Thursday, December 29, 2011
Dan Kervick elucidates MMT and JG
Promoted from the comments:
Tom: "MMT as a macro theory is chiefly about achieving full employment along with price stability."
Dan: I that's an important point, Tom. I agree that MMT has a purely descriptive component. And I think it is completely fair to say that the descriptive component is the core of MMT. That descriptive component can be separated from prescriptive elements, and stand on its own.
But people don't develop novel descriptive economic theories in a vacuum. They are usually trying to show something about the way parts of the economic world work because they think it is important to understand those things.
Suppose you are looking at pages of a book, and the book shows detailed maps of LA and San Francisco, along with highway maps of the interstates between those two cities, with descriptions of rest stops, restaurants and hotels along the interstates and of facilities in the cities as well. The content is all descriptive. And that descriptive content can stand alone to be used by various people for whatever purpose they desire. But it’s pretty clear from the nature and structure of the book that the book was designed to serve a particular purpose – it is designed for travelers between LA and San Francisco, and provides them with practical know-how for that particular activity.
Now MTT isn’t a comprehensive description of every aspect of our economy. There are vast areas of economic life about which MMT has either little to say at all, or nothing original to say. So what is the purpose of MMT? What is the point of its careful operational descriptions of the particular parts of modern economic system on which it focuses?
In Bill Mitchell's post yesterday, he quotes Randall Wray’s CofFEE keynote speech this month:
"And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.
"I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand."
This idea of "standing the Phillips curve on its head" seems to have been a key eureka moment for some of the earlier developers of MMT. And it really is a key part of the rationale behind the development of the descriptive parts of MMT.
If you read a lot of the blogs written by mainstream economists, or any mainstream macro textbook, you see that mainstream economist have had the Phillips curve and its companions burned into their brains, along with ideas such as the natural rate of unemployment. They think instinctively in terms of a tradeoff between employment and price stability. They are constantly arguing that either we need to accept high unemployment to keep the inflation rate down, or produce inflation to get employment up. Overturning this broad front of depressing orthodoxy is the central reason that Wray and Mitchell, I think were so excited about the views they were developing.
Wray emphasizes that point in the preface to Understanding Modern Money:
“The primary policy conclusion that comes out of this analysis is, perhaps, shocking, but can be stated simply: It is possible to have truly full employment without causing inflation. This will appear to be a desirable goal, but a preposterous claim; no self-respecting Keynesian, monetarist or supply-sider would allow herself to entertain such hopes. But if the analysis here is correct – and it goes without saying that I am sure it is – then the logical conclusion is that we can move immediately to full employment with enhanced price stability. Indeed, as I will argue, the two goals are inextricably linked: the policy that is recommended to achieve full employment will also increase price stability.”
In answer to another comment, Dan writes:
Dan: ...everyone realizes that you can always get full employment by having the government hire everyone willing and able to work. But the controversy is over whether you can do this without creating higher inflation. Since the orthodoxy that you can't is very common in mainstream economics, and since some even go further and argue that in the long run reducing unemployment below the natural rate will cause not just increased inflation but a recessionary stagflation, then I think the ideas developed by Wray and Mitchell were and still are a pretty big deal, and deserve to be regarded as very innovative and heterodox.
Wray and Mitchell actually go further and argue that not only is full employment consistent with price stability, a job guarantee program can actually help promote price stability by providing a nominal anchor for the price of employed labor. That's a pretty big idea. And I don't think there are a lot of people out there promoting anything like it other than the MMT people.
I think it's important for people to continue to look at this seminal MMT thinking, because it is an answer to the frequent charge that MMT thinkers do not address the issue of inflation, or even have a theory of inflation, and promote reckless view of endless money-financed government spending. Warren Mosler constantly rebuts this by saying that the inflation concern should be the *only* concern when considering the limits on government spending - and there is no solvency concern. But Wray and Mitchell go even further in their work, because their version of MMT has a Keynesian theory of the basis of price stability built right into it, and an account of the actual mechanisms to use to achieve it - a mechanism that has the additional benefit of achieving the incredibly desirable social result of full employment.