The late Canadian economist Harry Johnson, who came at the subject from the Monetarist persuasion, was correct when he wrote in 1969 (reference below) that “The adoption of flexible exchange rates would have the great advantage of freeing governments to use their instruments of domestic policy for the pursuit of domestic objectives, while at the same time removing the pressures to intervene in international trade and payments for balance-of-payments reasons.” How does this square with those who believe that even currency-issuing governments are constrained in their fiscal flexibility by an alleged balance of payments constraint. So-called progressive economists, particularly, are enamoured with the idea that Modern Monetary Theory (MMT) is flawed because it doesn’t recognise the fiscal limits imposed by the need to maintain a stable external balance. In this blog, we trace the arguments.…The post everyone has been waiting for.
Bill Mitchell – billy blog
Balance of payments constraints
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Ramanan responded in the comments here at MNE and developed his argument in a separate post. With "free trade" to the fore these days owing to the flurry of new trade agreements, this is a debate worth having.
The Case for Concerted Action
Neochartalism, Balance Of Payments And Mainstream Economics
V. Ramanan
My view is that there is a political dimension to trade as well as an economic one. Economics focuses in efficiencies such as comparative advantage. But from the political point of view, as well as engineering, efficiency about means and effectiveness is about goals. Efficiency serves effectiveness. This means that efficiency must be balanced with resilience.
A balance must be struck between autarchy and dependence, for example. In addition, history testifies that more growth of developed countries is benefitted by so-called free trade, whereas the growth of emerging countries has been enhanced by protecting infant industries. This was the case between Britain and the US in the 19th century, for example.
33 comments:
Posted a comment there. Don't think he'll publish, so publishing it here.
"There is nothing to distinguish so-called progressives who make this argument from the neo-liberals at the IMF who also make it"
Nice joke Professor. Cannot you see your own contradictions?
Progressives see it as an imposition of free trade on weaker nations. It is you who concedes to the IMF not the ones you are critiquing.
Indeed the New Cambridge group had proposed for import controls opposed by everyone, but according to Neochartalism, it is simply not needed. Why worry at all.
"Don't think he'll publish"
Our Tom would first think there was some sort of technical glitch...
Not really. Bill draws lines.
Not criticizing Bill in the above. A blogs draw lines wrt what they deem trolling. Some draw the line tighter than others. Some draw the line very tight indeed. Others pretty loose. Some avoid the issue by not publishing comments at all. It's the blog owner's choice of policy. There's no criterion that blogs adhere to.
Anyway, wanted to point out how contradictory you MMTers views are.
I mean it is Kaldorians who oppose free trade, a right wing policy, not MMTers.
MMTers cannot speak against free trade. If they do, they concede it is a constraint. So free trade doesn't matter in MMT.
And wrote this:
http://www.concertedaction.com/2016/02/10/neochartalism-balance-of-payments-and-mainstream-economics/
I added it along with my own comment.
"This was the case between Britain and the US in the 19th century, for example."
GOLD/SILVER STANDARD for crying out loud Tom... throw it out man....
Yes history shows it has benefitted rich nations - at the expense of poor nations.
GOLD/SILVER STANDARD for crying out loud Tom... throw it out man....
Alan Greenspan admitted that central banks operate as if on a gold standard. The fundamental assumptions of conventional economics and policy makers follows suit.
For all practical purposes the world is still operating in terms of a gold standard.
Why? In order to "exert discipline," and anyone who breaks that discipline gets bashed.
So we should propose policies that still assume we are on a gold standard?
Meanwhile we are in the MMT paradigm?
Thats like saying: "Well.... sometimes attaching leeches on a sick person appeared to work so...."
There are two problems.
1. Proposing MMT policies independently of implementing the MMT framework won't work and will backfire on the MMT project. It would be sabotaged even if passed in its original form. More likely is that it would be crippled to begin with.
2. There is as yet no comprehensive statement of MMT-based macro wrt to policy. So there is no MMT policy framework to launch from.
I have suggested that what is needed at minimum is an MMT version of what John Kenneth Galbraith attempted in The Good Society (1996), which was itself an update of Walter Lippmann's The Good Society (1937). We need a comprehensive policy vision and how to actualize it using the available policy space.
The key message of MMT is about the policy space that different monetary arrangements provide and how the existing policy space provided by the current monetary system can be used to create "a good society." Here, some criteria for "good" must also be provided.
The opposition has a plethora of such works. Ludwig von Mises, Friedrich von Hayek, Murray Rothbard, Milton Friedman have written extensively about social, political and economic liberalism and public policy, for example, as have neoclassical economists. The liberal and progressive works are out of paradigm with MMT. Even Keynes was not fully in paradigm as his initial negative reaction to Lerner's functional finance shows.
On a personal note, in doing this I would chuck the whole conventional approach to econ and update Marx. He was the last one who was writing about reality — class, power and rent as a free ride.
MMT should continue to describe what is. Ramanan provides quite a misrepresentation of MMTers' views on so-called “free trade”. As far as I can tell, on the whole MMTers have an almost mercantilist bent, referencing real terms of trade. MMTers are not generally opposed to trade liberalization, per se, but are in no way dogmatic supporters of it, and are rather agnostic on whether individual countries should run current account surpluses, merely pointing out that one country’s surplus is another's deficit.
In fact, WarrenMosler has explicitly written in that context that “those are political choices. With exports the cost of imports, optimizing real terms of trade is about taking action to get as much in return for your exports as possible. And on top of that there are always those pesky moral considerations…”
This is a useful reiteration of what he has written elsewhere, but it comes at the end of an equally useful post by Andrea Terzi at http://www.mecpoc.org/2013/02/do-exports-lower-a-nation%E2%80%99s-standard-of-living/
"and rent as a free ride."
BIG LEAGUE!!!!
I have become convinced that social, political and economic problems can largely be reduced to a free rider problem. This sums up Marx's approach too, and why TPTB need to demonize it to preserve and extend the free ride.
Yep, there are many layers of free riding though, ultimately are the 'two ration of soup' poor of the world who are sustaining the whole thing... Is relative to where you stand.
Lack of social consciousness, as you say.
Tom if we stay about the same here as far as leading flow of USD balances (up 60B or so...) into the non-govt YoY BUT... with the oil rent removed and we are able to get a significantly better NIA gdp anyway, THEN imo we will be witnessing empirically the true economic impact of what you are/have been talking about...
I'd like to see us record gdp growth markedly BETTER than what we have been used to lately iow if we go up to perhaps 3-4% NIA gdp growth then imo that would be VERY revealing as to the REAL economic impact of this rent removal ie what a simple transition to more PRODUCTIVE contribution indeed does...
Matt imagine if the rents from the healthcare (and related) and finance industries was gone too...
I,
I might depart there I dont know if those things take too much out... yes they take out something but this oil thing has been very severe...
If you put it a $100/bbl and we use 19M bbl/day over 365 days that is close to $700B/yr for just the USA and about $3T equiv. globally...
So I dont know if the pure "rent" portion of the Healthcare and FIRE sectors are even a fraction of that...
You have to try to estimate the portion that is is pure rent...
We still need providers and accountants, etc...
So we here in the US at least are going to see the results of $700B/yr of pure oil rent removal over the course of this year... I'm (FD: very) optimistic but we still have to watch what happens.. this could end up very revealing...
And when were talking about this we have to be careful not to drift into monetarism...
iow imo what we are talking about is qualitative not quantitative....
See the post, F. William Engdahl — Washington Again Underestimated the Iranian Mind, I put up earlier today. He talks about the imposition of oil rents.
It is getting kind of old I think. Ramanan is right by saying: "In the post, Bill Mitchell doesn’t offer any argument as to why the literature behind it is supposedly wrong."
But he follows the same path himself. All I ever heard him say was that Kaldor said so, or Godley said so or no central bank is run the way MMT-ers imagine.
At the same time if look at the nazies or any modern economy that was stimulated to full employment, they either had capital controls and trade restrictions or were net exporters.
Kristjan - today's USA is a counterexample - without the "stimulus" of its somewhat insufficient but large deficits to counteract foreign leakages, it would be in a depression, not at about 5% "unemployment" - rather better than the European austerity-zone.
The most important point is that the unmeetable burden of proof is on those who imagine a hard balance of payments or foreign constraint on a currency issuing / monetarily sovereign nation. Where the hell does it or can it come from? Sure there can be some temporary "crisis" ending some "free ride" - but after that, so what? Show me the never-ending catastrophe! Sure import or whatever controls could be nice for some situations - but they are never necessary to a non-basket case nation. The bad argument, the destructive argument is that they are necessary. Far better superfree trade than addiction to bad arguments, illogic & nonsequiturs. The worst damage due to the former is nothing in comparison to the latter.
I used to be of two minds on the recent emphasis on good old-fashioned Euclidean geometry & 2 column etc proofs in elementary & high school education. No longer. It worked for millennia to familiarize masses with the idea of careful logical arguments that follow from their premises, not just sorta kinda followed (with assist from unstated premises, from people embarrassed and afraid to believe their eyes' observation that the argument has no clothes on.) It will work, is working now.
Tom:We need a comprehensive policy vision and how to actualize it using the available policy space.
No MMT framework other than what we have already is needed. What is needed is intellectual, conceptual, mathematical rigor, of the kind that MMT excels in - they've been speaking rigorous prose all their lives - better than they know!
Battery running low!
@ Calcagus
No MMT framework other than what we have already is needed. What is needed is intellectual, conceptual, mathematical rigor, of the kind that MMT excels in - they've been speaking rigorous prose all their lives - better than they know!
Specific reference for widespread distribution please.
I am talking about something that Bernie Sanders can hold up in his hand while he refers to it and say TINA, like Maggie Thatcher did with Hayek's The Road to Serfdom.
We're still lacking adequate levels of empiricism... So you will see rationalist spats like this erupt...
Bill uses corellation alot but corellation is just scratching the surface of empiricism...
I believe what Tom is saying is that rhetoric wins over logic. We need more ideological manuals and less rational papers.
All the books he listed are religious books to sell to the masses.
Whether or not you have tariffs/import controls does not have anything to do with the "external constraint" from my perspective. It may be that I have a different perspective on the meaning of that phrase, but I assume that there it means that foreigners somehow restrict monetary and fiscal policy.
The only way such a constraint on policy appears is if you peg your currency. It is entirely possible to have import controls and allow your currency to float.
As usual R makes little sense.
There is no fiscal constraint on a floating rate area. It can't be forced anywhere by traders messing around with it. If they try they run out of liquidity and end up having to scramble to settle their deals.
You can import as much as exporters are prepared to sell you. Because it is the exporters that clear the way on the finance arm of a trade so that the real arm can complete. Very simply salesmen need customers.
If the exporters can't enable the finance arm, then the trade doesn't happen with that exporters, and you switch to one of the 150 other countries at your disposal.
Everybody outside of MMT looks at external trade from the wrong end. It is precisely the same mistake as 'government borrowing'. Linearising a cycle from the wrong starting point.
Ultimately trade is driven by exporters desperate for somewhere to sell their stuff. They are out there in search of demand. And if they are in search of demand and you have some spare, then you have a valuable commodity in the international market.
Tom,
We don't need a book.
We need a visualisation people can play with.
AKA a computer game.
We need to build The Matrix.
I believe what Tom is saying is that rhetoric wins over logic. We need more ideological manuals and less rational papers.
All the books he listed are religious books to sell to the masses.
Three things are needed.
1. Substantiation - documentation
MMT is pretty good at that. But only on a limited scale. It's not a comprehensive theory itself but calls on others's work, e.g., PKE. But MMT can't bring any of this in as whole, since not all of it is compatible with MMT. So more work is needed on a comprehensive foundation.
2. Vision - To translate an economic position into a policy statement a comprehensive vision that rests on a social, political and economic foundation is needed. Presently there is no such vision that is compatible with MMT and also with social, political and economic liberalism.
3. Persuasion - the vision must be communicated through rhetoric to inspire people to action and it must also be substantiated both to convince and to overcome objections. The goal is to inspire as well as to educate and part of that inspiration has to be inspiration to action.
Popular books have traditionally been used for this purpose, from fairly technical one like Keynes's General Theory and Picketty's Capital, to calls to political action like Hayek's The Road to Serfdom.
Look at how the right pulled off their orchestrated "revolution" against "Keynesianism" as the dominant paradigm of the day. It took a long time, lots of funding, and a huge amount of coordinated effort. Now it is almost completely dominant but cracks are appearing in the foundation because it does not work as advertised and people are noticing.
It's not enough to call attention to the cracks though. A vision to replace the dominant vision is required and people have to believe not only that it is better suited to their needs and aspirations but also that it will work and is doable.
Neil is also correct that to reach digital natives especially creative approaches need to be taken that will appeal to them.
And if they are in search of demand and you have some spare, then you have a valuable commodity in the international market.
The US knows this and has used it in spades as a geopolitical tool to get its way. While the US talks a lot about "free trade," in the real world of geopolitics, access to the US market is a privilege and not a right. Moreover, the US controls the lever of the global financial system, too.
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