I had several people ask me in comments or e-mails whether I agreed with MMT that the government need to raise taxes to pay for spending or whether I agreed with Paul Krugman that it does. I won’t claim to know exactly Paul Krugman’s view on the topic, but let me reframe the issue somewhat in a way that may cause people to see differently what is in dispute.
I think that all MMTers believe that the government cannot literally spend without limits. In other words, we can push the economy to the point where inflation is a real problem. The MMT answer is to raise taxes to prevent inflation from getting out of control.
Now suppose we are in the world where we have pushed the economy to the point where inflation is a problem and we decide we want the government to spend more money on some great project. At that point, it would seem that MMTers would have to agree that we need tax increases to offset the impact of government spending in boosting the economy
We don’t literally need the tax increases to pay for the spending. The Fed could simply create more money to finance the spending. However if we don’t want the spending to be inflationary, then it must be offset by a tax increase.
I think the difference between the MMTers and Krugman is largely on the frequency with which they believe that the economy is up against its capacity constraints so that inflation is a real issue. I don’t want to put words in Krugman’s blog, but my guess is that he believes that the U.S. economy is typically operating near its capacity, so that the story of needing tax increases to offset spending would in general apply.
| Read it at the Center for Economic And Policy Research More Musing on Modern Monetary Theory by Dean Baker (h/t Clonal Antibody via email) Getting there. |
23 comments:
"We don’t literally need the tax increases to pay for the spending. The Fed could simply create more money to finance the spending."
Tom, This is pretty damn good from Baker... pretty damn good. This could be a big "get" for MMT...
If Baker really believes this (and no evidence here that he doesnt) then he has made it past "taxpayer on the hook/government as household". Hope he keeps this up...
Resp,
Matt,
I agree. Seems Baker has made bait of a leap.
A bit of a leap. iPad palsy.
He's not fully in paradigm but I've seen him express near-MMT ideas on a regular basis. Just the other day he was saying this about sectoral balances:
Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years.
They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it.
Shows the difference between an honest economist (Baker) and Krugman. Baker's attempt to portray Krugman as having an intelligent (if unstated) rationale is purely diplomatic...
If we could just settle on some good talking points for MMT logic, without actually saying "MMT", people would begin to accept it because it makes such good logical sense. Especially young people whose minds haven't been poisened with nonsense.
"We started out with effectively zero dollars. How have we borrowed to $15.2 Trillion…?" Who lent us the money?
"Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years.
They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it."
True?
Can't full employment be attainable along with smaller government deficits and a private sector surplus if the current account is in surplus?
Also, shouldn't "negative private savings" actually read "negative NET private savings"?
Anon,
"negative private savings" actually read "negative NET private savings"?
Don't you dare! ;)
Rsp
"Don't you dare"
It's important people don't spread inaccurate descriptions of MMT or else people will dismiss it as nonsense.
@Anon
Except for pedants, "negative private savings" has always meant "negative net private savings", over any period in question.
Bill Mitchell knows this as do all of the main MMT contributors. That's why they finally just started ignoring certain people's comment on the issue. Those commenters took their argument to others that would listen and made a big deal out of nothing.
"Savings" has no real meaning if we don't assume "net" - if we don't account for liabilities the concept of saving is pointless.
How much of your savings is usable if you have outstanding liabilities, especially if your outstanding liabilities are greater than or equal to your savings?
Otherwise we could simply borrow money from the bank and put it in savings. That makes no logical sense but roughly one billion words were wasted trying to clear it up. Unsuccessfully I might add.
That whole argument was nothing more than someone taking a simple concept and making it harder for people to understand. There is no graet insight hidden in there.
Fair enough - but for MMT to appear credible to "non MMTers" basic statements have to be made clearly so as to avoid confusion, rejection, and suspicion. We've all seen how misplaced suspicion about "intentional obfuscation" can needlessly poison the debate.
@Anon
Are you trying to tell us that…
"net negative private savings"
…is clearer to the layperson than…
"negative private savings"?
Because I am claiming just the opposite.
Throwing the "net" in there is more correct in a semantic sense but I believe would be confusing to most people. context is important.
Still, this minor disagreement did not warrant the time spent on it - especially when it should be obvious that no one was intentionally being deceptive in their approach. Many fine people's motives were impugned by making such a claim that was thrown around indiscriminately.
In fact the claim that it was intentional was borderline libelous.
This all happened because certain people wanted to promote this "flaw" in MMT that they had "discovered" and presented it as an issue that would divide the MMT community.
Those involved might have convinced themselves that it was a big deal but at the end of the day it wasn't and a lot of animosity was generated for no good reason.
Paul, I disagree that it did no good. "Saving," "savings," and "investment" are all ambiguous terms because they have different meanings in different contexts. For economists, "net saving" means saving minus investment. For ordinary people "net saving" has no meaning and it needs to be explained to them saving net of, that is minus, what, exactly. Probably most people would think of net saving as the funds that they have in bank accounts, CD's and money market funds less the money they owe (current liabilities). Clarity and precision are essential if parties are to understand each other on the same terms. That's why there are lawyers. If there is possible confusion, it needs to be cleared up.
@Tom,
I didn't realize we were confused.
Net savings in the S/B relationship is (S-I), which I presume is savings net of investment.
The sum of all of those (S-I)'s over history is (total) accumulated savings net of investment.
That accumulated total (savings net of investment) is identically equal to the sum of all dollars and dollar-denominated financial assets in existence minus all liabilities owed to the FR banking system.
Seems to me those two definitions of savings arrive at the same total quantitatively.
I also presume that the incremental changes in (S-I) are equal as I described, They are the same at all times in magnitude, so what I see is a distinction without a difference.
My larger point though was that the discussion was largely based on a different argument, that being that Bill Mitchell et al were being intellectually dishonest and purposefully misrepresenting the meaning of savings to "sell" their "snake oil".
I took offense to that. Had they kept the argument narrow based on the semantic and technical issues the discussion would have been fruitful without all of the animosity left over.
Plus we aren't really left with anything new and useful. Just hard feelings. I will eventually get over it.
People will continue to mis-speak all the while knowing what they are talking about and for those that are confused - they can ask questions.
Nothing has changed and as far as I can tell there is no new understanding of any of the finer points of MMT.
@Tom
Also, the meaning of "Investment" is so ambiguous it defies definition.
Take a look at the SNA or any of the other guides to the National Accounts and see if you can find a cogent description of it.
It's funny how certain people can throw around insults, such as that MMTers are being 'deliberately misleading and dishonest', whilst taking great offence whenever the slightest insult is hurled back in response. Some people just have a blind spot, I guess. They still deserve to be called hypocrites though.
"Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years.
They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it."
This is incorrect, isn't it? As I said above, full employment is compatible with smaller government deficits and a private sector surplus if the current account is in surplus. Have I got this wrong?
MMTers may argue that "exports are a cost and imports are a benefit", but that's a seperate issue, it seems to me.
The argument for perpetually high fiscal deficits and trade deficits can't be made on the basis of the argument put forward by Dean Baker (above) as it's not correct.
Other factors have to be introduced to make that argument hold water. No?
@Anonymous
"…full employment is compatible with smaller government deficits and a private sector surplus if the current account is in surplus…"
This is true in a technical sense since what is happening is existing NFA's are flowing back from the external account to the domestic account, so domestic savers are saving at the expense of foreigners. The previous deficit spending enabled the foreign entity to accumulate dollars without tanking the economy.
If we have an external surplus with a country that has no prior holdings of dollars It would seem that the government (U.S.) would have to "print" new dollars and exchange them for whatever their currency unit was.
This to me is functionally equivalent to deficit spending, except we wouldn't be creating an equal quantity of treasuries. The "no bonds" scenario?
I suspect the demand for treasuries in the U.S. would increase so what would likely happen as a result of that?
There is only one source of dollars.
My point on saving (flow), savings (stock), Investment (flow) and equity (stock) are different than most non-economists understand these terms. So the intended meaning has to be explained when non-economists are involved. What constitutes saving and investment are also matters of accounting and that, too,has to be clarified. I've learned a lot from the discussions about this which began as SRW's quite sometime ago. The great thing about blogs is that experts are willing to lay things out and answer questions. It would much more difficult digging this out, and one wouldn't be sure that misunderstandings weren't creeping in.
I have said many times that the challenge is being clear, precise and concise about technical matters in a way that is accessible. It's a trade-off. Some of the technical detail has to be omitted to simplify matters enough for people with no background.
I think that the MMT economists have really been quite good at this, and they have graciously taken time away from professional publication, which is what counts in academia, to explain MMT simply enough for most to get the basic idea of, and to answer questions.
In is true that exports are a cost (working for others and exporting resources that could ge used domestically) and imports are a benefit in real terms of trade (foreign workers working for domestic consumption and sending goods to the importing country) in real terms of trade. But as you say, Anon, that is not all there is to it.
It is a complex matter in a global economy and there is no simple solution. I don't think that the world is benefited by nations pursuing their own self-interest rather than acknowledging that the global economy is a closed system and coordinating policy.
If demand for dollars by foreigners increases, thereby pushing up the value of the dollar, isn't this in effect increasing the financial assets of the US private sector? (Assuming no loss of jobs as a result, for the sake of argument).
The value of people's money increases, imports become cheaper, without additional liabilities necessarily having to be created. A such could it not be said that net private sector financial assets have increases (if not in 'quantity' then at least in value)?
"A such" should be "as such"
If the exchange rate increases, the currency increases in value relative to other currencies it rises against, imports and foreign travel become less expensive, and purchasing foreign assets more attractive. As China has saved in USD and defended the peg, keeping the dollar up relative to the RMB (and the RMB undervalued as far as the US is concerned), US entities have increase direct foreign investment in China. It's called Chimerica.
MMT would be fine with this as long as the Chinese are, since the US is up in real terms of trade, if the federal government would offset the demand leakage to external saving plus domestic private with an appropriate deficit. This won't go on forever, since at some point China will turn to building its domestic economy by relaxing financial repression in order to increase demand.
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