Brad DeLong posts on MMT (obliquely through Lerner) and Scott Fullwiler comments. Interesting how the "big boys" don't want to give MMT direct recognition, at least positively. Not members of the tribe, I guess.
Grasping Reality with Both Invisible Hands
Lernerism In A Hicksian Straightjacket
J. Bradford DeLong | Professor of Economics, UCAL Berkeley
19 comments:
" Not members of the tribe, I guess."
LOL Tom... Noooooo they are not! LOL.
The sub-human, metal-loving tribe they're in....
rsp,
Can someone please explain JKH's post there to me? How does private investment create sufficent financial assets to satisfy the savings desires of households, without government deficits or trade surpluses? Is there an additional sector I'm unaware of?
A load of hot air from DeLong.
He starts off by claiming amongst other things that MMTers “know that fiscal expansion and contraction can keep . . . inflation equal to expectations…”
Well first I’ve never noticed MMTers saying much about expectations, and in any case why would anyone want to necessarily “keep inflation equal to expectations”? I mean if inflation was 30% and everyone “expected” it to carry on at that level, would anyone seriously want to “keep inflation” at that level? Either I’ve lost the plot or DeLong has.
Or perhaps what he meant was “control inflation” instead of “keep inflation equal to expectations”. In which case why doesn’t he learn to speak English?
Next he concedes that MMT works near the zero bound, but claims that four “empirical issues” to which neither MMTers nor anyone else has a clear answer arise above the zero bound. So he is admitting that he has no better reason for questioning the validity of MMT above the zero bound than MMTers have for asserting its validity. That’s not exactly damning criticism of MMT.
Anyway, the first of these “empirical questions” is “How sensitive are the components of spending to the interest rate?”.
Well first MMTers don’t have much to say about interest rates, except that if DeLong had read any of Warren Mosler’s stuff he’d have discovered that Warren advocated a permanent zero rate. So the relevance of DeLong’s point eludes me.
DeLong’s next “empirical question” is “How much is present monetary expansion taken as a signal of future inflation?”. OK there is an issue there, but the money supply expands and contracts under existing systems used to regulate the economy, so this is no more of a problem for MMT than for the latter existing methods of control.
His next “empirical question” is “How much are currency-printing sovereigns still bound by a nominal exchange rate target?” Again, if DeLong had actually read any significant amount of MMT material he’d have discovered that MMTers are happy to let the exchange rate float, just as it does at present.
Yawn, yawn.
Ben,
I don’t think JKH is suggesting there is an “additional sector”. He is claiming that if the private sector wants more savings, it can do that by accumulating sundry assets: more housing, shares, etc. But that argument is flawed, I think.
If the private sector suddenly decides it wants more assets, it will INITIALLY try to accumulate cash with which to purchase those assets. And as we all know, when everyone tries to accumulate cash, a recession ensues. So MMTers are right: given an increased desire to save, govt should just spend new money into the economy (and/or use the new money to cut taxes).
SUPPOSE that an economy was sufficiently strong that private sector investment created enough private sector saving (investment creates saving), such that the household demand for net financial assets is satisfied. That is theoretically feasible because a good deal of private sector investment consists of business sector investment that is intermediated through the financial system – which results in holdings of stocks, bonds, pensions, etc. by the household sector in respect of that expanded business sector investment.
If that happens – again purely theoretically – then private sector investment can generate enough net financial assets held by the household sector in such a way that net financial assets held by the private sector in total can be zero – because those intermediated financial assets cancel out within the private sector.
What it means is that private sector investment – again in theory - is generating enough private sector saving in total such that government deficits and current account surpluses are no longer needed to satisfy those saving desires.
In fact, that doesn’t happen – because in most cases, private sector investment is insufficient or ineffective in generating the saving that the private sector favors. I think that’s where the issue of the IS curve comes in, subject to reasonable qualification about the general vagueness of such a curve in the context of the whole NK paradigm etc.
BTW, this is a question I posed to Scott several years. It’s not a matter of disagreeing with the idea of demand for net financial assets by the private sector – but where that demand really originates and how it happens.
Framing it the way I have suggests that the demand for net financial assets by the private sector results from a failure of the business sector to generate sufficient net financial assets for the household sector (ex current account considerations).
I.e. the demand for net financial assets originates in the household sector, and it is only the failure of private sector investment to meet that demand (through financial intermediation of the investment/saving connection) that creates the spill-over demand for net financial assets in respect of the private sector as a whole.
@ Ben
I think that Ralph is basically correct, but I would add that JKH is simply saying what MMT says. If people consume and invest instead of save, then there is reduced demand leakage to save, the sectoral balances-function finance approach to the size of the deficit is the amount needed to offset demand leakage to non-govt saving. Moreover, net exports can also offset domestic private saving desire, obviating the need for a fiscal deficit to offset. The point is that the sectors must sum to zero as an accounting identity, so if non-govt desires to net save then govt has to run the appropriate size deficit to provide the net financial assets to do so.
Where DeLong's mistake lies is in thinking that the MMT view is that govt should lead the other sectors with its policy. Rather the MMT view is that the private sector leads based on its saving desire and desire for imports over exports and the govt must follow with the appropriate size deficit to accomodate the non-govt saving desire at full employment in such a way as to maintain price stability as well. So it is a "balancing act" on the part of government to run a full employment budget, shifting fiscal policy with changes in non-govt saving desire that expands and shrink aggregate demand for US production.
In other words, DeLong seems to think that MMT (or Lerner) is prescribing a proactive economic policy when it is prescribing a reactive one.
BTW, when I say "consume or invest," I mean "spend" on either consumer goods or capital goods, not save through purchase of existing financial assets which are aka "investments" and are a form of saving rather than spending into the economy on consumer or capital goods during the period.
My interpretation of JHK's comment is similar.
Who is really desiring savings? His answer is the household sector (see z1).
His contention is the household can get 'savings' from the business sector, which produces real assets. If those real assets are monetized with financial assets through loans to the business sector from the household sector, no need for federal or trade deficits.
It is an interesting idea but is it realistic?
Fiscal and monetary policy would target real asset production and the ability to easily monetize those real assets.
Given fiscal and monetary policy only has monopoly control over the currency, the idea they can target real asset production is questionable in my mind. I believe this is the foundation for MMR (could be wrong). Where MMT has fiscal and monetary policy target the production of labor, MMR targets real asset production.
I see distribution being a real problem as people are not naturally endowed with the ability to produce real assets as much as they are mostly capable of producing labor.
wow spent the last 20 mins signing up for a blog to get my comment published
Take a CEO that decided to use earning to buy back stock instead of expand capital good, assuming "bigger bang from the buck" due to the rising stock price as a result of fewer shares. He has decided to save rather than invest, presumably because he thinks that the risk-return ratio is tipped against investing in expansion in an economic contraction. Presumably he and most other shareholders are not going to spend the increase in share price, which they might have with a dividend distribution. And, of course, if the firm had invested those funds would have been spent into the economy on expansion by buying material, paying wages, purchasing new capital goods, increasing inventory, etc.
But when the economy is humming along, the CEO will likely see more bang for the buck in investing in expansion, so there is no demand leakage to saving. Everyone with ownership in the company sees their household saving increase through, due to the equity appreciation.
So there is one person, the CEO, making the decision to save or spend for the firm in the period depending on his assessment and his or her own interests. Yes, most of these people run spreadsheets that asset their change in net worth every day depending on changes their bonuses and equity position.
How a shortage (leakage) of financial assets is resolved is key.
Until someone explains otherwise, I believe MMR is a widget standard.
Government would agree to purchase/make loans on possibly a variety of widgets instead of purchasing labor from those that desire the 'excess' financial assets required to address a shortage (or leakage).
Instead of an employer of last resort we have a buffer stock of widgets or favored widget status as collateral for a new loan.
MMR is similar to the case of a gold standard but where that widget is gold. The main difference is gold was not loaned but purchased at a fixed exchange rate. Equivalently it was loaned at 0% interest.
I think that what JKH is saying (correctly) is that firm investment and operations increase equity in aggregate and that equity is owned by households in aggregate as saving in the form of non-cash financial assets in their portfolios. Households in aggregate also own the corporate debt. Of course, this would be somewhat modified by holdings of the external sector in an open economy.
"I think that what JKH is saying (correctly) is that firm investment and operations increase equity in aggregate and that equity is owned by households in aggregate as saving in the form of non-cash financial assets in their portfolios. "
No doubt this is currently the case, yet we currently have 'excess' saving desires that isn't being met by business sector borrowing. As he acknowledges with the all caps SUPPOSE...
"SUPPOSE that an economy was sufficiently strong that private sector investment created enough private sector saving (investment creates saving), such that the household demand for net financial assets is satisfied"
"SUPPOSE that an economy was sufficiently strong "
What makes the economy strong enough though?
Invisible hand?
Economics ("house-law") is not equivalent to weather prediction...
Govt has to provide positive flow of $NFA... and this does NOT mean "G-T" it means govt has to constantly make withdrawals from it's TGA account...
rsp,
Can it not be argued in a monetized economy the incentives are toward accumulation of financial assets rather than real? Even supposing a strong economy, the average household desires savings in the national currency. Uncertainty regarding the future almost necessitates maintaining significant liquidity to deal with crises. I can't imagine the sea-change in thinking that would be required for saving desires ro be satisfied without NFA injections.
Asset production targeting (through ???) is 2 -100x as hard as targeting nominal GDP (through ???) or 100x as hard as full employment through a government employment buffer.
I'm kind of mystified why MMT comes clean with the target and actual mechanics to hit the target.
Let me state this even more clearly, I have no idea how the 'nominal GDP crowd' propose to actually target nominal GDP. I have no idea of what MMR would target and how they propose to hit their target.
Perhaps I need to read more.
"Can it not be argued in a monetized economy the incentives are toward accumulation of financial assets rather than real? Even supposing a strong economy, the average household desires savings in the national currency. Uncertainty regarding the future almost necessitates maintaining significant liquidity to deal with crises. I can't imagine the sea-change in thinking that would be required for saving desires ro be satisfied without NFA injections."
History bears that out. Generally the federal govt runs a deficit and much of the time the deficit is not sufficient to offset demand leakage to saving with the result that there is an output gap and less than full employment, which constitutes huge inefficiency and waste of resources that cannot be recaptured.
It seems to me that we can never answer the most important questions about the dynamics of the macroeconomy and its many pathologies by abstracting from the whole economy and just looking at the financial portion of the economy. Economies don't go haywire simply because of monetary factors.
Economies based purely or primarily on private ownership, private enterprise and private entrepreneurship - whatever their many and substantial virtues - will routinely fail to employ their resources fully (including their human resources.) This isn't just an artifact of living in a monetary economy. It is what should be expected in any complex and decentralized economic system filled with millions of private agents, for whom investment decisions are inherently risky, and in which no small number of cooperating agents can solve the large-scale coordination problem that would have to be solved to generate full employment. The normal condition for such an economy is a sub-optimal Nash equilibrium.
That's why we need concentrated government action and significant government contributions both to consumption spending and investment spending - to coordinate the mobilization of unemployed resources in a deliberate way, since they will never be employed simply by the self-organizing of the private sector.
Simply looking at quasi-monetarist factors like the demand for money, or for financial assets and savings, isn't enough.
Ben,
"for saving desires ro be satisfied without NFA injections."
I dont think this would be possible mathematically... or at least to initially capitalize your banking system, some cohort would have to save for a while until they built up enough savings to capitalize the bank to begin with... and those savings would have to have come from the govt sector as initial $NFA injections..
Good points on 'savings' ... I think the disgraced mainstream of economics is "too afraid of savings" in general...
iow this is a good point you make: "Uncertainty regarding the future almost necessitates maintaining significant liquidity to deal with crises."
There is nothing to be afraid about wrt 'savings'... the econ department seems terrified of 'savings' for some reason.... but again that department is lower than whale shit in general... and I would encourage folks to just get out of there if at all possible...
rsp,
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