Friday, February 28, 2014

Winterspeak — Flexible Exchange Rates, MMT, and the Ruble Crises of MMT


Winterspeak addresses some of Ramanan's observations.

A point of clarification. Winterspeak says, "One of the more interesting MMT insights, as stated by Mosler, is "exports are a cost, imports are a benefit", which is the opposite of the usual narrative where export driven economies, like Japan, are hailed while import driven economies, like the US, are said to be more vulnerable." 

What Warren and MMT economists say is that ""exports are a REAL cost, imports are a REAL benefit," implying a monetary system in which an independent currency ("sovereign" currency) is neither a real good nor backed by a promise of the issuer to exchange it for anything real. I don't believe that is controversial in economics. 

The notion that n export-driven economic is superior to an import-driven one is a holdover from the metal standard, e.g., where international trade was settled in gold or silver and the wealth of a nation was measured by its stock of precious metal. 

That's the mercantilist position. While it is over, the same thinking persists, some would say irrationally. Now, the rational position is to prefer an advantage in real terms if it is possible to achieve, since national prosperity is measured in consumption rather than either financial claims or gold stock.

winterspeak.com
Flexible Exchange Rates, MMT, and the Ruble Crises of MMT

On matter related to trade that often doesn't enter the discussion in economics is relative power. Power has been demonstrated  in the extreme historically in imperialism and colonialism, and the slave trade, for instance. However even in contemporary, and supposedly, post-imperial and post-colonial times, power imbalance also results in economic and financial imbalance in trade, and usually this is in favor of the more powerful nation in the trade relationship.

11 comments:

Ryan Harris said...

Consider agriculture. Government subsidizes food production through lower property taxes for producers, transfer payments to the poor to buy food, subsidized crop insurance, market intervention if prices go too low. They ensure that we maintain more production than we could ever use domestically, they pay for ag research. The list is very long for ag subsidies. The end result is like an insurance policy against famine. It keeps farmers in business that otherwise would fail. It is a huge "real" cost and "financial" cost from an economists perspective. We end up producing meat and ethanol and other "inefficient" types of derivative products.
Yet ALL consumers benefit from being able to buy more, higher quality food at a lower price, which is a real benefit. We have a stable food supply. But isn't optimally productive or efficient. We export all the surplus. A giant cost.

Suppose we took an MMT approach instead imported everything the world was willing to sell us and allowed virtually all US farming to shut down over decade while the external sector ramped up their production in response. It would be a huge REAL benefit. We could do it tomorrow, it might put a few companies out of business but overall we'd be much richer in real terms using an MMT type model, world production would rise. I just can't imagine any negative consequences.
At what point does the wasted capacity, wasted opportunity, wasted human lives, additional pollution, negative sum trade out weigh those "real benefits" of imports. Or is it actually ALWAYS a benefit? MMT doesn't attempt to answer those questions. MMT's view of the external sector is deficient as is their unwillingness to quantify exactly how the productivity lost is supposed to be replaced with a minimum wage job guaranteee. Surely MMT doesn't use the assumption that there is infinite demand and that imports will be in addition to all the domestic production at full capacity. International Trade isn't fair in the sense that domestic trade is fair, it doesn't substitute based on comparative advantage but rather strategic advantage. So all production would go away, except novelty type production. Would it be mercantilist, to see value in producing food domestically?

Tom Hickey said...

I'm not sure that is the case, but the MMT economists haven't written very extensively about trade, at least that I have seen. But my impression is that they would agree with the consensus that a nation needs to retain its ability to meet emergencies wrt to defense and vital resources. A cost-benefit analysis is not the only or necessarily the deciding factor. The argument is rather that. cet. par., the real benefits of net importing outweigh the financial benefits of net exporting so if the external sector desires to save in a currency, the nation issuing the currency has a real advantage. Of course, it may not choose to take full advantage of that advantage if other factors supervene.

For example, firms generally use multiple vendors instead of a single vendor to obtain the lowest price so as to build redundancy into the supply chain in order to buffer against supply bottlenecks.

There are always tradeoffs. Here there is a tradeoff between price efficiency and mission effectiveness, where effectiveness trumps efficiency. Countries are faced with such tradeoffs, too. In wartime efficiency is sacrificed to effectiveness at any cost.

Similar to redundancy, countries have kept buffer stocks in case of famine from ancient times. There was even a seven year rule in case of grain stock.

Food and defense production are the biggies and the US builds a lot of slack into those systems to provide for emergencies — some would say "over-provides."

Tom Hickey said...

"Surely MMT doesn't use the assumption that there is infinite demand and that imports will be in addition to all the domestic production at full capacity."

The way I understand it is that if imports can replace non-strategic production, it should be allowed to do so and the currency sovereign should underwrite full employment though public investment that encourages higher level production, as well as providing a JG. I think that the "infinite demand" is assumed to be found in expansion of services that are necessarily locally provided.

On of the problems in developing an economics of trade is the assumption of a symmetrical world, which is of course not the case. The world is still very asymmetrical and development economics has not been all that successful so far. I don't think that trade economics can be considered in a way that useful practically without being integrated with development.

This means thinking in terms of the global economy as a closed system in which everything influences everything else. The objective should be to build a symmetrical system ASAP without resulting in undue disruption on the way there. The present haphazard approach is not working very well.

Brian Romanchuk said...

I am not an expert on agriculture nor can I speak for all of MMT writers, but the present policy settings in agriculture are hardly perfect. From what I have heard, the energy return from ethanol production is negative; it only makes sense due to massive subsidies.

Developed countries dumping agricultural goods on poor countries wiped out local farmers, causing those countries to have less food security. Those countries were forced into producing cash crops, which is fine until prices for those cash crops crash. In which case, those countries are unable to pay for imported food. For those countries, the food imports end up being a very real cost.

That said, I have seen nothing to indicate that the main MMT authors are unwilling to consider strategic, public purpose considerations into account. (In fact, from the few economists that I read, the MMT economists are the ones to actually utter the words "public purpose".)

Dan Lynch said...

My comment at WinterSpeak. It's slightly off the main topic of flexible exchange rates, nonetheless WinterSpeak brought them up so they're fair game:

Re: "if I was to establish winterspeak-land tomorrow, no one could pay a tax denominated in winterspeak-bucks because none would exist, nor could anyone buy a winterspeak-bond because they would have no winterspeak-bucks to do so with. The original winterspeak-buck would need to come from somewhere, and that somewhere would be me (else it would be counterfeit)."

Well, most money comes from private banks, not from the government, so the winterspeak-bucks might be created when a private bank makes a loan.

Re: "exports are a cost, imports are a benefit"

Mostly false. What is the real cost of exporting a copy of Microsoft Windoze?

When you export a knowledge product, you don't loose knowledge. To the contrary, the more knowledge product you make, the more knowledge you gain. You also gain market share and name recognition.

Ah, but that's software, you say. What about hardware?

If a US manufacturing plant with excess capacity manufactures some piece of hardware using metal that was imported from Korea, and then exports the hardware, is that a real cost to Korea, or a real cost to the US?

If the US produces a surplus of widgets, but nonetheless imports widgets from China, resulting in layoffs at US widget plants, how is that a real benefit to the US? How are the laid off widget workers better off? The laid off widget workers can no longer afford to buy widgets, so national widget consumption actually falls. If consumption falls, then how is the country better off?

One way to look at "real" costs is by the opportunity cost. What is the opportunity cost of making widgets in the US, if the widget is mostly value-added and if there is excess widget-making capacity?

If the economy was operating at full employment, then the opportunity cost of making widgets would be whatever you could make if you redeployed widget workers elsewhere.

But in fact the US economy has not experienced full employment since WWII. If the widget factory shuts down due to foreign competition, the unemployed widget workers may not be redeployed. If that is the case, then the opportunity cost of making additional widgets in the US is zero, and the imported widgets impose real costs on Americans.

MMT's trade policy would only be true if trade were limited to scarce natural resources, like oil. It's not true with regards to knowledge products -- and the majority of products are knowledge products.

Jose Guilherme said...

"One of the more interesting MMT insights, as stated by Mosler, is "exports are a cost, imports are a benefit"

Perhaps.

But this insight was already present - even if under a slightly different form - in many of the "Old Keynesian" textbooks.

For instance, the 1970s editions of Richard Lipsey's "Positive Economics" made again and again the point that "the importance of exports is that they permit imports to be made".

Exports are a cost - a necessary cost for having the benefit of importing goods and services. In the end, it's just a matter of cost/benefit analysis.

Unknown said...

Again in the comments above there is a focus on the 'importer' side of the equation.

IMV that is the wrong point of view and is exactly the same mistake as taking the 'government borrows' viewpoint in monetary economics.

The Rest of the World is not some amorphous blob acting with a single purpose to supply or deny you your imports.

It is, in fact, a set of competing entities desperate for your business - particularly the export led ones.

And that IMV means you can *force* them to take your money - by playing one export nation off against a competing one until one gets their own banking system to provide the necessary 'liquidity operations' to make the trade happen.

It's just a matter of the government of a developing nation realising that getting somebody to accept your scrip means that you have power over them and handing out licences to operate on the basis that the domestic currency is accepted. 'No deal' until that happens.

"MMT's view of the external sector is deficient as is their unwillingness to quantify exactly how the productivity lost is supposed to be replaced with a minimum wage job guaranteee"

It's not. It's pragmatic. And only those that take the extreme 'ad absurdum' viewpoint that you have done struggle with it. Imports should be seen as a 'top up' and neither imports nor exports should be 'encouraged' by any policy arrangement. They should just be and allowed to find their level.

The MMT approach is to say that the domestic government should focus on that over which it has some power - namely the domestic sector - and that the domestic sector should be brought to full output via a Job Guarantee and the correct quantity of money allowed to circulate to bring that about.

Within that framework you make strategic decisions to ensure that your nation is protected from external shock - which will include food security, national security and probably 'barrier' based import and export controls that can be brought into play to deal with any extreme world systemic shocks.

MMT is all about building up buffers - food buffers, real terms of trade change buffers, employment stock buffers - that cushion a nation against rapid change and smooth out the ups and downs effectively.

Brian Stobie said...

Not sure about your argument concerning 'Winterspeak bucks'. A banks debt-money needs the backing of a governments fiat-money, as anyone could withdraw their loan at any time as actual cash, which IS created by government alone. A new bank could create it's own IOU-notes without government backing, but would have trouble getting them accepted as 'money', or getting them accepted as payment for taxes.

On the question of exports, I understood the MMT position to be that exports are a loss of raw materials and peoples time (which is also a resource). The exchange for the export is merely 'money', which may or may not be a benefit to the country. At the moment it probably flows into financial speculation.

Finally, there are a heck of a lot of container ships floating about that are not packed with copies of software 'knowledge products'. Stuff to eat, stuff to wear, stuff to build houses with.

Brian Romanchuk said...

It's not just withdrawals from customers that would kill a bank. If there was more than one bank, they would need funds at the central bank in order to clear payments in "Winterspeak-bucks".

And taxes could not be paid if there were no "Winterspeak bucks" - the net governmental liabilities is zero, and taxes remove those liabilities. Even if the government accepts a cheque from a bank customer, the implication is that the banking system will be insolvent, as it would have negative "reserves".

The Rombach Report said...

"One of the more interesting MMT insights, as stated by Mosler, is "exports are a cost, imports are a benefit"

I believe I have a proper understanding about MMT proposition that exports are a cost and imports are a benefit, but I have doubts and question about it not unlike those expressed by Ryan Harris and Dan Lynch.

In the context of free trade, the element that makes free trade FREE is that both counterparts to the voluntary transaction perceive it to be a benefit to them, as in win/win. This suggests that for imports to be a benefit there is no exchange of fair value. Much of the rest of the world sells the US everything they cannot afford to consume themselves. In exchange we give them fiat currency of no particular intrinsic value. As Richard Nixon's Treasury Secretary, John Connolly once said: The US dollar may be our currency, but it's your problem. Some observers would interpret this kind of global trade as a dollar based imperialism.

So, when the US runs a domestic budget deficit, it gives consumers more aggregate demand than would otherwise be the case. Consumers then go off the the mall and purchase items in WalMart or Home Depot that are mostly manufactured in China or some other emerging market exporting nation. This makes me wonder which country is benefitting more from the stimulus of the budget deficit.

Unknown said...

This makes me wonder which country is benefitting more from the stimulus of the budget deficit.

China, in order to obtain "stimulus" from foreign markets, stimulus we should note it could provide for itself, distorts its economy into overproduction and inefficiency.

Don't make the mistake of focusing on currencies which mask what's really going on. China organizes society so as to export its labor to other countries rather than using that labor to improve life in China. Think of the hundreds of millions in man-hours lost on making iPhone so westerners can indulge in electronic fantasies rather than cleaning up pollution or installing renewable energy generation.

I really don't see how one can even question which country is getting ahead when China has poisoned itself; it will get sick before it gets rich, and all to give Americans nice things.