Sunday, February 19, 2012

Dan Kervick responds to Dean Baker

Dan Kervick posted the following as a comment at CEPR in response to Dean Baker's recent post on MMT, in which Baker recommends using monetary policy and increasing exports along with fiscal policy to address lagging demand. Dan also posted this as a comment here. I am promoting it to a post.

Dan Kervick:

I'm a strong MMT sympathizer and fellow traveler, but not an economist. I believe the deficit-driven fiscal channel promoted by MMT is by far the best of the three alternatives. But I speak only for myself in defending this position.

First, the interest rate channel seems to be somewhat effective for modulating demand in normal times, but limited in times like the present. Who honestly thinks we can effectively boost demand and economic activity just by more interest rate tweaks? That channel is exhausted.

Also, the interest rate channel works by expanding credit. That's fine for business investment, but the foundation of production is consumption demand, and I don't see why we should be at all eager to expand consumer credit again, especially following the terrible catastrophe of the credit bubble that we have just recently lived through. Progressives should prefer to find ways to generate economic activity that do not depend on further indenturing consumers to society's feudal landlords, but that instead put secure income boosts directly in consumers's bank accounts.

The devaluation channel works by reducing the real wages of working people, particularly those who have the least workplace bargaining power and can least afford to have their real wages reduced. Yes, this makes those poorer workers more "competitive" with the serfs who live abroad. Surely we should avoid this path if there are alternatives. In a society in which CEO to worker pay ratios are now measured in the hundreds, while incomes in the bottom deciles have stagnated and dropped for years, it is absurd to conclude that the problem with the American economy is overpaid workers buying too much stuff from Walmart.

My own view is that the excess of consumer credit and the general decline in economic health is a result of growing income imbalances and growing economic insecurity, and so we should prefer policies that boost demand and economic activity by promoting greater income equality, and especially by boosting incomes and security in the bottom portions of our population.

Government spending works by redistributing purchasing power. If it's spending of the classic, deficit-neutral tax-and-spend variety, then the redistribution is obvious. Purchasing power is directly removed from those who have it in abundance and bestowed on those who do not have as much of it. Because the shift can often go from those who have a higher propensity to hoard and toward those who have a higher propensity to consume and produce, the redistribution can be a large net plus for society.

If the additional government spending is instead accomplished by expanding the deficit in the manner proposed by MMT, the re-distributive effect is more subtle and less disruptive, both economically and politically. One adds to the purchasing power of some without taking money directly from others. This boosts the demand for goods and services, and eventually the economy reaches a higher equilibrium state where those at the bottom are enjoying a significantly better standard of living while the rest enjoy more or less the standard they had before. Relative purchasing power has been redistributed.

The other great thing about the fiscal channel is that we can decide how to to spend the money, and can use it for big projects of long-deferred public investment, instead of relying solely on the frequently wasteful whims of the private sector, and it's endless flim-flam rackets and artificially induced desires.

Economists seem to love to stick with aggregates, and avoid uncomfortable discussions of distribution. But apart from the important social questions of justice and power in a democratic society, the dynamics of the aggregates and dynamics of distribution are entangled. It is impossible to avoid the distribution question.


Matt Franko said...

And for Baker's "Channel 3" it looks like that in a global system of state currencies, what actually causes a relative fall in one nation's currency vs another is a fall in the real working conditions of the nation that seeks to increase exports (ie taking the lead in a race to the bottom).

Moron Baker who is supposed to be an advocate for working people, is actually here via his ex/im channel advocating SCREWING the US worker as this is the real way that nations that operate state currency systems can devalue their currencies between each other...

What a M-O-R-O-N.


Dan Kervick said...

Thanks Tom! "boots" should have been "boosts" (my typo). Maybe we should put boots in some people's backsides. But what income needs are boosts.

Matt Franko said...

Dan: " but not an economist."

Tom, Dan here is starting to sound like you where you sometimes feel the need to qualify your comments this way.

I would rather read anything you two write than ANY orthodox economist out there.

Both of you please dont feel the need to qualify your writings in this way on my account!!


Tom Hickey said...

I fixed the typo, dan.

paulie46 said...

Great post Dan

geerussell said...

Between the above post and his follow the money distillation of MMT over at MMR, Dan is on a real hot streak.

Dan Kervick said...

Hi Matt,

Thanks for the support. One reason I qualify my comments in that way is that I know I am still capable of making some pretty egregious errors in elementary economics that even most undergraduate econ students wouldn't make. (My son is an undergraduate econ major, so I know what I'm talking about!)

So if I commit a real clunker in a public comment, I don't want the real MMT economists to take the fall for it. I like people to know I'm an amateur just trying my best.

Dan Kervick said...


Thanks. Unfortunately it is marred by a bunch of typos and jumbles. I'm going to try to write up a cleaner version and post it on NEP.

Neil Wilson said...

MMT differentiates from classical Keynesian spending by focussing on the small man.

Classic Keynesian spending was large projects for large egos, and quickly ran into supply side issue because it used high skilled labour.

MMT instead focusses on the small man. A Job Guarantee and payroll tax cuts. Put the cash in the hands of the ordinary citizen and let them decide.

It fundamentally replaces the failed 'trickle down' policies with a simple and straightforward 'bubble up' system.

Tom Hickey said...

Dan K. One reason I qualify my comments in that way is that I know I am still capable of making some pretty egregious errors in elementary economics that even most undergraduate econ students wouldn't make.

Dan, I have a PhD in another field but I'm a newbie in economics, so I qualify my statements, too. What I find surprising is that many people who are experts in one field assume that they are automatically experts in other fields. That is patently not the case.

My field is philosophy, and philosophy underlies all fields. Most people in these other fields that have not studied philosophy or the aspects of philosophy relevant to their discipline make some egregious errors even with respect to their field.

I am astounded at how many economists are completely unaware of relevant work in philosophy, especially ethics, social and political philosophy, philosophy of science and philosophy of language.

I am also amazed at how they are either unaware of or ignore relevant work in the social and cognitive sciences as well. The result is simplistic models built on untenable assumptions. But the math is correct, so appatently it's OK. Crazy.

As a result of this playing loose with knowledge, the whole of mainstream economics is based on assumptions about human beings and society that are just numbskull and the result is nonsense. Applied to policy the consequence is a social disaster.

This lacuna really vitiates their work, and this "expert" work is being used to set government policy for the most powerful nations in the world. It's more than astounding. It is pathetic and constitutes gross malfeasance. Ignorance is no excuse, especially when it is willful and culpable.

They even often admit when pressed that their models are based on overly simplistic assumptions and are only meant as aids to thinking. But they go on to make egregious logical jumps in applying these models to policy as if they actually models the complexity of a modern economy or the global economy. It is a freshman error in logic, and I can only conclude that it is not really an error at all. they are using their work as propaganda for a partisan policy position.

Ravi Batra describes this as an alliance between intelligentsia and acquisitors when the acquisitors are in power and reward the intelligentsia for supporting their rapacity with "expert" justification for why it is the best way or the only alternative. Sound familiar now?

Tom Hickey said...

@ Neil

Right. This is what opponents of the MMT JG either don't get or don't want to get. As Bill Mitchell said, the policy choice is between a buffer stock of employed and buffer stock of unemployed.

Unforgiven said...

Tom -

Seems like it's built right in to our system of education (pay no attention to the man behind the curtain). The design seems to be to produce a worker that fulfills a role in society and leaves peripheral concerns to others. (Thanks Neil W.)

One ends up wondering why so many of society's problems persist from generation to generation, no matter who is at the helm. "Do your job and do it right, life's a ball, TV tonight." Meanwhile in the upper echelons, "experts" deftly redirect focus away from possible solutions and towards servicing of dysfunctional paradigms (whether by design or by accident). Without the proper feedback loop, that system will never be changed.

Unforgiven said...

I might add that this seems like a logical outcome given our history of deferring to the ruling class and dependence on religion.

Tom Hickey said...

@ Unforgiven

Ravi Batra explains this historically in The Downfall of Capitalism and Communism (1978, 2nd ed. 1990). It's a must read to understand this dynamic in contemporary terms, IMHO.

Basically there are four cognitive types ("types of mind") that Batra calls laborers, warriors, intellectuals, and acquisitors. The alternating dominance of these groups explains the social, political and economic history of humankind in terms of a simple but powerful model of personality types. See Wikipedia — Law of Social Cycle for a brief summary of the basic ideas.

This becomes a more powerful model for understanding shorter cycles when combined with Strauss & Howe's generational approach. See Wikipedia — Strauss-Howe generational theory.

At any rate, I have found this approach useful. The basic ideas can be gleaned from the Wikipedia articles.

Tom Hickey said...

Unforgiven said...
I might add that this seems like a logical outcome given our history of deferring to the ruling class and dependence on religion.

Exactly. Feuerbach, Marx, and Freud established this. Batra includes it as one of the ruses the intellectuals use to confuse the other groups in order to gain dominance. They either assume dominance themselves in periods dominated by intellectuals in a religious ages, or advance the dominance of the other type in power in order to gain advantage for themselves. In non-religious periods, the intellectuals become the "priests" of some other non-religious ideology, like economics today, in which neoliberalism is the dogma of the day.

This doesn't mean that there is no substance behind religion at all. Many, including Batra, point out that there is a spiritual dimension assessed by the higher cognition of the sages that is the basis of religion. I call it "core spirituality" at the heart of perennial wisdom as the teaching of genuine saints and sages, masters and mystics, and prophets. However, it is taken over by priesthood that corrupts it for their own advantage. Actually, this is also cited by the teachers of perennial wisdom themselves, who warn against being taken in by the self-serving machinations of the priests who will inevitably rise up to misrepresent the original spiritual teaching, obscuring it behind a veil of dogma, ritual, and observance.

Unforgiven said...

Good points, all. Thanks for the links, Tom.

Anonymous said...

@Matt Franko - Dean Baker is one of the few mainstream economists who is anywhere near comprehending MMT. Yes, he still has a long way to go and could benefit from actually studying the subject instead of saying he doesn't understand it. But calling him a M-O-R-O-N isn't going to help.

Letsgetitdone said...

Dean Baker may not be a MORON, but he certainly is a very sloppy thinker when it comes to MMT. He just doesn't get it yet, and I'm sure that's because he just read the MMT blogs.

Great comments here from all. Thanks especially Dan, Matt, Neil, Tom, and Unforgiven.

Tom, I've studied some philosophy of science and read a lot more in epistemology, philosophy of science, ontology, and ethics since leaving graduate school in the 1960s. I'm also a Ph.D. in behavioral political science with a very interdisciplinary background. And I'm entirely in agreement with your views about the narrow scope of most economists and also their arrogance. After they spend a few years here in DC, they take themselves to be experts in politics as well as economics and take their political judgments to be better than the judgments of people who study politics and political history broadly and around the world.

Letsgetitdone said...

Btw, that last complaint of mine affects some in MMT, or at least MMR people as well. The MMR people set their political judgments over the political judgments of others and use them constantly to say that others are "unrealistic" and they are "realistic." It's just propaganda and self-promotion.

Not one of the MMRers were able to predict the appearance of the Occupy movement. Nor can they predict its course now. If it really gets going through the Spring, Summer and Fall, by next winter the political background could be drastically changed. Then we'll see about 4% inflation and 4% unemployment as targets.