Some quick thoughts on inflation:
Perhaps an area where modern monetary economics could grow into is about what to spend money on. While MMT states that the federal government's only spending constraint is its ability to cause inflation, I think we should go a little further and explain how and when that could happen.
For example, I think there is tremendous opportunity in making the argument of how our massive military spending does not cause inflation. We now spend over a trillion dollars a year on military, defense, and national security related items. This "welfare state for engineers and computer geeks" is money spent by the government that does not result in any commensurate production of goods and services to absorb to the new spending. Most of what this spending creates are intangible items such as "security"; what physical items it does produce are mostly either consumed abroad (bombs and bullets in wars), or not really used at all (ships, planes, all the other array of high-tech vehicles that we pay millions to design, billions to produce, whiz around the world a few times and then dump in the New Mexico desert). Then, when we spend trillions to pay all the millions of DoD, CIA, NSA, and DHS employees and their contractors, they take this money and use it to consume other goods and services in the American economy, without having produced any of their own for other people to consume. So at least half of what the federal government does is produce low-utility military surplus, and even this does not produce much inflation!
This gives you a sense of how truly large the American economy is, and how much more domestic spending we could be doing. In fact, if anything domestic spending would produce even lower levels of inflation than defense spending, because unlike defense spending, domestic spending does produce a commensurate increase in goods and services for its new dollars to consume. Some government investments, especially infrastructure and education, have enormous returns in the form of future efficiency and productivity. So as long as the new money spent by the government (injection of Net base money) is accompanied by an equal increase in the amount of goods and services available for consumption, there will be no inflation!! In fact, because the modern American economy is so efficient, it may be possible for the money supply to increase, and the price level to actually stay the same or go down! Ha! Take that gold buggers!
23 comments:
A skeptic might not be convinced by this argument. I don't think you can just look at the aggregate size of various spending programs and extrapolate from there. Those programs are offset by taxes for one thing. They are also enabled by bond sales, of which some proportion is medium or long term debt. So people are going to want to know what determines whether an increment in government spending, combined with some particular form of tax or debt issuance, will produce higher inflation.
Also, while there are kinds of government spending that produce goods and services available for sale, either directly or via multiplier effects, many forms of government spending produce public goods that are not sold in the market (a park for example).
It may be possible for the money supply to increase, and the price level to actually stay the same or go down! Ha! Take that gold buggers!
Well duh. Of course it's possible and quite likely under certain circumstances for the price level to stay the same or go down as the money supply increases. No one ever thought that before. Except Rothbard in 1963 and every other of the hundreds of Austrians I've known for 40 years. There will still be fatal distortions of relative prices, a topic about which you MMTers are oblivious.
http://mises.org/daily/5577
Still, the scale of government defense spending is stupendous, and the fact that it does not cause inflation significant. This especially noteworthy given that most who are against government spending (e.g. Republicans) are big supporters of military spending. It's worthwhile to point out how specious this type of political posturing is...
Still, the scale of government defense spending is stupendous, and the fact that it does not cause inflation significant.
I don't think that follows Dan. Mainstream economists would say that as long as you tax back enough of what you spend, you won't get inflation. It doesn't matter if the spending is $1 trillion or $10 trillion.
@ DD
And military spending is among the most inflationary spending there is, since it produces no domestic product while it inject huge funding into the domestic economy.
@DK
But there is no tax offset for military spending. It goes either toward the deficit or is off budget. One of the cardinal rules of fiscal discipline is paying for military spending out of taxes to avoid inflationary effects.
"So as long as the new money spent by the government (injection of Net Financial Assets)"
This may be nitpicking but your point is important and deserves precision. Increased govt spending doesn't necessarily result in an injection of NFAs. I would say "net" new money.
Tom, on-budget defense spending is 20% of the federal budget. It is by no means all off budget.
And it makes little sense to say that any one particular category of federal spending goes "toward the deficit". Most tax revenues are not dedicated to any category of spending but go to the general fund. So you can't say the deficit is any more due to defense spending than it is to Medicare and Medicaid spending.
If we want to convince people to increase the deficit then we need to do better than hand-waving arguments.
Suppose you have $3.5 trillion in spending and $2.5 trillion in tax revenues, with a $1 trillion deficit. And suppose defense spending is 20% of the budget at $700 billion, and that there is currently 2% inflation. Does it therefore follow that if we increase spending by $700 billion to $4.2 trillion, and leave tax revenues right where they are that inflation will still be 2%? Of course not. Maybe it will still be low, but maybe not. Maybe the jump in the deficit from $1 trillion $1.7 trillion will push inflation up sharply. We need better arguments here.
Also, military spending is not at all completely wasteful. Aside from the fact that when we aren't blowing up random foreigners in stupid and wasteful wars we are indeed building and maintaining essential national defenses, military spending has had huge secondary economic effects. Most of the innovative technologies in the tech area were developed in government labs by researchers receiving lots of military money. What the next generation needs to focus on is developing major national projects that are an alternative to military expenditure, but that drive innovation in the same way military spending has driven innovation in the past.
Whether we pay for those investments with large additional taxes on the affluent, or via deficits, or (more realistically) some combination of the two is not that important. The size of the floating deficit is relevant for countercyclical stabilization and should expand during recessions, but we need to focus on much more than countercyclical stabilization. The next generation has a planet to save and it's going to take decades to do it, with huge national investment.
Dan, I never thought I'd see you arguing for military spending. :-o
I'm arguing for the moral equivalent of military spending, Tom. Something with the same clang for the buck, if not the same bang for the buck, that will replace the loss of military-driven innovation.
There is no doubt that military-industrial complex had a major role in driving technological innovation over the past 70 years. Almost every research lab and high-tech industry has been gorging on the military's money. Many of the products we use every day were by-products of military investments. It wasn't a bunch of free-wheeling Hayekian entrepreneurs pulling cell phones and the internet out of their asses.
The next generation needs to pull together something like a "war effort" to focus the nation's energies, mobilize the public politically and drive enthusiastic public investment. But instead of an effort focusing on blowing up enemies, it needs to be an effort to save and reorganize the planet.
Dan, pathetic.
What is it that you disagree with MG?
Here's how Americans built prosperity:
http://www.publicfinanceinternational.org/features/2013/06/the-myth-of-the-meddling-state-nothing-ventured/?utm_source=Adestra&utm_medium=email&utm_term=
It wasn't just the military, it was NIH and the Department of Energy.
Interestingly, at a time when the US economy was most dynamic, it also made the most progress in its history toward broad prosperity, and the gap between the top dogs and ordinary people was much less than now.
The next generation has to find a way to do the same thing, but without so much military focus.
The end justifies the means? Please.
....prosperity for who, Dan?
Again, MG, I don't know what it is exactly you are taking issue with? Your short sentences aren't giving me much information.
In the postwar period, I would say that the US did a remarkable job not just in becoming much more prosperous in the aggregate, but in distributing that prosperity very broadly. The period saw the growth of the US middle class, and a model which was copied around the world.
Unfortunately the US reversed itself around 1980 and began creating a neoliberal system that hollowed out the middle class, destroyed social mobility and generated stark inequality.
Hi Justin,
I'm assuming you're asking this question based off of what was said in the INET YSI forum on facebook, where I specifically said this:
The inflation/unemployment tradeoff as portrayed by Krugman et. al is misleading. Prices for goods and services (outside of commodities) are determined by the firms that sell them. Rising prices of goods and services have various sources, theoretically: 1) A conflict theory of inflation that originally arose in the Marxist literature...see chapter 3 in this book:
(link snipped, see post after this)
Another conflict theory of inflation...one not in any textbook but that marxists you could say predict, is between capitalists and the rest of humanity. In this case I refer specifically to commodity price speculation and its deleterious effects not only for those filling up at the pump, but also the end-consumer through maintenance of markups by firms...more on this later.
2) Bottlenecks. There are many authors you could read here, but one I really like is Marcelo Diamand...his 1977 paper is a classic. Latin american structuralists cite him to this day.
3) When the economy is humming on all circles, and productive capacity utilization is at 100% or close, perhaps pushing costs up in certain sectors or all sectors. This is the kind of analysis and details you're not sharing. If you want to talk about inflation and numbers, talk about capacity utilization, and as a proxy of it you can look at the unemployment rate. But that proxy is not a good judge of it either, and that's the mistake you make.
4) Even more generally, we know that firms like to maintain their markup on costs. That is, prices are administered to the market, and they do not fluctuate, and empirically we know they change their price every 6 to 12 months. This alone destroys the supply/demand model of the economy we learn in Econ 101. Prices do not change rapidly due to various reasons, such as goodwill between the firms and their customers. For details please read Fred Lee's Post-Keynesian Price Theory.
5) In the case of countries where their productive capacity is destroyed. Those countries that experience this and have external debts to pay (ie, in another currency), like Weimar Germany, of course have no way to pay those debts. So the printing presses go wild (skipping a lot of details here), and that money becomes as worthless as the paper its printed on. Again, for details of this and #6, you have to actually sit down, go to the link provided by Philip near the start of the thread, print it, shut off your damn computer, and read it.
6) External debts are owed. This can be related to #5 but not necessarily. In this case high rates of inflation can ensue, but not necessarily hyperinflation. Or...if you're Greece, where you don't even have your own currency, you don't have an economy humming to it's own tune. It's dependent on money issued elsewhere. So the only way to pay back those debts is...well, if you're an austerian, through soaking every last dollar out of the peoples hands. Inflation is not a concern in that case.
Of course there is also the type of speculation that caused rising prices leading to the Great Recession, and the Great Depression...laid about by Fisher, Keynes, Minsky, etc.
Some of these are theories for one-off price increases, continuous increases in price, etc, but the point is that your axiom-based deductive form of reasoning isn't specific. This isn't just you though, but those like Krugman and others that also do this. But by saying this what I'm really saying is that it then becomes rather idiotic to assert that "I think inflation is a dangerous thing to play around with", because you're not being specific. In what way will inflation ensue? You're making claims that nobody can critique, except to say you have no idea what you're talking about...because of course, you don't.
The link I snipped is here:
http://books.google.com/books?id=-rjlTCZkJS4C&pg=PA22&lpg=PA22&dq=Pat+Devine+Conflict+theory+of+inflation&source=bl&ots=sLShtrEft0&sig=qYYhA_Gx_X5JA3w4ISwbK0LVJK0&hl=en&sa=X&ei=a9r-UduzGoXU8wTetoFQ&ved=0CCoQ6AEwAA#v=onepage&q=Pat%20Devine%20Conflict%20theory%20of%20inflation&f=false
Dan,
The end catalyzed by the military industrial complex justifies the means?
I'm just reporting what happened. To me the lesson is that if we want to build a similar level of prosperity again, we need to undertake similar collective national projects with similar concentrations of state investment and public enterprise. If we are straight-thinking and don't want those investments to be in the military realm, then they need to be other kinds of projects. I'm sure young people can think of something since humanity is in the midst of committing planetary with CO2 over 400 parts and species, water and arable land disappearing.
It's either get busy on something major or accept an economy of people paying each other bitcoins for meth, gambling and kiddie porn.
@Dan K
Totally agree with "Almost every research lab and high-tech industry has been gorging on the military's money. Many of the products we use every day were by-products of military investments."
I've seen this first hand at many local high tech research facilities where I grew up. However, it always seemed to me that if there was ever any "crowding out" of talent, it was in defense spending. As big of an advocate for government spending as I am, it always seemed to me that the skills of the PhD scientists and engineers could be put to better use making marketable consumer products than military equipment of high expense but low utility.
I say, why wait for consumer spin offs from defense spending, when we could be investing in new consumer technology directly?
@ Deus DJ
I dont disagree with your points, and of course, I was being too simplistic! I'm trying to make some sense of the worlds largest economy in a blog post. I'm not an academic economist and blogs generally are not the best forums to go into detail. Did you see how I said "some quick thoughts" at the top ;)
Just,
Warren always says that 'all prices are a function of what the govt pays for things and what the govt allows its fiscal agents to lend against things...'
I can see this...
The currency monopolist is necessarily the price setter under a ffnc type system.... If govt will pay an object oriented programmer 200 per hour, that becomes the price...
Govt acts for price support, on everything, similar to 'the natural rate of interest is zero', the govt sets the rate ABOVE ZERO....
Prices would collapse and probably be VERY stable without govt price setting at ever usually increasing prices....
RSP,
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