An MMT site bringing you dogma-free economics without the pleadings of self interest
The more I read comments from monetarists and supply-siders the more inane their arguments seem."…Some people would worry about government deficits and debts, even though we knew we owed it to ourselves, except for some of the debt that was held by foreigners…"Debt held by foreigners is merely foreigners earning interest on money they have earned by trading their hard work for dollars, rather than stuffing it in mattresses or mattress warehouses.Rowe should be worried about private debt but you will rarely hear him mentioning it.When one have a savings account one still has his money.How smart people can see that as being indebted to someone is beyond my imagination, yet Rowe still manages to utter the words in defense of some lame argument.Why does anyone listen to these dinosaurs?What is worse is he is still actively teaching people this drivel.Here's another laugher from the comments:"…taking money from working people and paying people to dig holes will make us poorer, not richer."Get back to me on this when taxes exceed expeditures, then you may have an argument.As Charles Pierce would say "this is something that makes me want to guzzle antifreeze."
"…taking money from working people and paying people to dig holes will make us poorer, not richer." Yeah, I got a chuckle from that too. Still hasn't figured out that since 1971 the US is the monopoly supplier of a non-convertible floating rate currency and funds itself directly. Taxes just serve to dampen effective demand and control inflation. And, as Warren Mosler often says, the US is grossly overtaxed for the size of government.
Now he lives in a world with hot potatos but the potatos aren't that hot really if you think about It.Seems to me he has been reading MMT and now wants to say: I knew all that but macro is much more complicated. Step by step he is dropping all his monetarist arguments against MMT description of operational reality. No more IS-LM for him.
These people perform mental gymnastics to defend their ideology, I've posted this quote from Carl Sagan before, but it encapsulates what MMT is facing,“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”
"Taxes just serve to dampen effective demand and control inflation"They still remove purchasing power from private individuals and allow government to spend in their place.
James that's why science advances one funeral at a time. As Planck said: "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."Imagine if this happens on a hard science like physics, what the hell if gonna happen in a 'discipline' like economy which is all about politics and social structure in its nature (ideological construct), most economics are not about real resources & production but about money, and money is a sociological construct.Then you don't need one funeral, then you need five funerals to move on. Also captured by this quote from Keynes: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
"They still remove purchasing power from private individuals and allow government to spend in their place."That's a feature not a bug - it's the operation that puts the signal into the system. Otherwise stagnation.Plus we always spend more than we tax for the same reason.
Nathan Tankus doing yeoman's work over there...Ramanan gets the award for 'One liner of the day':"I guess Friedman had great hypnosis skills :-)"LOL
PaulOk, but say the government is running a given deficit and there is medium-high inflation, the government can either raise taxes and continue spending as before (redistribute more income from private spending to government spending) or it can cut back spending (reduce government spending relative to private spending). Or I guess it could raise interest rates.
"Ok, but say the government is running a given deficit and there is medium-high inflation,…"This is mighty hypothetical and I see no evidence over my lifetime that this is likely. High inflation is merely a claim that is used for political purposes IMO.No one ever defines what high inflation is and even the sainted Ronal Reagan thought that a 4% inflation target was the sweet spot.Like you said though the remedy is just to decrease spending.
@ Matt,The comments are the best part of Nick's place. He puts up a controversial thesis and some interesting people weigh in on both sides. It's one of the few places where there is actually a debate between mainstreamers and Post Keynesians of different flavors.
"[Taxes] still remove purchasing power from private individuals and allow government to spend in their place.That's true in a sense, but government doesn't spend for itself but for the people (public purpose). The right's notion that the evil government is taking people's spending power away from them involuntarily is a canard. In a liberal democracy, taxation with representation is the rule, and the people agree to send commit of their spending power to government in order to (insert Preamble to US Constitution). As the right likes to say, "Love ior leave it."
@ LeverageIt used to take fifty to a hundred years for a new new paradigm to filter into collective consciousness. It's happening more quickly now due to information and communication tech, but still far from fast.
@ Anonymous "Or I guess it could raise interest rates" to control inflation.MMT economists are not in complete agreement over certain things and use of interest rates seems to be one of them. Warren Mosler would set the overnight rate to zero and end issuance of tsys other than 3 mo T-bills max duration, while Scott Fullwiler would retain interest rate setting and tsy issuance. So I would say, "to be determined."Rodger Malcolm Mitchell has made the case that fiscal policy has not been as effective as monetary policy is controlling inflation. See here, for instance.
Duff link I think Tom, goes nowhere.
Link should be this instead. Sorry.
Hmm. That's not working either. http://rodgermmitchell.wordpress.com/2011/04/18/how-monetary-sovereignty-differs-from-modern-monetary-theory-simplified/
"Warren Mosler would set the overnight rate to zero and end issuance of tsys other than 3 mo T-bills max duration, while Scott Fullwiler would retain interest rate setting and tsy issuance."Actually, my position's roughly the same as Warren's as described in that sentence anyway. What I'm against is the no bonds, only reserve balances proposal that sometimes pops up. I'm all for setting the overnight rate at about zero (like now) and issuing only st bills, in fact.I do think there are other things to do with monetary policy aside from the overnight rate, and I think the overnight rate is itself a very ineffective, often perverse tool for managing the macroeconomy and the financial system. The issue during an expansion that gets too "hot" or a buildup in fragility is to raise the rates that businesses and households pay (which isn't the overnight rate, and for which the ratings agencies do a poor job since their actions cause rates to move countercyclically--the opposite of what we want) and stop behavior that is raising fragility. In both cases, the overnight rate might not help much (particularly if ratings agencies are doing what they normally do--viewing default risk as declining during the expansion), and particularly in the latter could hurt a lot. But that's quite different from saying we shouldn't use monetary policy--we don't actually say that if by monetary policy one means adjusting the costs of borrowing or affecting the activities of financial institutions; we're very much in favor of doing that, in fact.Sorry for the tangent, but thought I'd pop in real quick since it came up.Best,Scott
That's interesting. Sorry for my ignorance but how would you suggest the government go about getting the desired changes to the costs of borrowing and the activities of financial institutions if not by altering the overnight rate?
BTW A formal debate between the MMTers/post-keynesians and Rowe-type monetarists and NGDPers would be really productive. Just occasional back and forth in blog comments can only go so far.In particular, a formal debate between someone like you, Scott, and Rowe would be really good, given that he's not closed minded and arrogant like Sumner.
Anon,When foundations are completely different there is not much to agree or discuss about.At some point when you discuss systems you arrive at foundational axioms, human beings establish these axioms though perception and observation (in science axioms can be falsified, that's what the scientific method is all about). When perception is closer to reality (or axioms are just straight from measured observation, reality), is just truer than other wrong axiom which is further away from reality. Substitute MMT for truer and wrong for Monetarism.Ok I agree investment, innovation, etc. is a powerful driver at creating wealth, new market niches or totally substituting older markets, productivity gains (which are not shared a lot of times with the population, meh), etc. It even can destroy industries and make availability for the whole population (Internet has been a revolution when it comes to sharing 'intellectual property', knowledge and information and 'development communism', and is a trend that is here to stay, in fact it has been started to be adopted by corporations which are now more keen to release partially free content for example, in the videogaming or music industry). But when it comes to day daily operation of the economy, demand is what drives it, pure consumption, not supply-side fairy tales.At some point is pointless to discuss. "We agree to disagree."
@ STFThanks for correcting my confusion on that, Scott.
"if by monetary policy one means adjusting the costs of borrowing or affecting the activities of financial institutions; we're very much in favor of doing that"How?
Anon: "How?"See Warren Mosler's proposals, for example, for institutional reform.http://moslereconomics.com/proposals/
Thanks Tom,I had a look around there but I couldn't find anything on the subject mentioned by Scott F:"The issue during an expansion that gets too "hot"... is to raise the rates that businesses and households pay"I want to know how this might happen without changing the overnight rate but I couldn't find it on Warren's site. Changing capital requirements perhaps?
REal necessary to change institutional arrangements. Diddling around the edges won't work because the existing institutional will just work around them. Have to reduce systemic risk and rent-seeking behavior to get to place where policy tools will works. The existing institutional arrangements and incentive structures are perverse. The crisis did not happen by accident. It was built into the system, which is based on what Bill Black calls a criminogenic environment. That has to be fixed. The playing field is tilted, and government is committed to protecting the credit system at all costs — and the financial sector not only knows this but set it up this way.Take capital requirements, for example. They are based on risk weighted assets and that leaves a lot of wiggle room, which is just what the big banks do to wiggle out of stricter regulation.There has to be a tighter leash on leverage in the system, and a number of factors are involved. But the big one is cutting the percentage of GDP the financial sector "owns" back to something reasonable.
Anonymous,Aside from the things Tom mentions, here are a few (not an exhaustive list) that have been kicked around at different times . . 1. Procyclical adjustments to capital requirements, which would raise costs of funding assets and be passed on to borrowers.2. Procyclical adjustments to default risk ratings. 3. Tom Palley's asset based reserve requirements, whereby the CB adjusts the reserve requirements of banks (and others that have access to the discount window--which could be expanded for purposes here) based upon the assets they are holding. So, if the CB wants higher mortgage rates, it could institute and then increase a reserve requirement on mortgages. This effectively raises bank costs and this will be passed on to borrowers.None of these really matter or would be all that effective without wholesale regulatory change, as Tom points out, and that's why one sees a lot more focus on that from MMT'ers rather than alternative approaches to monetary policy. But that doesn't mean we are against using monetary policy per se.
Okay, thanks Tom, Scott.Would these alternative monetary policies also affect the rate of interest recieved on savings, do you think?I feel that from what I've read MMt is a bit harsh on savers, and I'm not entirely sure why this is(apart from the 'euthanise the rentier' argument, which seems a bit over the top). Shouldn't people be able to put money away in the knowledge that it won't be decimated by inflation, at the very least? We know a certain level of inflation is guaranteed, and in all likelihood inflation will often be higher than any given target, so it just seems wrong to argue that savers should receive next to zero on their money. I'm assuming this is generally the kind of return they'll get under a permanent ZIRP.I would have thought it could also lead to people simply taking their savings out of the country?Mosler argues that people don't need to save for retirement because the state will provide everything they need through social security. Which would be fine if people actually had the option to save if they wanted to without the value money of their money being crushed by inflation.
Is ZIRP necessary for other MMT policies to work, or could they be compatible with a moderate steady rate of interest (to keep pace with inflation)?
@ AnonymousAccording to the sectoral balance approach increase in non-government saving desire leads to demand leakage unless offset by a govt deficit. Wealth hoarding at the top leads to the needs for increased govt deficit, which flow eventually to greater and greater financial wealth (savings) accumulating at the top, with all that implies socially, politically and economically. So moderating saving desire is stabilizing. What is desired is a balance between saving and investment, where saving performs its intended economic function in postponing consumption, i.e., as a liquidity buffer against uncertainty and provisioning for future needs. Excessive saving creates an economic drag.Yes, MMT would work without ZIRP or even the needed reforms. It just won't work as well, and it would really justs be a way to extend a bad situation, improving it slightly without really fixing it. But it would still make a lot of people better off than they are, unnecessarily, under the present arrangements.
"MMT would work without ZIRP or even the needed reforms. It just won't work as well"The thing I'm worried about is that if your setting the overnight rate to zero in the knowledge that there will be at least two percent inflation, and probably more (av. 4% perhaps, if all goes well), then you're basically telling savers that each year their savings will be losing value. This is essentially instituting a permanent and intentional 'inflation tax' - unless people can at least earn enough in interest to offset the loss imposed by inflation. People already hate tax and inflation enough as it is. Saying that it doesn't matter much because the government will give people enough income anyway is basically like saying 'don't worry about your property rights, under socialism the government will take care of you'. I can see how extremely problematic this is, and I'm pretty left wing.
As for the rentiers and banks, maybe it would be better to deal with any unjust privileges there through taxation (rentiers) and restructuring or full/part nationalisation (banks)?
. This is essentially instituting a permanent and intentional 'inflation tax' - unless people can at least earn enough in interest to offset the loss imposed by inflation. If savings are a leakage that drags on the economy and taxation is best applied to things you want less of... is this a bad thing?
"As for the rentiers and banks, maybe it would be better to deal with any unjust privileges there through taxation (rentiers) and restructuring or full/part nationalisation (banks)?"Michael Hudson says to tax economic rent — land rent, monopoly rent, and financial rent — and not tax gains from productive contributions.Warren Mosler has put forward reform proposals.
"People already hate tax and inflation enough as it is."The question is whether the MMT claim to be able to achieve FE & PS is credible. If it is, it deals with the two biggies, while also providing the effective demand necessary for a near optimal level of production. If that is shown not to be credible, then the trifecta cannot be resolved and it becomes necessary to choose a maximum of two targets and use the third factor as a tool to achieve them.
Tom, we know already that even if MMT policies were perfectly implemented you're still going to get a degree of inflation PLUS all the unexpected stuff such as supply shocks and inflationary market imperfections/failures. 'Price stability' doesn't mean zero inflation. If I save money for the future I don't want to think that it's value is necessarily going to be stripped by inflation. I want to think that its value will at least be protected by enough interest to offset inflation. If I feel that the government is actively encouraging the reduction in value in my savings (my property, hard earned), that's just going to make me hate the government. It seems to me that a moderate rate of interest above zero (enough to protect against inflation on average) might be preferable to a permanent ZIRP, though I don't know what that would do to the MMT models.Greg:"If savings are a leakage that drags on the economy and taxation is best applied to things you want less of... is this a bad thing?"The government may want less of it, the economy as a whole might want less of it, but individuals should be entitled to save their property for future use without its value being purposefully degraded by the government, no? We can agree with reasonable people that taxation is a necessary part of belonging to a society - it forms a part of a wider range of social obligations. But it's a lot harder to argue that the entirety of a person's savings should be subject to a permanent and intentional 'inflation tax'. Again, saying that it doesn't matter because the government will take care of everything so you don't have to worry about losing your property just won't wash with most people.
Anonymous,Remember, ZIRP only applies to the overnight, risk-free rate. Other rates are going to be higher. And with no manipulation of short-term nominal rate, longer-term rates would be less inclined to have negative holding period returns. On average, those returns might be about the same but with less risk.The point of euthanasia of the rentier (Keynes's idea, actually, not MMT's) relates to overnight, risk-free investments. That is, if you want returns, you need to take the risk or invest for more maturity.As far as I know, there are very few "savers" invested primarily in risk-free, overnight. And for retirees that might be more closer to that, for the economy overall it's better to simply raise SS benefits in some manner than raise short-term rates.
I guess there's always the option of putting savings in higher-yielding but potentially riskier investments. I'm wondering now what the real experience of living in an MMT world as a saver would be like. What would be the best thing to do?
Ok, thanks for clearing that up again Scott.
I guess if you set the IOR above zero you're basically just doling out free cash to the banks.
What about 'capital flight' - is this a potential problem?
"I guess if you set the IOR above zero you're basically just doling out free cash to the banks."It's a subsidy. Is monetary policy worth that subsidy?BTW, the Fed targets ~2% inflation, not zero inflation.ZIRP only applies to the FFR. Creditors will set rates taking into account inflation risk. Better to let markets assess the inflation risk competitively rather than the Fed setting it through guestimation, which is a command aka managed economy approach antithetical to capitalism.Who holds their savings in cash anyway?
Ok, I had to ask so thanks for helping to clear some of that up.
"What about 'capital flight' - is this a potential problem?"Capital moves for two reasons. First and obvious, in search of more promising opportunity. Secondly, out of fear of loss, e.g, from high inflation or severe economic contraction, or devaluation of a currency in the foreign exchange market. Governments have to take all these things into account in fashioning policy.
"…The government may want less of it, the economy as a whole might want less of it, but individuals should be entitled to save their property for future use without its value being purposefully degraded by the government, no? "@AnonI can understand your point of view here but doesn't it bother you that your saving is just as detrimental to others ability to earn income and save themselves as the perception that inflation is robbing you of the value of your own savings?I mean, these things are connectedin a continuous feedback loop and any one in th eloop can be hurt by the actions of others.How do we decide who takes one for the team?
Paul,Instead of choosing one over the other it might be better to try and reach an optimum balance between the two? After all, the incentive for many people is to work so as to accumulate financial assets which can then either be spent at a later date (having gained some interest) or passed on to others, including through inheritance. It would be a mistake to put people in a situation in which they were faced with a constant and intentional 'inflation tax' on their savings - this could reduce both the incentive to work and to invest, would breed resentment and fuel anti-government sentiment. However, Scott seems to be saying that a ZIRP is compatible with a modest return on savings at the very least (hopefully in line with inflation) - and people also always have the option to go for riskier but more rewarding ways of investing their money. The mistake would nonetheless be to assume that people's saved assets are not that important because a money-issuing government can always afford to provide what people need anyway. That's simply a different way of alienating people from the fruits of their own labour and creating a culture simultaneously of dependency and resentment, it seems to me. But thankfully that's not apparently what MMT necessarily entails (although some of Mosler's comments, including - to paraphrase - that saving for retirement isn't necessary or even desirable because the govt can provide generous social security - could be seen to suggest otherwise). It seems like a good idea to try and reduce the rentier culture, but without punishing those who are simply trying to build a nest egg for the future. It seems to me that people should be encouraged to take responsibility for themselves, and providing them with a way to save their assets profitably over time seems to be an inevitable part of that.Mosler doesn't have to worry about such things of course 'cos he's absolutely minted.
As I said, saving should be for liquidity provision (cash flow) and provisioning for the future. Encouraging a modicum of wealth also creates incentive. But hoarding financial assets to increase income from rent rentierism) diverts funds from investment and is anti-social. Countries with significant income and wealth inequality are socially, politically and economically disadvantaged, in that that much saving at the top creates a drag, distorts the political landscape, and tilts the economic playing field. Progressive taxation with marginal tax rates increasing at toward the top, taxing economic rents more that productive contribution, and an inheritance tax levels the playing field and increases investment.
@TomWhat do you think of Apple Computer's $100 Bln cash hoard?
"What do you think of Apple Computer's $100 Bln cash hoard?"It reflects poor management unless Apple's top management is expecting a depression and massive deflation. The funds should either be invested or else distributed to employees through wage increases and bonus, to shareholders as dividends, and charitable contributions. Sitting on that much cash is crazy, and as a successful company, it sends the wrong message about management practice to others. Maybe it just reflects Apple's quirky management style under Jobs and will change under the new regime.
@TomI've come to the thinking that these big companies are insecure, probably for good reason, but that is of little consolation to the rest of us.They fear each other though, not the market. There is so much power at stake that the biggest companies keep accumulating wealth to protect themselves from each other. In doing so they distort the system.Ironically Apple is likely to destroy many companies and in doing so destroy a lot of jobs because their business model scales well without hiring bunches of new employees over here and their Chinese labor resource is limitless.We should begin punishing companies that outsource jobs. Massive increases in productivity is a massive job-killer, another paradox that so-called free-marketeers conveniently ignore.Apple has found (created) the perfect fishing hole and now they are just reeling in the fish. Nothing to stop them in the near term.I say this as a long-time Apple user and former fanboy. Never dreamed they would break out like this, all I ever hoped for was they didn't go under so I could continue using their products.I still love their products but am beginning to fear the consequences of them destroying so many other companies on the backs of foreign workers. This can't end well.
Post a Comment