT.
Scanning the Bill Mitchell piece I think I know how my next few weeks will be occupied :)
Guessing that your thesis is on this subject?
NP. Sadly no, we have yet to decide … on the how, the what and the when. #PartTimerBlues
I notice that in my reading of this theory, a couple critical points are addressed, but not in what immediately appears to be a rational way. Inflation is one. It appears that MMT begs for inflation and justifies it by a “what else can we do?” attitude. It also seems as though it will drive resource extraction harder and faster than we do now, crippling our planet to make some people (those on the receiving end of the big money printing) very rich indeed. Yet they will become Rich with a currency that has no return on investment because it will be worth less tomorrow than today. Thus they have to invest in schemes created by the scum of wall street, the looter class. Can hyperinflation be far behind without restraint? In 2008, everyone on the lower end of the economic scale suffered cuts that continue to harm them today. Most will never get even again. Make them work harder for for a wage that appears to be growing where costs are outpacing any perceived growth.
In our past centuries, debt jubillee was the way to fix the problem. But is there any discussion of the reasons for erasing debts? Instead we have erased pensions earned by the people doing the work. We have erased home ownership because people on pensions or lower incomes can never catch up to own their own homes. Won’t most current owners lose their homes due to ever increasing taxes or inflation?
And lastly, the mythical trust of politicians doing the right thing or being restrained is not rational. When has that ever worked?
We are a planet destroying civilisation that appears intent on making it worse every day. Shouldn’t we be trying to curtail the destructive powers that be rather than feed them? Won’t MMT cause 90% of the people to be enslaved in poverty to enrich the remaining top 10%? Will this be justified? And why is it that none of this part of the equation are addressed? Why would this brilliant theory leave so much of importance out? Is there any provision for the people that do the work except bondage? I just can’t find justification in the arguments that the people or the planet will actually benefit, but would be happy to be enlightened if someone would provide a link to the rule book where this must be explained by all these brilliant authors and theorists.
Screeching about the national debt and deficits is so nutty. Oh god, the sky is falling. And all our corporate monopolies will be undermined if we can’t control prices anymore… the stock market will crash… Tsk, tsk. Just think about all that squandered value. Or is it really squandered value? I submit that value cannot be squandered – it’s impossible. Value is created by spending money to accomplish something of value. Otherwise money, our dear currency, has no value at all. (Is it valuable to deregulate finance to create special purpose vehicles for speculation which are backed by multiple rehypothecations of some rapidly depreciating collateral?…. I mean, really, are you serious AEI? – Something of no value whatsoever is never something of value. It stands to reason that if our currency is used to create valueless things then it is more or less “backed” by the same things and loses its own value… and the pig got up and slowly walked away.) The point is that there is no value without spending money and the more money we spend on the good things the more value we create.
Don’t believe the claimed basis of the myth. That’s a secondary myth, self-serving and possibly self-delusional. Mainstream economists aren’t really worried that if politicians see reality, they’ll lose control and eat everything up — they’re afraid that the consequences of seeing reality is that the shackles of inequality will become obvious and thrown off.
If austerity isn’t necessary but a choice, then the consequence of austerity — the impoverishment of the population is a choice. Inequality is a choice, rather than a necessary mechanism to keep the people from eating all the resources.
That’s the justification of poverty and inequality — that only a small population can be allowed to see reality and abuse it, because otherwise we would all starve. The lords discipline society, they’re a necessary evil.
Very simply put — if the vast waste of WWII managed to go on for 5 years without a self-sustaining improvement in technology since the resources were being wasted on destruction, and that with the technological basis available 70 years ago… what is possible today if we loosened the fetters?
The only real limit is ecological sustainability — and we’re intentionally keeping our technology down which makes our tech unsustainable.
Imagine.
MMT gives the lie to ‘supply-side economics’ – the myth that we have to throw gobs of money at the rich to get a good economy and ‘pay for’ the the gobs of money by austerity on everyone else.
it certainly does. +1
There is an interesting column today that looks at the current lessons of the shutdown and the main take-away is that the vast majority of Americans are unprepared for the next recession because they are living paycheck-to-paycheck due to low pay and a system not structured to support them.
https://www.marketwatch.com/story/government-shutdown-exposes-a-harsh-truth-most-americans-are-unprepared-for-the-next-recession-2019-01-22
I recall seeing data showing that peak industrialization in the US was about 1910 as a slice of labor; I expect similar numbers in Europe. Then services, etc, started to take over, delayed by the two wars — essentially, the percentage of effort needed in actually making things fell off for a century, and we spent more and more effort in work secondary to production.
So, I infer that essentially for the developed world, and now for the almost entire world, we’ve been over-supplied for 70 years (a bit less for the peripheral world — say China has been needing more until recently, and Africa may still need further industrialization to be self sustaining).
Thus — all austerity and the entire structure of inequality is not necessary in the sense of the 19th century, when there was literally not enough to go around, production wasn’t sustainable without starving someone.
So, most of economics — why questions like MMT are so sensitive — is a question of creating an illusion of disciplining the population as if we were living in the 19th century. The Marxist revolution happened in a sense with the world wars, everywhere. We just failed to notice. [MMT doesn’t require us to see our productive abundance, but it really does focus the question there, does it not? And thus why it’s a “joke” — but not a funny-ha-ah joke.]
If this is true, the pathologies of society come out of delusional societies. We can’t face the truth, and thus we must retreat to insanity.
I’d propose that it should have been obvious by 1945 that “supply side” was crazy — that WWII proved that the problem had shifted from how to produce enough, to how production and consumption should be organize, a la Marcuse.
How did we all miss it? Not everyone, but how has the delusion been kept up? A mythology that is out of date, like 16th century burgers still worshipping Astarte? What am I missing here culturally or economically?
Other than tamping down inflation, tamping down obscene and dangerously powerful wealth can be a function of taxes under MMT. Because a person or corporation have experienced a jackpot combination of Greed and Luck should not mean that they should also accrue the great political power that comes with obnoxious wealth in the US. That gross ndividual wealth is poison.
The US national govt has a problem as it cannot tax wealth directly, so the composition of its revenue system lays heavily on current flows as it must use basic income taxes and payroll tax regimes. Neat trick for the wealthy, already an unwise burden lays upon basic living flow hitting the utilities of the 90 percent hard (and let us not forget who controls prices and wage-setting in the private economy, another reason the 90 percent could stagnate, and why in the longer histories the controlled masses remain the dociled poor).
But in the 1960s we saw labor share a good proportion of the incomes. Modern times, could we return to those days? What indeed were the tax rate ceilings then, from which the rates then progressively declined to try and compensate for the burdens on utilities?
Oh, much higher then.
“That passage is a veiled concession that MMT scholars supported fiscal stimulus and correctly predicted that it would aid the recovery from the Great Financial Crisis (GFC) without producing harmful inflation.”
So Black, and other MMT supporters believe that the wild inflation of stock and property markets will not, over the long-term, prove to have been harmful?
“Inflation as the consequence of government spending/stimulus” is a red herring of sorts. Why? Because we get a lot of that inflation as the result of other types of economic policy that have nothing to do with direct government fiscal actions. The spirit of the quote is to say that there was plenty of slack in the economy to absorb the stimulus without creating inflation due to bidding up of wages and prices. In fact, there are many of us on the heterodox left who believe that the stimulus was too small!
Let’s look at one of the types you articulated: real estate. There is plenty of inflation in certain real estate markets (bubbles) and many indications that these bubbles are beginning to deflate because there is simply not enough demand/ability-to-purchase for high priced real in places like Silicon Valley and Manhattan. Looking at Silicon Valley, you realize that the high price of real estate has nothing to do with government stimulus, but rather with the burgeoning tech sector. I traveled to LA a couple years ago and the driver of the livery cab that took me back to LAX lamented that Snap was moving in to office near Venice Beach which was driving up real estate prices including rents. Nowt to do with government spending at all. Now if you want to say that the federal government should engage in massive public housing initiatives all over the US like it did during the New Deal, I would agree. The effect of such an effort would be to burst bubbles in real estate and rental markets, and one could argue that the initial effect would indeed be a deflationary one. Of course, the initial cry from the capital class would be one of “Crowding out! Crowding Out! You’re crowding us out!”
#Natch
I appreciate your points that there are other contributing factors, but the suggestion that 10 years of extraordinarily suppressed interest rates had little to do with the inflation of the real estate bubble is, to put it very mildly, unconvincing.
Even setting aside the obvious direct influence that such a policy would have had, it also helped to inflate, in a sense, some of the very sectors that you imply are organic. Do you imagine, to use just one example, that the tech sector would have grown as it did without the benefit of cheap money sloshing around everywhere?
“I appreciate your points that there are other contributing factors, but the suggestion that 10 years of extraordinarily suppressed interest rates had little to do with the inflation of the real estate bubble is, to put it very mildly, unconvincing.”
OK, but that has nothing to do with fiscal stimulus … fiscal stimulus didn’t inflate the tech sector or the real estate sector. Tax policy, monetary policy, bailouts and quantitative easing contributed more.
Whoa! I am not especially well-versed on MMT, but my cursory understanding is that it advocates for low rates. In fact, MMT’s founder, Warren Mosler, advocated a permanent zero rate!
So it is dubious to suggest that in an MMT world, and especially in the wake of a reaction to an economic crises, interests rates would not be suppressed in much the same way.
And that strikes me as a rather big problem.
OK, now that we’ve moved on fully from the fiscal origins of my response, I’ll only add that Warren could explain his p.o.v. far better than I could. This is the best I could find on a quick search. Please read. Warren does concede that perm-zero rates would hurt savers, but provides counters to that.
It seems to me that MMT and AOC are winning.
The more ‘take-downs’ I read of MMT the more I see orthodox economists grudgingly admitting that MMT is correct. These ‘take-downs’ usually point out a few minor quibbles while admitting the fundamentals are correct and then proceed to fret about “What might politicians do?” if they realize they can spend freely to give citizens nice things. After decades of watching politicians who claim to care about the budget deficit explode the deficit, but only to give Wall Street trillions in free money, start pointless, disastrous, multi-trillion dollar wars of choice, and give billions of tax breaks to billionaires while simultaneously claiming there is not enough money for schools, roads, pensions, Medicare, Social Security etc. I doubt the general public’s first reaction upon being exposed to the tenets of MMT is to start worrying about the generosity of politicians.
Cognitive dissonance is the only thing MMT proponents have to overcome. The belief in thrift as a virtue is deeply embedded in the American DNA. It’s psychologically painful for people to give up their belief that government finance works like household finance. It sounds too good to be true while also being a bitter pill to think the savage financial abuse people have suffered over the years for their education and healthcare could have been totally free and painless instead. It’s a bit like trying to convince people that there is an invisible briefcase full of money under their coffee table, and, it’s theirs for the taking if they can just believe it’s there.
Concerning AOC, I am reminded of Trump’s Presidential bid in 2016. The more the right-wingers demonize/publicize her and her ideas the more the general public find themselves really liking her and her policies. I really hope they keep it up! The Drudge report has AOC up on the banner, front and center (again) today claiming she’s “cracked” due to some out of context quote, but once again, I think his more independent-minded readers will find themselves nodding and agreeing with her.
I agree with this completely. The irony will be too much if the republicans persist.
Wondering if our modern technology prevented the logical/gradual progression of evolution. Maybe we should set aside some money to miniaturize our species. We could get so small that roast beef would be a fabulous myth; we would find roast cockroach most delicious; barbecued on a spit. Pretty sure we’d still drink lotsa brew. Who knows, maybe fungus was once a magnificent creature. Still pretty magnificent.
Blacks rebuttal to Strain is factually thorough, logical and scholarly. His rebuttal is also a complete waste of effort as Trumpites do not understand facts, logic, or scholarly argument. As one of my university profs used to say – they lack the cognitive glue on which to stick those new concepts.
The funny thing about logic is that two opposing views can be true at the same time.
To me it isn’t about MMT vs austerity. Its the strategy rendered for each. The strategy is always based on the presumption that the little people don’t matter.
We got MMT with quantative easing, strategy was to prop up assets with the money, and let wages and money flow languish.
MMT at it’s ultimate abused extreme becomes a regressive flat tax
With Austerity we cut off assistance to those in need.
Either way we lose.
It seems to this non-economist that MMT is a correct monetary theory, but not a complete economic theory. Is that correct? Don’t we need companion tax theory and spending theory to approach a full economic theory? Comments above hint at various related issues, but unlike MMT do not seem to gel into coherent forms.
It seems to me that money flowing through an economy is a lot like blood flowing through a body. That blood flow has any number of flow and quality controls operating on it in a healthy body. Are not taxes a lot like veins that ultimately bring blood back to the heart, lungs, intestines, etc. to prepare it to once again be sent (spent!) back into the body? Is not too much money/wealth accumulating with the wealthy similar to an aneurysm, waiting to explode? It seems a clearly defined complete theory would ease the process of explaining why MMT is correct, and how it should be used.
Perhaps I have missed a post that explains this, but if not, I (and I expect others) would appreciate a post from someone who knows more than I do on how this all fits together. Thanks!
With the use of the word “lunacy” in Mr. Strain’s rhetoric, compare such artifacts as seen here https://twitter.com/anninquirer/status/1049434346275463170 and here https://twitter.com/joey_girardi/status/951610041521537025 . Google will retrieve many, many more. There is a clear pattern of evoking mental deficiency or illness to demonize political opponents. Democrats do it occasionally when they accuse Mr. Trump of being mentally unstable or idiotic, but Republicans appear to have turned it into a concerted project. It is a mediated project, using billboards, bumper stickers, social media, and the mainstream and specialist presses — the full range, really. It has been going on for some time, as is clear from https://www.realclearpolitics.com/video/2018/09/06/crazytown_rnc_releases_campaign_ad_with_democrats_going_wild.html and https://www.chicagotribune.com/news/opinion/page/ct-perspec-page-nancy-pelosi-donald-trump-maxine-waters-1111-20181109-story.html . As Mr. Strain’s usage shows, it is ongoing. It goes far beyond political caricature, or the use of unflattering portraits in negative campaigns, or lying to gain advantage. Does anyone else find this project not just offensive, but disturbing?
If we take MMT to the logical extreme, there is a fair question of why the government taxes or takes debt at all. Why not pay all bills with seigniorage?