Saturday, June 21, 2014

Peter Martin — Unemployment, Currency, Taxation and the Job Guarantee ! The MMT view.

Economically it has to be the case that the currency issuer is responsible for the level of unemployment in the economy.
Modern Monetary Theory: Real Economics
Unemployment, Currency, Taxation and the Job Guarantee ! The MMT view.
Peter Martin

29 comments:

Dan Kervick said...

The idea that the level of unemployment in society can be contolled by the currency issuer seems far-fetched. Just think about it. All of the complex facts about employment determined by issuing currency?

Tom Hickey said...

The idea is simple. Tax are withdraw money from the economy and spending injects money. There is no financial cost to government to inject money and no financial advantage to withdrawing it. Currency really is neutral as far as the issuer is concerned.

That means that the cost of capital to government is zero and the government can add funds to the economy to address unemployment with the only constraint being availability of real resources, which also implies inflation risk wrt the currency.

There is no problem adding enough money in the right places through fiscal policy to relieve unemployment created by lack of demand due to the sectoral balances being in balance as under a full employment budget per functional finance.

A currency sovereign has the funding ability to run a full employment budget iaw sectoral balances and functional finance, and then mop up residual UE with an employer of last resort program.

So, yes, a policy running under a full employment budget with a residual mop up leads to UE, and shifting policy to do the opposite eliminates UE.

Clonal said...

Also, a short article from Mike the Mad Biologist - The Cost of Misunderstanding How Money Works: So Long Invertebrate House

Tom Hickey said...

BTW a fundamental assumption of neoclassical economics and capitalism in general is that capital is scarce. However, capitalism also holds that natural resources are unlimited. Knowledge and creativity (innovation, technology) are also potentially unlimited. With a currency sovereign, financial capital is also unlimited. So the presumption that capital is scarce is false.

Detroit Dan said...

"All of the complex facts about employment determined by issuing currency?" [Dan K]

It's not issuing currency that will eliminate unemployment so much as it is hiring people (and paying them with issued currency). It does seem pretty straightforward.

Compare MMT's job guarantee with other policy proposals. We could increase wealth taxes, which would reduce inequality and thus improve the balance of power between capitalists and workers. Over time, this would result in higher growth as a stronger working class would earn more and consume more. The increased consumption would in turn increase demand for investment and provide more job opportunities. That's all good, but much less direct than a government job guarantee.

Another possibility is to lower interest rates in the hope of more investment and less savings (monetary policy). But, again, this is an indirect approach which may not work as increasing private debt may lead to instabiity or a zero bound may be reached -- or both!

The simplest way to reduce unemployment is to hire people.

Tom Hickey said...

Inequality is a distributional issue arising from asymmetrical power of capital and the ability to extract rent in a capitalist economy. It can only be corrected by policy if capitalists do not voluntarily pass along productivity gains. History shows owners do not do this in the absence of strong enough labor bargaining power to provide a market-based solution.

Employment is essentially the ratio of bones to dogs. If private investment doesn’t provide enough bones, the government is the last resort before some dogs go without.

Dan Kervick said...

Yes, the idea is simple, Tom. I think other words for it would be "crude" and "simplistic."

There is no reason to think that injections of money will always successfully increase net real spending in some substantial amount before the point at which those injections simply elevatate prices. Nor is there any reason to believe that, even if real spending is boosted, those spending increases will proportionally increase the number of people employed. They may only stimulate increases in hours employed or improvements in productivity among those who are already employed.

Employment - the number of people employed, how they are employed, the conditions underwhich they are employed and the manner is which they are compensated for what they are employed to do - is a very complex collection of social facts and phenomena. While the issuance of new money can certainly play a supporting role in employment policy, there is no reason to think it is the primary determining factor.

The job guarantee is more important, but also not sufficient to accomplish all of the employment policy tasks that need to be accomplished. When a society is operating at a level very far below its productive and moral potential, it needs more than just a program for people excluded from the workforce to be set toi work picking up highway trash for a minimum wage.

A government that issues currency has more tools at its disposal in seeing to it that its citizens have useful work to do, and that the nation's resources are used efficiently and effectively its and potential industrial energy, so to speak, is fully actualized. But we shouldn't fall into the trap of thinking that all of these challenging tasks can be accomplished through money magic.

Clonal said...
This comment has been removed by the author.
Clonal said...

Dan K, MTMB raises a good point in the article I linked to above. The Invertebrate House in the National Zoo is being closed because of the lack of funds to the National Zoo. The National Zoo is funded directly by the Federal Government - there are no intermediaries involved. As Mike pointed out, the Invertebrate House was a valuable resource for not only for budding biologists, but for researchers as well. Of course it also provided a source of employment for some biology majors.

To me this appears to be a case of destroying existing infrastructure to meet the need for dollars, when the Federal Government can manufacture an unlimited number of dollars. It is also not the case that the Invertebrate house was a cash cow to the "insect housing industry" and was purchasing "gold plated insect dropping repositories."

Tom Hickey said...

I agree that money magic is insufficient to solve the problems that arise from capitalism. As readers of this blog know, my considered conclusion is that capitalism is antithetical to liberal democracy because it puts money and machines above people. Therefore, it's basic principle is that those who own should rule rather than government of the people by the people and for the people.

The rightist view of capitalism v. socialism is that capitalism is private ownership and socialism is state ownership. That is a definition that doesn’t fit the case since it is a narrow definition that is limited to special cases. The more comprehensive definition is that capitalism privileges real and financial capital over labor, that is most of the people, on the grounds that capital is scarce and must be favored for growth that raises all boats, I.e., trickle down. Capitalism also presupposes that natural resources are unlimited and that markets discover true price, both of which are false.

The actual definition should be that capitalism favors capital as money and machines over labor as the vast majority of people, whereas socialism favors the needs the social system, which is based on the people and people's needs and wants, and opportunities and challenges that people as whole face in an ever-changing context.

Money magic shows that capital is not scarce and that government can afford to do anything it wishes, as Jeremy Grantham has observed wrt to the mounting climate crisis, and concerning which Alan Greenspan schooled Paul Ryan.

A venerable definition of economics is the study of allocation of scarce resources. This involves production, distribution and consumption. Mainstream economic has put distribution off limits on the false assumption that markets optimize distribution and that there is no other way that is as effective because markets are efficient. That is false.

In an environment in which capital is not scarce and real resources need to be husbanded for effective use globally, the assumption that capital needs to be favored is nonsense, and mainstream economics is propaganda for the status quo.

The only viable solution going forward is post capitalistic in the direction of social democracy and ecology by putting people and the environment above money and machines. Means are meant to serve ends. People are end in themselves and the environment is the necessary ground for survival and progress. Money and machines are simply means. Right now, the assumptions on which the system is operated are ass-backwards with the predictable result — FUBAR. This leads to SNAFU.

Lets shitcan the status quo and its ridiculous assumptions, get real, and move on.

Tom Hickey said...

I began arriving that these conclusions while I was serving in the military in wartime during LBJ the era. I began to see that even in the Kennedy-Johnson era that the war was not to make the world safe for democracy, as represented, and which most of the troops believed they were fighting for, but rather to secure territory and resources for Western neoliberalism, neo-imperialism, and neocolonialism, and to achieve the hegemony of capitalism.

Democracy was merely a façade, with a sleight of hand claim that capitalism and democracy were naturally one and the same thing, each implying the other necessarily and sufficiently in a cause and effect relationship.

Needless to say, I was shocked, disappointed and disillusion and became politically radicalized as I woke up to want was happening and the war broadened and deepened. My tour was up before Nixon was elected and I joined the anti-war movement after getting out, even though I was still in the reserve force. As soon as my service obligation was complete, I resigned my commission in protest, yet with regret. It was a very bitter ending of a relationship that had begun well and promised much.

Then it became clear over the years that America had squandered its goodwill and soft power coming out of WWII in the service of capital at tremendous cost of human live and suffering and waste of resources on a grand scale. In my travels back then, I was in both Germany and Japan about twenty years after the close of WWII and found the German and Japanese people very friendly and appreciative of America for not taking retribution. It looked for a while like a new world was in the making.

A similar things happened with the fall of the Iron Curtain and the dissolution of the USSR. A tremendous opportunities presented themselves. But the rest is history. The ruling elite of the US could not restrain its greed for power and control.

This has been exhaustively documented by people like Noam Chomsky, and the inner workings disclosed by whistleblowers like Daniel Ellsberg and Deep Throat then and Manning, Assange, and Snowden now, to name only a few of the many. The mask is off. What a waste of opportunity, not to mention a sea of blood and a mountain of treasure.

I hope I don't come across as a bitter old man because I am also optimistic that this trend can and will be reversed by good people acting in concert. However, I do not see a solution within the status quo characterized by the neoliberalism, neo-imperialism, and neocolonialism that constitutes advanced capitalism morphing into neo-feudalism and neo-fascism.

Dan Kervick said...

Tom, does "scarcity" just mean the same thing as "limited" in this context? If so, then isn't it obvious that capital is limited, just like anything else. There are at any given time only finitely many factories, machines, mineral resources, plots of land, etc. in the world.

Tom Hickey said...

If scarcity refers to real resources, then capitalism is caught in the contradiction of infinite resources being available for unlimited growth but real capital (goods) being scarce.

We know that financial capital is not scarce in the context of the existing monetary system, since the currency is unlimited in its ability to provide it. The only constraint is limitations on real resources.

There are limitations on natural resources so they need to be husbanded effectively for social use. Markets do not do this either effectively or efficiently owing to externalities that socialize costs. Therefore policy intervention is required.

The limitation on real resources in the sense of capital goods is dependent on R&D, innovation, and technology, I.e., human or, as Bucky Fuller said, "metaphysical" resources in contrast to physical resources. Through ingenuity it is possible to "do more with less."

The so-called scarcity of capital that would require its extraordinary privilege is just BS.

Tom Hickey said...

See John Maynard Keynes, Economic Possibilities for our Grandchildren (1930).

Keynes thought we would be there by now. He underestimated the power and greed of the ruling elite.

Dan Kervick said...

If scarcity refers to real resources, then capitalism is caught in the contradiction of infinite resources being available for unlimited growth but real capital (goods) being scarce.

You've completely lost me Tom. What "infinite resources"?

Obviously both natural resources and produced capital resources are finite and limited. no?

Clonal said...

Dan,
I believe, that Tom was referring to the belief of certain economists, that if enough money is thrown at it, scarce resources shall somehow become less scarce because money drives innovation.

THis is where the Cambridge Capital Controversies become important. Cambridge UK belived that capital referred to physical capital, when Cambridge MA believed that everything physical is fungible (or convertible to financial capital)

Tom Hickey said...

I was not referring to that as such as the lump of capital v. the lump of labor thinking, along with the assumption that natural resources are unlimited and there are no externalities, so that growth is limited by the amount of financial capital (lump of savings, "loanable funds"), and existing capital goods including finite land, with full employment as the labor limit.

This is the basic logic of scarcity in a closed system. It's micro thinking exported to a macro context along with a lot of false assumptions and equivalences.

Since this is supply side thinking, it is the amount of investment that is crucial and so capital needs to stand in first place in order to provide both capital and consumption goods and incomes. Capital should not be taxes, labor bargaining power needs to be gutted, corporations are people, money is free speech, and the actual purpose of militaries is to secure resources and property rights.

Tom Hickey said...

"You've completely lost me Tom. What "infinite resources"?

Obviously both natural resources and produced capital resources are finite and limited. no?"

One of the big objections to environmentalism and steady state economics (including denial of the laws of thermodynamics) is that energy and natural resources are essentially unlimited and that negative externalities either don't exist or are irrelevant.

This the propaganda line that many people believe, and it is implicit in the GOP and New Dem platforms.

Fixed capital is not a lump of capital either, owing to human ingenuity that continually allows us to innovate and also do more with less.

The only actual scarcity is natural resources that are either used up or not reclaimable. And this is the thing that TPTB deny. And part of this involves externalities that are socialized, as in "the solution to pollution is dilution" in the atmosphere, land, and waters, as if there were no cost involved.

Dan Kervick said...

Tom, it seems to me you are going through a lot of twists and turns to avoid admitting that scarcity is a fact of life. At any point in time there are only finitely many people, with finite intelligence, finite capacity working with finite resources. They thus have to make difficult decisions about how and whether to allocate and employ what they have. This has nthing to do with capitalism vs. any other kind of system. It's just reality. The fact that we can indefinitely add units of the medium of exchange to account balances doesn't alter those real economy constraints.

Tom Hickey said...

Then we have a different views of reality. In my view, we humans are not limited by the amount of financial or physical capital, or the amount of labor. The only limitations are human ingenuity and the physical resources and constraints of this planet, at least until we extend our reach further into space.

What limits us is our inability to cooperate and coordinate in order to adapt to emergent opportunities and challenges through exploration of options. Why? Largely due to the obstruction of vested interests that seek to perpetuate status quo and extend the control of the cohort of the "elite." What C. Wright Mills wrote in The Power Elite (1956) about the superclass has only been amplified since then.

As Bucky Fuller argued based on the information available at that time, Earth could be a utopia for all of humanity almost overnight if we coordinated existing resources on seizing opportunities and meeting challenges effectively instead of following the present course based on a false economics of scarcity, which induces scarcity thinking and obviates possibility thinking.

Fuller noted that there is no mention of scarcity when it comes to military expenditure or resource allocation based on markets. It's all about project effectiveness in meeting goals, and task efficiency wrt to means. Huge cost overruns are expected and absorbed.

On the positive side, Fuller also observed that the military pioneered design science to do more with less physical resources in the development of naval, air and rocket technology, owing to design constraints. No amount of funding was spared in the R&D, testing and scaling processes. He added that in spite of contributions to tech innovation, the militaries constitute the largest drain on resources.

Since then, the innovation and technology resulting from human ingenuity and creativity have catapulted humanity into the Information Age through the knowledge revolution in a way that Fuller could not foresee. The opportunities are far greater now, and so are the challenges.

But if we continue to waste non-renewable resources and destroy the environment at the present rate, humanity will indeed be faced with an existential threat within a few decades, as some decades ago R. Buckminster Fuller put it in the title of one of his books, Utopia or Oblivion (1969).

Dan Kervick said...

The only limitations are human ingenuity and the physical resources and constraints of this planet, at least until we extend our reach further into space.

And there are only finitely many humans, with a finite amount of ingenuity living on a finite planet with finite resources.

Honestly, I feel like things have fallen to a pretty low level if these basic points have to be made.

Tom Hickey said...

The point is that we are so far way from the limits it is silly to talk about scarcity. And to provision for the future the answer is not saving but lavishly funding education, R&D, infrastructure and everything else imaginable that will produce abundance sustainably.

But the first priority is distribution. There are adequate resources to provide every human being with a standard of living that royalty did not enjoy a century ago. In fact, this is the really easy part.

The hard part is cleaning up the mess we made that is fouling the nest and threatens to poison all of us and our progeny for a long time to come if nothing is done, or even too little too late.

Tom Hickey said...

I would prefer to talk about constraints rather than scarcity. Constraints are objective although dynamically changing as creativity rolls back previous constraints.

Stephen Hawking is seriously talking about colonizing space as an imperative in removing the location constraint that he sees implying extinction, and he sees HAL is the constraint on AI. This is a long way from economic "scarcity" wrt unlimited wants.

Scarcity is a relative concept based on wants, which are unlimited. Of course there will always be "scarcity" relative to unlimited wants. But it's irrelevant to social effectiveness in creating a system that works for everyone that is pushing the envelope of constraints through intelligence.

There's no need to meet unlimited wants. There is a need to meet real people's actual needs, including the needs of those yet to be born.

Then, if there is space within constraints to accommodate reasonable wants too, so much the better. But not meeting many people's actual needs in favor of serving the unreasonable wants of a few is insanity that only sociopaths and psychopaths could promote and defend.

Dan Kervick said...

"Scarcity", "constraints", "limitations" are just three different terms for the same thing.

Tom Hickey said...

In econospeak, "scarcity" assumes unlimited wants. All but free goods are "scarce goods." How do we know? They command a price relative to quantity. Goods are classified as rivalrous or non-rivalrous, and excludable and non-excludable. Only free goods and public goods are non-rivalrous and non-excludable, although public goods that have a cost may come with fees or taxes to offset costs.

The assumption of scarcity underlies neoclassical economics' basic assumption that relative supply and demand optimally determines allocation by price as the most efficient distribution mechanism, operating on preferences and opportunity cost (maximizing utility) and rationing distribution on ability to pay (price).

Economic scarcity is a constraint imposed by the assumptions. It's one way of handling distribution although this is argued or assumed (ideologically posited) to be either optimal or TINA regardless of distributional effects.

In system-speak, constraints relate to possibility space, or option space. Constraints are boundary conditions, which may be rigid or fluid depending on context.

Limitations relate to not only to finite resources but also include constraints imposed by nature on human abilities, for example. Technological innovation often overcomes such limitations. Human beings cannot fly naturally, but we overcame that limitation through aeronautics and rocket science, and overcame it in spades. The sky is no longer the limit. Now people are talking seriously about space colonization.

Digital technology is vastly increasing the reach of intelligence, rolling back individual and group limitations imposed by the human nervous system. Now very smart people are concerned about whether humans can keep their own creations on a short enough leash not to be controlled by them.

Economic scarcity will always be true by definition if unmet wants are unlimited, as they seem to be, since greed knows no bounds. Neither are constraints and limitations necessarily fixed. They establish some of the challenges to meet and overcome.

But what difference does unmet wants being unlimited amount to, really. It's just an assumption underlying an ideological approach to economic modeling. And scarcity economics is showing itself to be a crappy model for running the life-support system of humanity. We need a possibility economics, not a scarcity economics.

Detroit Dan said...

Tom-- All of what you say makes sense to me. And I think you're doing the right thing by sharing your fundamental world view as opposed to arguing line-by-line specifics. Too often, conversations between people with differing world views degenerate into name calling exercises.

Dan K-- I can understand if you do not have the time to go to that level here. I don't either at the present, but appreciate the effort that Tom made to explain where he's coming from...

Tom Hickey said...

The main point of what I am saying is that "scarcity" is ideological. It underlies the justification of capitalism as either the best way to distribute resources, or even TINA. That is a rationale that I see as self-serving on the one hand, and unsupportable on the other.

There are actual constraints and limits in any real system, but the challenge in social systems is overcoming them, and humans have shown themselves to be remarkably successful at this in a myriad of ways.

The issue here is capitalism and distribution. My contention is that capitalism does a crappy job of distribution and it's not difficult to see why. The system is fixed institutionally and also corrupt on top of that.

When I travelled widely outside the US fifty years ago as a young person I was appalled to see the rulers that the US was supporting in the name of either democracy or national security. IN these countries the wealthy and powerful lived in a world that separated from that of the rest of the people, who were living in abject poverty. Now we are starting to see that happen in developed countries, while the US and its allies are still up to the same things abroad.

It's clear what the policy is about, and it not about optimal distribution in any meaningful sense. It's about growing the pie for the top cohort, and crumbs from the table to rest if they are fortunate enough to not to be ruled by complete sociopaths. Then they get nothing unless they are minions or cronies.

Anonymous said...

I’m on the unseen potential side of things. Imagine a caveman sitting around saying he had finite flint for stone axes and spears: we would never have evolved over 200,000 years to the point where a Wall St. trader with a cell phone in his pocket manipulating billions of dollars on a global network of bits could jump out of a 200 storey building’s window – because the GFC happened and he ‘thought’ he had lost ‘everything’.

Most people wouldn’t know human potential if they fell over it …. Even ‘being human’ in the personality sense is lost to this world: who understands their essence understands the human heart. It’s a long road back home …. but only then will we even begin to fathom human potential!

Anonymous said...

... and scarcity (of consciousness)!