There is one thing that Palley is right about, which is that substantially all of MMT can be found in the old Keynesian literature. This isn't news -- in the same Stephanie Kelton slideshow linked above, she goes out of her way to say that there is nothing "modern" about MMT. And so what? There's nothing wrong with updating insights from the past. In my opinion, most useful work in economics is about pouring old wine in new bottles.
I don't write this from a position within MMT. I tend to feel that the genuine insights of Lernerian functional finance are obscured rather than strengthened by basing them in a chartalist theory of money. It's fine if Tom Palley disagrees with our friends at UMKC and the Levy Institute. But he needs to put down the blunderbuss.The Slack Wire
A Response to Tom Palley
JW Mason
MMT economists have consistently said that the original aspect of MMT is to put together important work of the past that has been either ignored or contested by conventional economics to the detriment not only of macroeconomics but also policy formulation.
Warren Mosler maintains the what is original is his insight that really launched MMT when he started collaborating with Randy Wray and Bill Mitchell, with assistance from Pavlena Tcherneva when she was a grad student at UMKC.
That insight is a currency sovereign is the monopoly provider of the currency of issue and enjoys the advantages of a monopolist regardless of whether the government realizes this or chooses to use it. Most government do not.
The basis of MMT's policy formulation is using the monopoly power of a currency sovereign in shaping and executing policy.
This is almost never mentioned in discussions of MMT by economists, or else it is attacked as untrue.
16 comments:
MMT is the best. What's Palley got to offer?
See, this is where I have a friendly disagreement with you guys. I don't think what Mosler says is wrong. But I think it is functionally equivalent to saying that the central bank can set the domestic interest rate. So it seems to me this is a great effort to convince people of something they already believe. It's like you're are getting to the 12th floor by scaling the outside of the building, when there is a perfectly functional elevator.
On the other hand, MMT has been more successful at reaching a broad audience than any other branch of heterodoxy lately, so who am I to criticize?
@ JW
Right, although Warren says that two things are involved in the state's currency monopoly. First, the currency sovereign sets its own rate as it chooses, or may delegate it if it chooses (UK), and it also sets the prices it pays in its currency in markets to transfer private resources to public use.
As I understand him, Warren says that this is indeed obvious but it needs saying because a lot people act as if it is not the case, and government's often do not use their monopoly power in the public interest.
A good example is President Obama saying that the US is running out of money when he could use the public monopoly constructively. One can say he is being pragmatic, since Congress would not go for it, but he could also bite the bullet and state the truth, quoting Marriner Eccles, for instance.
Very few are calling out the Peterson people, the deficit and debt hawks, and the deficit and debt doves other than MMT economists and allies like Jamie Galbraith.
Others need to stand up and say the obvious. Even Greenspan told Paul Ryan that the problem with SS was not solvency but making sure the real resources are available in the future.
I don't think that this needs to be done under the MMT banner either if people don't like certain aspects of MMT policy prescriptions like the JG/ELR.
I also agree with you that we need to look at the MMT position on fx and trade critically. I believe it is stated too broadly and generally. While it's true that imports are real benefits and exports are real costs, and flexible exchange rates address bop issues in principle, special cases must also be considered.
I understand that the reason for this is likely that international trade is not the speciality of anyone directly involved in MMT at the moment, but this is an area that needs further elucidation in terms of the overall macro theory of open national economies in a global closed economy.
Of all the critiques of MMT, I find the "yeah, everybody knows that" to be the absolute oddest. I have lived and worked in Washington DC for several years now. I have worked in/around congress and the executive branch, and frequently go to discussions of monetary/fiscal policy. And not ONCE have I heard anyone say anything remotely like MMT. I found it all on the internet.
I think it says a lot about the soundness of our arguments that the most common argument against MMT is "you're not saying anything new",as if American policy discussions were already full of MMT-like ideas.
The misinterpretation of the ELR annoys.
The ELR is declaring that everybody on social security (or not in the case of the US) because they haven't got an 'ordinary' job has an 'ordinary' job and is receiving a wage.
The reason MMT 'disposes' with the Philips curve is because the Philips curve refers to 'unemployment'.
There is no 'unemployment' in the MMT model because you have used fiat power to declare that there isn't any unemployment!
So there can't be a 'classic philips curve' or a 'NAIRU' because there is no longer any unemployment. Something both those models declare is impossible.
"While it's true that imports are real benefits and exports are real costs"
this is only really the case if there is full employment.
I do not know enough of the history of economics to comment on the originality, but the MMT "founders" appeared to be careful in specifying what was original or not.
I think Palley misses on at least three points:
1. If he cannot figure out how the JG enhances price (actually wage) stability, he is deliberately not thinking about it. The wage in the JG is supposed to be fixed over time, and creates a "nominal anchor". Private sector wages will probably drift up in an expansion, but then converge towards the JG wage in a recession. How this effect would work would depend on modelling assumptions, but any reasonable model should pick up that behaviour.
2. He throws in the external constraint on government, and he says that the US is special. I see very limited evidence that any of the non-euro developed countries have external constraints, other than phantoms made up by conservative policy makers. The only countries that need to worry about the value of their currency are very small ones like Iceland.
3. When discussing the government budget constraint, he misses the condition as time goes to infinity. That is the part of the intertemporal government budget constraint that MMT rejects. The part that he constructs is the accounting identity, which MMT argues is just that, with no behavioural value. He completely missed the point.
Good points Justin...
The one that gets me is how all the morons go all around saying "we're out of money!" and "we're borrowing from our grandchildren!" and as you point out , DC policy is STEEPED in these false views and yet the MMT 'school' is the ONLY one that does and ever has vehemently called BS on that falsehood...
While someone like Palley, Krugman all the mainstream economists,etc. just sit there drooling while this continues to go on right in front of them... so what good are they?
"hat insight is a currency sovereign is the monopoly provider of the currency of issue and enjoys the advantages of a monopolist regardless of whether the government realizes this or chooses to use it. Most government do not. "
Right Tom this is a result of the out of control libertarianism that has plagued the west for most of the last 2,000 years...
A basic western out of control libertarianism (small 'l') that is running rampant prevents our society from being able to perceive this authority feature (not a bug) of our govt institution... hence "we're out of money!" and "borrowing from the Chinese!"... I'd like to see libertarianism set back about 2,000 years and all of this economic chaos we see everyday goes away pronto...
"With liberty and justice for all": oxymoron imo
rsp,
Uh, Ryan, what's your point here? I think we all agree with you, even if it wasn't explicitly stated.
Tom-- I agree with you (and Palley?) about the foreign exchange and trade issues needing more work in the MMT framework. That where Palley has his best insights, if I recall correctly...
@JW--
Good point about domestic (risk free) interest rates being set by central bank. Traditionally, this has only applied to short term rates, but QE has demonstrated that there's nothing to stop this from happening for long term rates also.
The MMT insight on the nature of this "debt" is a bit jarring for most people, and can't be digested as easily as the interest rate issue.
I enjoyed reading many of your posts last week after Tom referenced one here ... about Graeber and Wicksell and commodity money / credit money cycles ...
MMT has been more successful at reaching a broad audience than any other branch of heterodoxy lately, so who am I to criticize? [JW M]
Yes. The fact that MMT founders and advocates speak plainly is something that appeals to me and, I suspect, to others who are trying to figure out the economy. For example, a group split from MMT and founded Monetary Realism (MR) because they found MMT proponents careless and unnecessarily confrontational. I think there was something to this, but the MR alternative has turned out to be forgettable because it's not clear how they differ from the mainstream. They are too respectful and non-judgmental with regard to silly economic notions such as controlling the economy through "NGDP expectations", for example. There is no use in getting into shouting wars, but you need to call a spade a spade...
The cb set the own rate as the rate its willing to lend at, in the US the FFR and discount rate. Warren ways just set the rate to zero and provide unlimited liquid it to those that are solvent members. The cb can also set rates along the yield curve, too if it chooses. These are benchmark rates that influence other rates and yields. And governments do intervene in their currencies in the fx market.
However, governments can also affect prices in asset markets, too, if they choose, but that is usually considered only in extremes.
Government also chooses the prices it will pay. The particular relevance of this to MMT is in establishing a price anchor for an hour of unskilled labor with the MMT JG, setting a floor price but not a ceiling price, allowing the buffer stock to expand and contract with private sector demand.
But governments can also set price in other markets either directly through price or indirectly through quantity by the use of buffer stocks. For instance, Bill Mitchell got the idea of the MMT JG from the Australian government's use of a buffer stock wrt wool.
@JW Mason
It's well understood in orthodoxy that the CB sets the short-term rate, but also generally accepted that the CB doesn't set the long-term rate on govt debt and that "markets" do. I cited all sorts of orthodox research on this that is often considered standard in the field in "interest rates and fiscal sustainability."
So, while I've always agreed on JW Mason's point that the real issue is the interest rate on the national debt rather than the ability to print money in terms of effect (though the fact that there are no bond vigilantes requires the ability to create money, we shouldn't forget), I would disagree that it's "something they already believe."
Further, MMT has gone way beyond this to show that it doesn't matter if the govt issues bonds or not in terms of inflationary impact--if you don't, you're still issuing reserves at IOR anyway. This is missed by almost everyone, including most Post Keynesians. And it's crucial as well to understanding why the interest on the national debt is or at least always can be a policy variable.
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