Every economic school has its own theory of inflation. MMT, which until recently had no clear theory of inflation, was roundly criticised for this by mainstream and heterodox economists alike: it is now developing a theory which as far as I can see is based upon the idea that inflation is always and everywhere caused by inefficient deployment of labour. Hmm.Huh?
Pieria
Inflation is always and everywhere a political phenomenon
Frances Coppola
(h/t Ralph Musgrave)
60 comments:
I think she misses some of the nuance in the MMT inflation view but in all fairness she wasn't really writing about MMT.
I think MMT says that unemployment is evidence that taxes are too high.
And inflation can result from any number of causes, like real resource constraints, such as an oil embargo, Or a more than fully utilized labor force. Or foreign exchange effects on imports... many reasons. Makes me curious what she has been reading. Maybe someone has written something new and we've missed it.
Ryan,
"I think MMT says that unemployment is evidence that taxes are too high." Strictly speaking excess unemployment is evidence of taxes being too high RELATIVE TO public spending. I.e. its the size of the deficit that matters, not the total that government collects by way of tax.
She doesn't seem to point to any MMT advocate saying this. So "Huh?" is the appropriate response. (She has a link to a 2011 paper about hyperinflation by Cullen Roche. Could that be what she's referring to??)
Just to point out, during the Mosler-Murphy debate, I was involved in a long chat with Frances Coppola and Noah Smith. I think, and could be wrong, the exchange began because Noah didn't seem to understand that if the government sells public lands that 'drains' dollars from the non-government.
In any event, MMT has a very consistent theory of inflation. And there is over 20+ years of print evidence.
Her article was really about the Fiscal Theory of the Price Level. I wrote a sequence of articles about that recently (which were linked to here earlier). It's an interesting area of theory, as it forms a different view of how the price level is formed in a DSGE model.
But this only matters if DSGE models are useful, which is a fairly questionable assumption. The MMT view of inflation is much more grounded in empirical reality. And if you are going to wave your hands and use a verbal description of the Fiscal Theory of the Price Level, such as she did here, you end up with something resembling Chartalism.
MMT has a consistent theory of inflation? Far from it.
-- the MMT claim that a JG would control inflation by being a "price anchor"
-- the MMT claim that most recent inflation has been caused by oil, contradicting MMT's claim that inflation is caused by the price of unskilled labor.
-- the MMT claim that we can't have a BIG because it would cause inflation.
-- the MMT/Minsky claim that 70's inflation was caused by food stamps and other transfer programs.
-- the MMT/Minsky/Hudson claim that inflation is caused by financial bubbles
-- the MMT/Hudson claim that inflation is caused by monopolistic rent extraction.
-- the MMT claim that high interest rates pump money into the economy and that low interest rates are disinflationary.
Now it may be that there is a grain of truth in several of those claims (tho certainly not Minksy's assertion that 70's inflation was caused by transfers). It may be that there are multiple causes of inflation. If so, that contradicts MMT's "price anchor" theory, because if there are multiple causes of inflation, then you can't control inflation merely by controlling the price of unskilled labor.
I agree with Frances that MMT lacks a consistent theory of inflation, and I agree with everything she says in the essay. Her comments on MMT were a side issue, her main point was that economics as a whole does not have a good handle on inflation and yet we still expect the Central Bank to control inflation.
The MMT tribe is in denial about its weaknesses. As the saying goes, a skunk can't smell its own scent.
@ Dan Lynch
Huh?
@ Tom Hickey, huh? right back at ya. :-)
I'll be blunt. Total nonsense.
Remind me to be convinced by the evidence and logic that you have presented, Tom. :~/
But rather than criticizing me, how 'bout you write up a post on the definitive MMT theory of inflation?
One problem with criticizing MMT is that there is no definitive agreement on what MMT is or who is authorized to speak for MMT. I've even been told that WM's 7DIF does not speak for MMT!!!
So you go post the definitive MMT explanation of all things inflation, and then we'll talk about it.
Dan L--
Good to have a 3rd Dan around (along with Dan K and myself -- apologies to any other Dans I may have missed).
My impression is that MMT is pragmatic with regard to inflation. As you say, there are multiple causes of inflation (or lack thereof). Globalization and its impact on wages is preeminent at the current time in the U.S.
From MMT I learned that the conventional wisdom is wrong and that the central bank cannot control inflation. (Certainly, central banks can have an impact by setting certain interest rates and by buying and selling foreign currency. But MMT authors have on many times noted that monetary policy is a blunt instrument and not very useful for managing an economy.)
I'll concede that the job guarantee is untested, so we can't be positive as to how it would work with regard to inflation. However, it is clear that wage growth is one of the key factors in inflation, and the idea of a government job as an economic buffer (automatic stabilizer) makes sense to me, although it would be difficult to implement. Of course, resource constraints can lead to inflation also...
There are three chief aspects to the MMT fiscalist approach to growth (investment), employment (a job offer for all willing and able to work), and price stability (moderate inflation), which are the focus of economic policy and therefore of primary concern to macroeconomics as political economy. MMT holds that the inefficiency of persistent unemployment offsets moderate inflation, which also encourages real growth.
MMT holds that focusing on one or two rather than all three distorts adequate analysis and is likely to skew policy, e.g. using one factor as a tool to target the other two, which is the case with present policy under NAIRU. The present fiscal stance is also too tight owing to a mistaken notion that government finance is like household or firm finance, which confuses the currency issuer with currency users.
One reason the fiscal stance is too tight now is an over-reliance on monetary policy due to a lack of understanding of monetary economics, confusing the monetary base with money supply affecting spending on firm investment. Low rates and a large monetary base do not spur investment when saving desire greatly exceeds spending desire and consumption is not sending a signal to firms to invest in higher production, and entrepreneurs are reticent to enter a soft economy since it will take longer to hit break-even and risk is higher.
The first aspect of MMT is determining the fiscal stance appropriate to existing conditions and anticipated change. The MMT approach to this is the sectoral balance method developed by Wynne Godley that is based on SFC macro modeling. Essentially the approach involves running a full employment budget by balancing the sectors at full employment without inflation. This involves government offsetting change saving desire of non-government with its fiscal balance so that government and non-government are in balance at full employment and moderate inflation.
The second is the major tool of functional finance adopted from the work of Abba Lerner. This is a fiscalist approach to maintaining effective demand at full employment without provoking inflation. It is ideally accomplished pro-actively with automatic stabilization since the budget is too non-discretionary to use alone as a tool to target growth, employment and price stability.
The third is a development of Hyman Minksy's job guarantee or employer of last resort program that creates a buffer stock of employed for the private sector to draw on rather than a buffer stock of unemployed. The former is a much more humane and efficient approach than the later.
This also establishes the wage the government sets as the price of an hour of unskilled labor as a price anchor, which functions as a benchmark similar to the interest rate that the government sets. This establishes the value of the currency in terms of labor rather than in terms of a commodity or an interest rate.
Warren Mosler also recommends setting the interest rate to zero and targeting price stability fiscally in that this provides consistently low cost borrowing for investment, encouraging growth.
This is a comprehensive and integrated approach to economic policy that claims to resolve the trifecta of growth, employment and price stability. The charge that MMT's approach to inflation is through controlling unemployment misses the point of MMT as a macro approach to economic policy.
First, it is chiefly fiscalist rather than monetarist, making in broadly Keynesian in that it is chiefly concerned with maintaing effective demand at full employment output without price instability. Secondly, the analysis and tools that MMT proposes are multiple, building on Post Keynesianism and Institutionalism.
Bill Mitchell wrote a series of posts on inflation, as part of the draft text for the 'MMT textbook'.
First post in the series is here:
http://bilbo.economicoutlook.net/blog/?p=22646
Bill Mitchell, Unemployment and Inflation, part 14:
http://bilbo.economicoutlook.net/blog/?p=23497
(This is the last part in the series, and it has links to all the previous parts).
Also:
Bill Mitchell, Buffer Stocks and Price Stability, part 5:
http://bilbo.economicoutlook.net/blog/?p=24063
(This is the last part in this series, and it has links to all the previous parts).
This page at NEP has links to MMT papers which discuss inflation:
http://neweconomicperspectives.org/mmt-scholarship
such as
I put together a list of excerpts from about 40 papers but blogger says my list is too long. I'm not really an expert on MMT but in a couple hours I've been able to dig up quite a bit on inflation by the academics. Most of MMT is based on Pk lit, so all the MMT papers reference people like Minsky and Galbraith and half a dozen others so there are lots and lots of references to the shoulders of the giants.
“It would clearly be inflationary to keep pushing the deficit
s beyond the level required to achieve full employment. But up to the point of full employment, deficits are not necessarily inflationary. Still, policy needs to be aware of bottlenecks and other structural problems that can
generate inflation even before full employment“
The Consumer Price Index As a Measure of Inflation -- Entire paper pretty relevant.
The War on Poverty After 40 years - Kelton(Bell) and Wray
Economic growth based on " private investment strategies tended to exacerbate
income inequality, generate inflation, and undermine financial stability"
Wray on Argentina and Inflation
Pilkington on Argentina and Inflation
“The Strategy of Economic Policy and Income
Distribution.” Minsky, 1973
<a href="http://cas.umkc.edu/econ/economics/faculty/wray/508wray/Papers/Effects%20of%20shifts%20of%20AD.pdf>Effects of Shifts of Aggregate Demand on Income Distribution, Minsky 1967</a>
I'm supposed to be working today and I'm playing MMT librarian for y'all!
Fiscal Policy: Why Aggregate Demand Management Fails and What to
Do about It, Pavlina R. Tcherneva 2011
Synthesis of relationships between inflation-aggregate demand-investment and labor force. Draws on previous work by Wray, Bell, Minsky heavily.
Ryan and Y, I think Coppola's point, and certainly my point, was not that MMT had never taken a position on inflation, but that MMTer's inflation policy is not clear because MMTer's often contradict each other (and sometimes themselves) on the subject of inflation.
If one MMTer says that inflation is due to wages and that *ALL* wages can be controlled by anchoring the price of unskilled labor (actually, WM has stated that price stability can be achieved by anchoring the currency to the price of ANYTHING), and another MMTer says that inflation is due to the cost of energy, another MMTer claims that transfers cause inflation, another MMTer claims that inflation is caused by too many dollars chasing too few goods, and still another MMTer claims that deficit spending cannot cause inflation (MN said that on this blog, and I'm well aware that he was exaggerating to make a point) that is not a "clear theory of inflation," it's a confusing and sometimes contradictory theory of inflation.
If inflation is caused by the price of unskilled labor, then you should be able to back that up with data correlating the price of unskilled labor to inflation. Instead, inflation in my lifetime has correlated largely to energy prices. MMT has not reconciled energy-induced inflation with their JG "price anchor" theory.
As Minsky pointed out, even during the post WWII boom when oil prices were stable, inflation had more to do with the price of unionized skilled and semi-skilled labor than with the price of unskilled labor. MMT has not reconciled Minsky's claim that unskilled labor did not correlate to inflation with the MMT claim that inflation can be controlled by controlling the price of unskilled labor.
I've read many (tho not all) of Minsky's papers on the ELR, and don't recall him making the claim that an ELR would be a "price anchor." It's my understanding that the price anchor claim comes from not from Minsky but from Bill Mitchell?
If inflation may be caused by many different things, and if some of those things are beyond our control (the price of oil, climate change impact on agriculture, growing population, free trade, private debt bubbles, etc..) then I suggest the best policy is to say as much -- that inflation may be caused by many different things, some of which we may have no control over.
IMHO we should focus on taking care of our people, on "right-sizing" the budget deficit, but not attempt to target inflation other than being mindful that excessive deficit spending is capable of *CONTRIBUTING* to inflation (under the right circumstances, which have never happened in my lifetime).
Dan,
"MMT has not reconciled energy-induced inflation with their JG "price anchor" theory. "
I'm not sure you've totally understood the JG idea. The government sets the JG wage, which becomes the de facto wage floor, and then adjusts fiscal policy (and possibly monetary policy) to change the size of the JG pool.
This is a more efficient alternative to changing the number of unemployed by adjusting fiscal and monetary policy.
Both approaches serve to control inflation, but the former approach is less wasteful, and in theory reduces hysteresis, thus improving long term productive capacity and reducing associated supply-side inflationary pressures.
From the Pavlina paper that Ryan posted:
"greater aggregate demand is not the
answer to these problems."
And yet Mosler and Charles Hayden "demand aggregate demand," and MMT claims to subscribe to Abba Lerner's aggregate demand-based policies. So Pavlina contradicts Hayden and Mosler and Lerner and yet I am ridiculed when I point out the contradictions within the MMT community ?
Pavlina: "Employment equilibrium is a function of three key independent factors — the marginal efficiency of capital, the marginal propensity
to consume, and the marginal efficiency of money. Since none of these factors are under the direct control of policymakers, fixing them and keeping them at the full employment
point of effective demand is impossible via a policy of fine-
tuning overall government spending."
So Pavlina claims Abba Lerner's policy of functional finance is "impossible" even though MMT claims that functional finance is a cornerstone of MMT.
Pavlina: "But aggregate demand measures fail in one other respect: they work through a fundamentally flawed trickle-down mechanism in labor markets as well. As government increases its total demand for goods and services, it first improves the conditions of the skilled, employable, highly educated."
This claim is easily debunked by looking at a chart of the gini coefficient. The New Deal & Great Society Keynesian policies -- flawed tho they were -- reduced the gini. The gini began to rise when Keynesian polices were abandoned and replaced with Neoliberal policies.
Pavlina: "These inflationary pressures then prompt policymakers to abandon the aggregate demand approach
before full employment is reached."
Nope, Keynesian policies were abandoned because the USSR collapsed and the oligarchs no longer felt obliged to maintain the New Deal social contract, as Tom Hickey has posted many times. This was predicted and explained by Kalecki in 1943.
The rest of Pavlina's paper merely repeats the worn-out talking points for the JG. These talking points pretend to be based on economics but are actually rooted in conservative values. I have already blogged at length on the JG and will not repeat my critique of the JG here.
With regards to the original topic of inflation, Pavlina's paper merely reinforces my assertion that MMT lacks a clear, consistent (never mind accurate) inflation policy.
I've read many (tho not all) of Minsky's papers on the ELR, and don't recall him making the claim that an ELR would be a "price anchor." It's my understanding that the price anchor claim comes from not from Minsky but from Bill Mitchell?
The buffer stock of employed was contributed by Bill Mitchell in the initial interaction between WM with Randy and then Bill. Pavlina was a grad student back then.
Not sure who first surfaced the idea of a price anchor, but it was WM who first emphasized that a currency issuer has a monopoly on the currency, hence, is the price setter.
See Bill Mitchell, Modern Monetary Theory and Inflation — Part 2
IMHO we should focus on taking care of our people, on "right-sizing" the budget deficit, but not attempt to target inflation other than being mindful that excessive deficit spending is capable of *CONTRIBUTING* to inflation (under the right circumstances, which have never happened in my lifetime).
How is that different from MMT?
@ Y "I'm not sure you've totally understood the JG idea."
So anyone who questions or criticizes the JG must be too stupid to understand it? Y, I have read (and blogged) extensively on the JG, probably more than most people in this discussion. Your comment is an ad hominem attack, instead of focusing on the issues.
Y: "which becomes the de facto wage floor."
Yes, the JG would be a *WAGE FLOOR* not a wage ceiling -- and the minimum wage law already provides a wage floor. So you haven't made any connection between a JG and inflation.
Y: "adjusts fiscal policy and possibly monetary policy to change the size of the JG pool."
But who is concerned about the size of the JG pool? Certainly not me. I want the JG pool to be as small as possible so my wages will be driven up! If only employers are concerned about the size of the JG pool, then I have to ask who does the JG pool serve? Would a JG pool serve the "public purpose," or would it serve capitalism?
Y: "reducing associated supply-side inflationary pressures."
If you believe in supply-side economics, and if you believe that a JG would influence things that are truly supply side limited like oil, land, climate, etc.. Are JG workers going to excrete oil and land?
Y: "more efficient alternative," " less wasteful"
Vague, but I sure as hell don't see anything "efficient" about coercing intelligent, skilled people to perform dead end minimum wage jobs. Seems "wasteful" to me.
Dan,
What Pavlina is saying is that demand-management should be accomplished by directly creating jobs and eliminating involuntary unemployment, not just by increasing overall spending in the hope that this will eventually lead to full employment.
You see to be trying very hard to not understand people's arguments.
Yes Mosler says 'demand aggregate demand', but he also argues that you need to do so by directly creating jobs. There is no substantive difference between what Pavlina and Mosler are saying.
"So Pavlina claims Abba Lerner's policy of functional finance is "impossible" even though MMT claims that functional finance is a cornerstone of MMT."
No she doesn't claim that in the sentence you quoted.
Tom, in many ways my views are similar to MMT's (I wouldn't be visiting MNE if I didn't share some common interests).
I differ in that I don't care for MMT's uninspiring, paternalistic flavor of a "coercive" JG nor do I claim that such a program would "anchor" prices.
My comment was not an ad hominem, and I never said or even suggested that "anyone who questions or criticizes the JG must be too stupid to understand it". it was simply an observation. Your comments suggest you don't totally understand the JG idea.
There's a massive difference between minimum wage and JG as a wage floor since minimum wage brings with it no guarantee of obtaining a wage at all, leaving the actual wage floor at zero.
"Yes, the JG would be a *WAGE FLOOR* not a wage ceiling -- and the minimum wage law already provides a wage floor. So you haven't made any connection between a JG and inflation."
If you want to reduce inflation, you can contract fiscal policy. This reduces demand and increases the number of people in the JG pool.
The usual approach would be to contract fiscal or monetary policy, thereby increasing the number of unemployed.
Both approaches serve to control inflation, but the former keeps people employed and is thus less wasteful than having people involuntarily unemployed.
The wage floor acts as a nominal anchor as you can control inflation by changing the number of people who earn the JG wage.
"I want the JG pool to be as small as possible so my wages will be driven up!"
But you are not in government and you do not have the responsibility to control inflation.
"If you believe in supply-side economics"
I didn't say I believe in 'supply-side economics'.
"and if you believe that a JG would influence things that are truly supply side limited like oil, land, climate, etc.. Are JG workers going to excrete oil and land?"
No of course not. I didn't say that a JG would influence things like oil land or climate. Changing the size of the JG pool is a way of managing demand. However, because it keeps people employed as opposed to involuntarily unemployed, it means that people remain attractive to private sector employers and they don't lose skills as much. So you have a more effective workforce over the long term and a more efficient private sector employment market.
MMT is "old Keynesian" (and Kaleckian) in being concerned with effective demand.
Keynes wrote in Chapter 3 of his grand book, "... the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand."
See also Trying to Make Sense of the Principle of Effective Demand by Jochen Hartwig at CFEPS (MMT site) for an in depth analysis of ED.
In the next sentence Keynes declares Effective Demand "the substance of the General Theory of Employment". In view of his statement: "The ultimate object of our analysis is to discover what determines the volume of employment" (KEYNES 1973A, p. 89), it is beyond doubt that the Principle of Effective Demand is the centerpiece of the economics of Keynes1 . Keynes defines Effective Demand as a point of intersection of two curves. (p. 2)
***
If the above-mentioned qualifications are taken into consideration, the individual D- and Z-curves can be aggregated, which yields the Point of Effective Demand for the economy as a whole17. This point contains all information about price-, output-, and employment levels for the next production period. One might conceive of this point as an equilibrium, but it is not some kind of "market equilibrium". It is a point where the entrepreneurs' expectations and pretensions concerning different things, e.g. prices, costs, profits, demand etc. are mutually consistent. I have chosen to call this interpretation of the Principle of Effective Demand "thoroughgoing" because it uses the same analytical devices as did Keynes (the D- and Z-curves), and it overcomes some interpretative problems as to the meaning and shape of the two curves, so far unsolved in Post Keynesian Economics. (p. 11-12)
This is a wonkish paper with lots of math, but it's not necessary to work through all of it to understand that the so-called "Keynesian" aggregate demand approach is flawed. It is not what Keynes was doing in the General Theory, and also that the Keynes's meaning of "effective demand" has been poorly understood.
It is also pretty wonkish, and I don't how relevant a criticism of MMT holding up a sign, "We demand aggregate demand," actually is.
In fact, one of the problems is that doing economics on blogs is prone to oversimplification, but it's the price of popularization, like explaining quantum theory without the math.
So Pavlina claims Abba Lerner's policy of functional finance is "impossible" even though MMT claims that functional finance is a cornerstone of MMT.
MMT economists have consistently said that the applying FF to the budgetary process alone is insufficient for fine tuning, since the fiscal balance is non-discretionary. Automatic stabilization addresses this generally but while FF is necessary, it is not sufficient.
The JG is a mop up operation.
differ in that I don't care for MMT's uninspiring, paternalistic flavor of a "coercive" JG nor do I claim that such a program would "anchor" prices.
I 'm not sure you properly understand "price anchor" is if you think it "anchors prices." A price anchor establishes a particular price as benchmark of value. Setting the interest rate establishes a benchmark price that affect other interest rates. It doesn't control them.
According to price theory, the price level needs some anchor as a benchmark. Under the gold standard it is the fixed price that the government offers to acquire gold for it reserve and to exchange it for currency. With the JG, the "reserve" is the buffer stock of employed, which the govern has a standing offer to add to at a fixed price.
While the minimum wage sets a price by law, it is not a price anchor in the sense of what the government offers. So it is different since there is no employed buffer stock as a reserve. The reserve is "the reserve army of the unemployed and destitute" with no offer.
Firms can bid up the price of unskilled labor, but until the reserve is exhausted, there is a buffer stock to draw on and this dampens the pressure for wage increases at the bottom—which is a significant driver of inflation, since firms do not draw on the bottom extensively until they are running at full steam.
The central bank can only set the nominal rate of interest and not the real rate, which fluctuates with inflation. A "real" price anchor such as what the government offers for a commodity like gold, or an hour of unskilled labor also becomes a benchmark for other prices. It doesn't control other prices other than by setting floor, and no MMT economist ever made the promise that a JG as price anchor would function to control prices in the economy or set a ceiling price.
Prices on the upside are controlled by competition in competitive markets. Prices are basically a function of producers' costs and the industry standard rate of profit and return on capital. Without pricing power resulting from imperfect competition, firms discipline each other through competition.
The idea that inflation can be controlled by fixing the price of unskilled or JG labour is complete nonsense. Given grossly excess demand, the price of everything (apart from JG labour) will rise willy nilly. I’m 95% sure Warren Mosler accepted that point in one of his posts.
Why control "inflation" anyway? To a biologist reminding us of the overriding importance of cultural adaptive rate ... inflation is a straw man.
Constraining EITHER current fiat or current currency inflation only constrains future options.
Personally, I think the entire inflation debate is missing much bigger points.
To me, worries about inflation fall under Mosler's Law, which I'll restate this way. "There are no local frictions which cannot be handled by intelligent adjustments in policy."
In short and by definition, there are no frictions in any organized system which aren't eventually handled by subtle system-wide tuning (exploring desired outcomes and policy space). Anything less intelligent - like trying to constrain inflation - is a hopelessly isolated response to systemic options and challenges.
Ralph,
"The idea that inflation can be controlled by fixing the price of unskilled or JG labour is complete nonsense. Given grossly excess demand, the price of everything (apart from JG labour) will rise willy nilly."
Straw man. To control inflation in this case, MMT generally advocates contracting fiscal policy to reduce overall demand, or using other policies to reduce excessive growth in demand. This could/ would have the effect of increasing the size of the JG pool, i.e. increasing the number of workers receiving the JG wage.
So controlling inflation, in MMT, is not just about 'fixing the price of unskilled labour' at all.
Warren Mosler:
"To regain control of prices, the government could act to offset the reduced desired private sector H(nfa) directly and restore the ELR pool to a desired level by cutting spending or raising taxes. It could also attempt to indirectly raise desired H(nfa), by changing interest rates; introducing tax advantaged savings plans, etc. Such efforts would be designed to trigger a deflationary private sector slowdown that would result in a reduced demand for private sector workers above the $12,500 ELR wage, and workers finding their way back to the $12,500 ELR payroll. If this were deemed too disruptive, the same fiscal constraint could be matched with an increase of the ELR wage, say, to $15,000 per year. This would redefine the currency downward to that level- presumably the perceived market level that wages had gone to at that time. Prices would stabilize around the new benchmark as desired H(nfa) and actual H(nfa) correspond to a desired buffer stock of $15,000 ELR workers. The question of the appropriate size of this pool of workers would be somewhat analogous to the current debate over the current natural rate of unemployment."
http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/
The core irrelevance of inflation is a fundamental corollary of a fiat currency system.
That's true simply because a growing system relies upon increasing it's options, and exploring them via 2 main strategies.
a) extending the analog computing network (in our case, growing population)
b) increasing the computing throughput (in our case, increased message-passing, aka increasing public discourse). Ask any family, firm or military about the value of improved & more pervasive communications.
The outcome of growing system intelligence is expansion of both policy space AND exploration speed, which we otherwise call adaptive rate.
The biggest lesson is that return on future coordination options (a dynamic asset) completely swamps any changes in perceived value of prior static assets (e.g., unitary purchasing power of a "unit of fiat").
If that weren't true, then static assets wouldn't be obsolete so quickly. Show me a static asset any time in history that isn't rapidly obsolete - & made so by the accelerating dependency on dynamic rather than static assets.
>In short and by definition, there are no frictions in any organized system which aren't eventually handled by subtle system-wide tuning (exploring desired outcomes and policy space). Anything less intelligent - like trying to constrain inflation - is a hopelessly isolated response to systemic options and challenges.
This is basically what is wrong with the way conventional economics is done and how economic policy is set iaw it.
This is what you get with methodological individualism, microfoundations, and cet. par. (which just states "abstracting from the system and assuming that the variables in a cet. par. function don't affect other variables in the system simulataneously).
Anything short of a full-on systems approach to economics, especially macro and its policy implications, is bonkers, as Kenneth Boulding observed decades ago when he abandoned the discipline to co-found general systems theory.
Using the present approach competent economists can construct models to support anything they wish to, and conditions are such that the models are untestable. It's just bad philosophy, especially assuming homo economicus and assuming away that humans are moral agents functioning in social, cultural, and institutional contexts that influence their functioning on all levels from birth to death.
It's complete nonsense and the result is huge "collateral damage" from "unintended consequences." Economists need to start taking some responsibility, or be held accountable.
You control domestic price inflation in MMT in exactly the same way as you do in the mainstream.
By reducing demand (via autostabiler tax increases and spending reduction mostly) and making people unemployed thereby reducing their income.
Except you don't call them unemployed in MMT because they have a Job under the Job Guarantee. Hence the anchor.
You set discretionary spending where it needs to be to let this process function - just as you do now.
The only difference is you don't try and do it via the indirect means of borrowing and saving money. Which as we've seen doesn't work.
This 'theory of inflation' notion is complete garbage. Policy settings in one country cannot affect demand in another country. Therefore the international fight over resources has to be dealt with in a more sophisticated fashion than just price.
If it becomes a problem, you have to ration goods and services that are bought abroad. Stop importing private jets if you are short of raw materials, etc.
Again the message of MMT is clear. Stop worrying so much about numbers and Get Real.
"I'll concede that the job guarantee is untested, so we can't be positive as to how it would work with regard to inflation. "
It has been tested. We just call it 'unemployment' at the moment and throw away any output from those on the scheme.
That's not very efficient of course. Job Guarantee captures the output and directs it in a useful manner.
@ Neil said "You control domestic price inflation in MMT by reducing demand (via autostabiler tax increases and spending reduction mostly) and making people unemployed thereby reducing their income."
If Australia could maintain tight full employment and low inflation for 30 years using only Keynesian-Lerner methods, then why is it necessary to reduce aggregate demand to a point that there is significant unemployment? I maintain that there is no evidence that a Keynesian-Lerner approach to full employment and price stability have failed. Instead, it has simply never been tried in most countries for all the reasons that Kalecki pointed out.
@ Neil said: "Except you don't call them unemployed in MMT because they have a Job under the Job Guarantee."
I would call them UNDEREMPLOYED. I might also call them SLAVES.
Note that there was zero black unemployment in the pre-civil war American South. So yes, you can achieve "full employment" without risking excessive aggregate demand if you coerce people to perform crappy jobs for little or no pay -- it's just not a very nice thing to do.
If a JG were truly non-coercive, then some unemployment would continue because some people would refuse to perform the low paying dead end JG, just as some unemployed (particularly older workers) refused to participate in the New Deal CCC because it was low paying grunt work.
MMT defines full employment as a dead end minimum wage job for anyone who wants one. I reject that definition and say it's not full employment unless there is an APPROPRIATE job at the prevailing wage for anyone who wants one.
@ Neil said "hence the anchor." That's not an anchor, it's low aggregate demand and wasted resources, because the skills of the underemployed are not being utilized.
There is no guarantee that the output from a JG would be useful, since there is no agreement on what is "useful" and currently no democratic political system to make those decisions. The reality is that many JG tasks would be make-work, or would be some powerful person's pet project.
If you want my support for a JG then you need to 1) guarantee a job that is appropriate to the individual's skills and education 2) pay the prevailing wage for that position, or close to it, and 3) have a plan "B" such as a BIG to offer individuals when you cannot provide them with an APPROPRIATE job.
Note that paying close to the prevailing wage for a particular occupation would not be inflationary. Note that the WPA paid different wages for different skill levels. MMT needs to rethink its precious JG.
"I 'm not sure you properly understand "price anchor" is if you think it "anchors prices." A price anchor establishes a particular price as benchmark of value. Setting the interest rate establishes a benchmark price that affect other interest rates. It doesn't control them. "
Tom,
I'm rather sympathetic to people who don't understand it as I couldn't get a handle on it either until I asked and you explained it to me some time back.
It's simple but unintuitive from a lay point of view (and possibly some economists too). While a definition may exist somewhere in the MMT literature, I have yet to see anyone else, MMT economists included, use the phrase "nominal price anchor" with explanation of the concept.
I have yet to see anyone else, MMT economists included, use the phrase "nominal price anchor" with explanation of the concept.
I was drawing the distinction between setting the price of the nominal interest rate like the FFR and setting the price of real good traded in the market like gold or an hour of labor.
Some price anchor is necessary in a monetary economy.
See The Economics of Keynes: A New Guide to the General TheoryThe Economics of Keynes: A New Guide to the General Theory By Mark Hayes, p 15.
"I would call them UNDEREMPLOYED. I might also call them SLAVES."
You might, but that would be pejorative, really stupid and wouldn't advance the discussion very much at all.
I was going to write a response to this diatribe, but frankly it's a waste of time.
Bill put the case well I think, but it will never convince those people who think they should have the right to do whatever the hell they please and also demand that others carry them anyway.
Or 'toddler rules' as they are better known.
See The Economics of Keynes: A New Guide to the General TheoryThe Economics of Keynes: A New Guide to the General Theory By Mark Hayes, p 15.
Thanks for that link, I'll re-read it a few times and see if anything takes. :)
These posts by Peter Cooper criticizes the MMT view of the value of the currency being determined at the margin.
Currency Value is Not Formed “at the Margin”
Response to Warren Mosler
Lot of comments.
It's possible that this is what Frances was thinking of.
Why do people think that the purpose of an anchor is just to hold things down?
Boats don't use anchors to stop them from floating up into the air. They use anchors to stop them from drifting away, in any horizontal direction, from a certain point.
The same goes for a 'nominal price anchor'. It doesn't just serve to stop prices in general from rising too much, but also to stop them from falling too much. It serves to stop the price level, or rate of inflation, from drifting away, in any direction, from a certain target point.
Thanks for the anchor analogy, y. That really helps. And since labor is such a big factor in price, the minimum price of labor seems like an excellent price anchor...
Dan Lynch,
"why is it necessary to reduce aggregate demand to a point that there is significant unemployment?"
There's no necessary reason why the JG pool of workers should be very large. It could potentially be very small. However, if inflation does increase significantly beyond a desired level, then a way to bring it back under control would be to tighten fiscal policy (some of this would be automatic as Neil says), thereby reducing demand. This would have the effect of increasing the size of the JG pool.
"I might also call them SLAVES."
But they aren't slaves, so that would be wrong.
"If a JG were truly non-coercive, then some unemployment would continue"
As far as I'm aware the JG idea does not exclude the possibility of having unemployment insurance for those who don't want to do JG work.
"a dead end minimum wage job"
It's not a dead-end as there is the possibility of moving into other jobs. The JG is aimed at those who are currently unemployed and who want to work. This can then lead to them finding employment in the private sector, public sector, etc.
Bill Mitchell:
"let me state unequivocally that you do not have to scrap the unemployment benefit system to have a Job Guarantee system. You can have whatever transfer system you desire running parallel with the Job Guarantee. However, my sense of values tells me that I would not pay unemployment benefits if I was guaranteeing employment. I consider people have an obligation to give back to a community that is guaranteeing them a job. I would pay the Job Guarantee wage from day one and allow the person a fortnight or so to adjust before requiring them to start work. But this is my personal preference and while I am one of the key conceptual developers of modern monetary theory and the Job Guarantee, others who I count as close colleagues consider you could provide some sort of parallel unemployment benefit system. I should also note that you don’t even have to adhere to modern monetary theory to see the logic and hence support a Job Guarantee."
http://bilbo.economicoutlook.net/blog/?p=3737
Bill Mitchell:
"...In this regard, the Job Guarantee would offer flexibility to workers. Some would prefer part-time jobs while others would require full-time jobs within the Job Guarantee. It should be obvious this flexibility can accommodate virtually any requirement of workers. Further, it is very easy to design the program in such a way that child care services will be provided by Job Guarantee workers, to accommodate parental needs."
http://bilbo.economicoutlook.net/blog/?p=3737
More excellent comments and references, y. Thanks.
I think y's comments make it clear that the job guarantee is largely untested -- as there are all sorts that have to be sorted out and tested. I think it's definitely worth a try, for all the reasons mentioned above...
The one huge thing that the JG/ELR does is to provide a buffer stock of employed instead of a buffer stock of unemployed. This is a sea change in policy.
This not only guarantees everyone wiling and able to work a job. It establishes the right to an income from work, and it also increases the bargaining power of labor by eliminating the buffer stock of unemployment that now serves to "discipline" wages.
This is small step toward putting people and the environment ahead of money and machines. But even a small step at the outset advances the agenda of freedom from debt servitude and wage slavery.
For these reasons alone, it is worth trying. There are lots of ways to implement it, and the MMT economists are not fixed as group on any one of them.
And a JG is not exactly "untested." It was tested with some degree of success during the New Deal, for example, as well as in other instances around the world, which Bill and Pavlina have documented.
I agree 100%, Tom. Thanks.
I can also appreciate that others might be skeptical about the JG, given that would be new and still somewhat experimental. But that shouldn't be a show stopper with regard to agreeing on other things about how the economy actually works today...
It has to be prevented from being turned into workfare, though, since that will be the push from the right. So I would make it completely voluntary with the option to go with either unemployment insurance (which is only temporary) or something like the present Social Security disability.
There are many ways to configure this. It just has to be kept in mind that there are many agendas operative and the objective is to secure the principles as rights.
Of course, if this is ever considered seriously the right will attack it as entitlement rather than right, and emphasize privilege based on merit over human and civil rights.
My opinion is there will soon be an opening for this sort of progressive legislation. The young in America have become quite disillusioned with our economic system, and are more open to more socialistic alternatives.
Peter Beinart has a good discussion of these changes here: The End of American Exceptionalism. Excerpt:
The question exceptionalists should be asking is why America, once vaunted for its economic mobility, now trails much of the advanced world...
young Americans are expressing greater interest in "socialism," although it's unclear what they mean by it. A 2011 Pew study found that while Americans over 30 favored capitalism over socialism by 27 points, Americans under 30 narrowly favored socialism. Compared with older Americans, millennials are 36 points more likely to prefer a larger government that provides more services over a smaller one that provides fewer.
Three cheers for Kenneth Boulding. Pity his approach didn't seep further into economics.
He seems to have gotten a bit lost in abstractions, instead of simply using dynamic considerations to assist in actual policy decisions.
The whole point of system dynamics is to rely on massively parallel trial & error, since - by network definition - system options ALWAYS expand at a faster rate than systemic computational abilities.
At least until we run into as yet undiscovered system constraints. Maybe at the next Big Bang, or rather Big Probability event.
Everyone on the criticising side here are looking for a theory of everything - that's not MMT.
There are some here that were formerly sympathetic to MMT now don't seem to understand a word of MMT.
And this constant desire for a "theory of inflation" - of which the definition is completely unclear. So it wants not only the definitions of various inflations but means of controlling them all. You can only do that in context of inflation.
As said here alread the MMT theory of inflation (as defined above - since no one else would define it) is little different from PK inflation. Some methods of control differ - that's about it.
Given an inflation situation in a real world context - not a hypothetical - inflation control methods can be discussed.
If we can roughly accept how real world economics works - then inflation discussions (as related to resources) is the only discussions we should be having.
I would limit the use of the term "inflation" in economics to Milton Friedman's definition that inflation is always and everywhere a monetary phenomenon.
That excludes cost-push or supply side price rises due to resource scarcity, e.g, energy inflation resulting from a swing producer or cartel's monopolistic activity.
I would however include asset appreciation since much inflation begins with imprudent lending on assets that increases spendable money supply and wealth effect. Wage pressure occurs late in the game as workers try to adjust the real wage for losses to increasing goods prices that are driven by increased lending and animal spirits.
But price volatility is a complex phenomon that involves many factors and the context of each case of "inflation" is different since the combination of factors producing it is unique to the situation.
See Abba Lerner, Flation: Not Inflation (1972)
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