Thursday, December 22, 2011

John Carney does MMT!


The school of economics that best explains this phenomenon is called "Modern Monetary Theory" or MMT. The MMT school is made up of scholars, businessmen and online advocates who have a deep understanding of the operations of the actual operational aspects of our monetary system.
Read it at CNBC/Net Net

Monetary Theory, Crony Capitalism and the Tea Party
By John Carney/Senior Editor, CNBC.com

Woo hoo!

John is critical of MMT on some points, too.
• But my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending....
• Likewise, the MMTers seem not to understand the politics of inflation and why government often doesn't prevent inflation from occurring, even though it is obviously within its power to do so. 
 I'm sure we will have some healthy debates on these points and that the MMT economists will clarify their position(s) on these points.

I would also say that it seems to me that these issues have been elucidated by MMT'ers already, but apparently not prominently enough or clearly enough. So there is work to do on this front clarifying these sticking points.

John also issues a call to action by elucidating the connection among economic theory, political economy and policy, based on his perception that the presentation of MMT is overly theoretical and is deficient in the practical.
This objection to cronyism is at the very heart of the Tea Party movement. It is controlling the Republican primaries right now. It is why the bailouts irked so many. It is, in fact, a deep part of the Occupy Wall Street movement....
So my recommendation to the MMTers is that they stop talking about spending in the abstract. Start talking about spending that leads to crony capitalism and spending that does not. Get on the side of the anti-crony, Tea Party brigades. There's a natural friendship to be made.
Let's make it happen.
 Sounds good to me. After all, Warren Mosler originally ran for office as a Tea Party candidate.

Where I think we can agree is on crony capitalism and political corruption. These are central topics on this blog because they ae central to MMT as an aspect of institutional economics. Warrem Mosler often says of problems, "It's the institutional arrangements."

Economics is largely about reciprocal relationships — production-consumption, investment-income, supply-demand, credit-debt, and so forth. A lot of the debate in economic is over which of the complementary opposites is causal — supply side v. demand side, for example.

Similarly, the debate in political economy today is over the complementary opposites of business-government, and which is causal in the crisis. The correct institutional answer is that this is a chicken and egg question. The real issue is how to reform or reorganize existing institutional arrangement that result in imperfections and frictions in a way that produces an optimal result that is also practically feasible to institute.

This requires a correct theoretical understanding. As Thomas Aquinas said at the beginning of De Ente et Essentia, paraphrasing Aristotle, "A small mistake in the beginning becomes a great one by the end."

MMT holds that understanding how the existing monetary-financial system works is a sine qua non. A great deal of the contribution of MMT comes from the work of MMT economists on government finance, building on Post Keynesian circuit theory developed by Basil Moore, for example, in Horizontal Money. MMT makes the key distinction between horizontal money and vertical money.

Horizontal money is created by the non-government financial system, and since all the assets and corresponding liabilities are in non-government the sum of financial assets is zero. However, vertical money is different in that the liability is that of the government and the asset is that of non-government, so vertical money injected into non-government results in net financial assets for non-government. Elaboration of this simple point eliminates much of the confusion that has arisen around the role of government finance. This view goes under the name of Chartalism, and MMT is also called Neo-Chartalism.

MMT builds on Wynne Godley's monetary economics, which is based on stock-flow consistent models of sectoral balances (see Godley and Lavoie, Monetary Economics, 2007). MMT adopts Abba Lerner's functional finance for managing government fiscal policy. Fourthly, MMT relies heavily on Hyman Minsky's analysis of financial instability for analyzing the financial system. Fifthly, MMT shows how to achieve full employment along with price stability using a buffer stock of employed and floor compensation package as a price anchor.

MMT holds that this knowledge reveals a spectrum of policy options. Political economy is about developing these policy options and institutions for realizing them. MMT is politically neutral, holding that choice among the various policy options along the spectrum is a political question that is decided by voters in a liberal democracy.

Of course, this is not all there is to MMT, and MMT also has various "allies" who are not among the MMT developers or in the MMT lineage, so to speak, such as criminologist William F. Black, and economic historian MIchael Hudson, colleagues of MMT developer L. Randall Wray at UMKC and all contributors at New Economic Perspectives blog.

While MMT may not have addressed crony capitalism and political corruption as a central point, key proponents of MMT such as Prof. Wray have done so in association with Profs. Black and Hudson, who have focused their attention on this.

MMT economists have also blogged and commented on political economy and espoused specific policy options. Australian professor Bill Mitchell writes from the rather far left at billy blog, US professor L. Randall Wray writes from the left at Economonitor's Great Leap Forward, and financial manager Warren Mosler takes a more conservative position at The Center of the Universe. Warren also has a series of proposal on reform at The Center of the Universe under Proposals in the menu bar.

Thanks, John, for launching this debate. It's just what we need.

UPDATE: Steve Randy Waldman (@Interfluidity) tweets, "Excellent. @carney calls for a synthesis of MMT and public choice economics, an anti-crony-capitalist MMT."

Australian MMTer (@AusMMT) tweets: "Only one problem with @carney's conclusion - alienate the global MMT followers for the americo-centric view."

16 comments:

Mario said...

yes it is real good. I chuckled when it referred to mike's blog as more "combative." Funny as well as accurate. LOL ;)

Here's the letter I wrote to him and the editor thanking them and discussing the points he brings up. I share it here b/c I think I bring up some good points on how we can manage government expenditure...namely first through focusing on cutting taxes and second through legislating that all government spending initiatives must "split the bids" such that no one company receives anymore than 30% of the total spending budget for that project.

Of course I encourage all of you to also send a letter and spread the love and thanks. It is really a good case he makes for MMT and is what I've been saying for some time now with getting MMT to merge with the Austrians....if only if only!!!! Perhaps the crony capitalism is a major key in that marriage...

Thank you John Carney for your post today about MMT and explaining it so clearly and also challenging so thoughtfully. I am a long-time MMT-er and post comments around and about various financial websites. Thank you.

I appreciate and frankly agree with both of your concerns with MMT. I do think it is important to remember that based on sectoral balances in the US economy, MMT calls for increased government deficits not necessarily increased government expenditure. In other words, we can cut taxes significantly rather than increasing spending. Cutting taxes is probably one of the absolute best things we can do and MMT appears to the ONLY economic school of thought that actually proves it can be done and is promoting it. Cutting taxes gives people more money, stops crony capitalism, and stops inflation being "passed on" to the people. It handles many if not all of the concerns you bring up.

Personally once, you do a JG and cut taxes sufficiently, you could very likely decrease discretionary government spending to a minimum and increase NECESSARY government spending on things like infrastructure, state aid on a per-capita basis, health care, home owner support, space R&D, green tech. R&D, etc., etc. Also going to no bonds or at least merging the Fed and Treasury balance sheets would also go a long way to ending the banking subsidies, and a decrease in military pursuits would be quite nice. Generally speaking the idea is to focus government expenditure either through government agencies that would do the spending themselves or onto companies working for the public interest like with building roads and upgrading all gas stations with green technology for example. Also we could pass legislation that says the government must spread all bids out to various companies such that no one company receives more than 30% of any one spending initiative. This way the jobs can get done AND there is more symmetrical expenditure throughout the economy.

Much of the crony capitalism comes not from expenditure per say but rather from a lack of oversight, legislation, and regulation of that expenditure.

Thank you again and your posts are VERY appreciated and welcome. A loyal reader indeed!!!

Matt Franko said...

For John,

Any hope of getting these issues analyzed via the MMT paradigm on the video side of CNBC?

Resp,

Mike Norman said...

I saw that, too, Mario. Funny!

SchittReport said...

dear mike,

my belated x'mas present for you, you will not be disappointed!

http://www.youtube.com/watch?v=2KSlZ92t2sI

Anthony said...

Carney makes some fair points. I can't say I've seen a lot of political analysis in the MMTers' literature, either, but then they aren't political scientists. Political naivete was one of Keynes' weaker aspects, as well.

Two thoughts come to mind. First, surely the NUMBER ONE thing the government could spend money on is our long-neglected infrastructure and those sectors of the economy (like education) that are public.

Second, though I, too, have detected some points of convergence between MMT and the Tea Party, I cannot say Carney's description of the Tea Party comports with most of my observations. Most of the Tea Partiers I've known have fallen into three categories. The first are "culture warriors" who literally think if we deny civil rights to gays, the economy will take care of itself. The second are debts hawks of the strongest variety who cannot be shaken from their belief that the government must fund itself through current taxes. The third are Austrians or Austrian look-alikes who envision the private sector as a stand-alone entity on which the government feeds as a parasite.

Not a fertile landscape for MMT, but for those who have ears to hear, I say, yes, let's work with them.

Senexx said...

I wouldn't call Bill Mitchell of the far left, left maybe, it just seems that way because the US is that far to the right, any further to the right and it'd be Iran or North Korea, etc. Anyway you get the picture.

Mike Norman said...

SR:

Yes, I saw this. Bravo to Cenk, but it will only whip his followers up to an even greater frenzy.

Tom Hickey said...

@Senexx

In the US Bill Mitchell comes across to many as far left. Up there with Noam Chomsky.

Good heavens, he mentions Marx and cites Kalecki, and even disses Keynes. Heresy in this parts, even among many on the "left."

dave said...

i find it hard to believe that the tea party would embrace mmt, even if it benefits them immensely. they seem to hate all things government(their behavior at the town halls during the health care cluster f#@k) it seems to me that their hatred should be directed at the politicians and not government. after all it is "we the people" not "we the politicians". maybe the "tea party" is not as big as the msm would have us peons believe.

Matt Franko said...

Dave,

http://www.youtube.com/watch?v=eJQHvoLEeRQ&feature=share

Take a look, Occupy & Tea Party getting together....

Resp,

paulie46 said...

I'm with Senexx.

I'm an American that reads Bill Mitchell religiously (maybe not a good choice of words) just like I read Paul Krugman.

Mitchell comes across to me as a true progressive, not a faux progressive as most of the left in the U.S. seem to be.

Being a former life-long Republican that woke up during the second term of the GWB administration, many of my my liberal friends call me radical - except I don't advocate for anything that is really out of the mainstream, which I think is really a lot more liberal than our politics.

Plus MMT taught me that capitalism is doomed, at least as it is currently practiced.

Tom Hickey said...

Excellent video, Matt. Thanks for posting. Cenk is right on here.

Dan said...

I think he makes an important point on the political aspect. It takes time to make people rethink and challenge the ideas which are so ingrained in public sentiment. We need to find ways of winning the argument from within the mainstream. That why it is so great to have people like Mike and now Carney at mainstream media outlets like Fox and CNBC.

It's ok to be combative among the people here. But in communicating the message, I think MMT needs to patience and better sound bites.

Matt Franko said...

Tom,
From the "right" another thing to watch out for is where Karl Rove surfaces in this.

His lack of visibility on these issues is perhaps a "dog that is not barking".

If I were a politician and I wanted to get elected, seems I would want to appeal to 99% rather than 1%.

I have a funny feeling that he is working 24/7 doing polling/research on this. Only studying it for now, hasnt come up with a detailed strategy.... yet.

Resp,

Tom Hickey said...

Matt, I think that savvy people are figuring out that a huge backlash in in the works and it is aimed at TPTB, and politicians are the most visible and easily reachable targets.

I think that is is going to be an emerging political issue going into the general and it portends wide-reaching economic implications. Neoliberalism is no longer securely in the driver's seat, with everyone else in the back seat. It's a reason that MMT is getting noticed now, too.

Notice that Democrats are now using "income inequality" as a buzz word, and the GOP is using "class warfare." The knives are coming out. Gonna get ugly as both side vie for the 99% largely by demonizing the opposition.

The only way that the 1% can survive this kink of backlash is by creating civil war between opposing factions of the 99%. That will be the underlying strategy, and it's why calls for unity between the (real) Tea Party and Occupy as both part of the 99% terrify them.

Naturally they will try to brand any serious opposition as "terrorism" and attempt to marshall the full power of the state to contain it, as we see already happening.

Senexx said...

I'm not familiar with Noam Chomsky to comment.

Like I said the US is that far to the Right of other Western Countries - it is so far to the right that even its left is on the right.

I, of course, use the terms left & right to highlight and for simplicity, personally I reject the terms. I used the NK & Iran earlier for hyperbole to make the same point.

Mitchell appears on the US far left because of how far to the right it is. Whenever we use the adjective 'far' in this context it is worth considering where those making the comment sit on the spectrum as it may not be 'far' at all, just 'far' in comparison to where the commenter sits.

I'm not sure I agree with you Paulie that Capitalism is doomed but as you seem to indicate you didn't quite mean it that way. I suspect you have a more nuanced view than that.