Saturday, February 27, 2016

MMT, trade balance and balance of payments

The trouble with Neochartalism (and called “Modern Monetary Theory” by the Neochartalists) is that what is correct is not original and what is original is not correct.
A popular heterodox blogger writing under the pen name “Lord Keynes” and blogging at Social Democracy For The 21st Century has written a post Limits Of MMT.

It’s good to see the blogger point that the main trouble with Neochartalism is the balance of payments constraint. He/she has said this in the past in posts while promoting it, so it’s good to see a special post for this. I don’t agree with many things with “Lord Keynes” but given the blog’s popularity, I think it’s a good thing to have happened.
The Case for Concerted Action

Social Democracy For The 21St Century: A Post Keynesian Perspective
Limits of MMT
Lord Keynes

*****************

MMT:

"Imports are a real benefit and exports are a real cost."
Transactions of real goods and services between those within the geographical confines of the U.S. and anyone outside the U.S. are generally defined as foreign trade. Exports are real goods and services leaving the country, and imports are real goods and services entering the country. By standard definition, exports are a real cost, and imports are a real benefit. Exports can be considered the cost of imports. Financial transactions are accounting information, and not considered as imports or exports.
The chronic U.S. trade deficit, for example, means the dollar price of imports continually exceeds the dollar price of exports. This puts increasing numbers of dollars in the hands of non-U.S. residents who have decided to hold dollar denominated financial assets rather than use their dollars to buy U.S. goods. This is an identity, for, if they did buy U.S. goods, there would not be a trade deficit. As holders of dollar denominated financial assets, they are net nominal savers, much like any domestic holder of dollar denominated financial assets. For purposes of this analysis, foreign dollar denominated financial holdings are considered part of H(nfa).
This is Econ 101. Nothing controversial about it. It says nothing about whether net imports are beneficial to the economy as a whole or to the nation as a whole. It's a comparison between financial and non-fiancial ("real"). A net importer is gaining "stuff in an exchange with a net exporter, and the net exporter is accumulating the currency of the net importer. Thus the net importer is benefiting in real terms while the next exporter is benefiting in financial terms. The net exporter is diminishing domestic product (real) for domestic use, and the net importer is increasing indebtedness (financial) to the net exporter.

On the other hand, net imports are beneficial to the economy and nation at full employment

The nation has more stuff than it would otherwise have at the current level of productivity. Because foreign workers are contributing to domestic productivity. And the country is not exporting jobs.

Unless economic policy offsets the cost of net exports in terms unemployment owing to embedded labor,  jobs are being lost to "silent" immigration. This may also involve exporting capital as domestic firms invest abroad to take advantage of less expensive labor. It can also result in the loss of industry since manufacturing is most likely sent abroad.

Center of the Universe
Full Employment AND Price Stability
Warren Molser
Stephanie Bell Kelton and John Henry address this in a CFEPS working paper and Joe Firestone in an NEP blog posst.
Hence, in the world we actually inhabit, free trade is not the panacea its proponents propagate. If we are to advance the economic interests of the bulk of the citizenry in a decent and humane fashion, we must promote a full employment policy domestically, and couple this with a flexible exchange rate regime internationally. With these institutions in place (on a global scale), exports become a cost and imports a benefit, and the conditions under which free trade is beneficial will have been established.
Center for Full Employment and Price Stability
Working Paper No. 26 — July 2003
WHEN EXPORTS ARE A COST AND IMPORTS ARE A BENEFIT: THE CONDITIONS UNDER WHICH FREE TRADE IS BENEFICIAL
Stephanie A. Bell [now Kelton].Department of Economics,University of Missouri, Kansas City and
The Center for Full Employment and Price Stability and John F. Henry, Department of Economics, California State University, Sacramento

New Economic Perspectives
Who Needs a Balanced Trade Policy?
Joe Firestone

18 comments:

LK said...

"On the other hand, net imports are beneficial to the economy and nation at full employment. "

But are they always beneficial?

But I am afraid this does not follow. What if an aggressive mercantilist is dumping cheap imports and wiping out your manufacturing sector?

E.g., China is right now dumping massive exports of steel all over the Western world: this is devastating US and European steel companies and workers. Is that beneficial?

LK said...

And please -- before we get into acrimonious debates, I appreciate MMT very much. This is not about MMT-bashing. I have defended MMT from idiot Austrians on numerous occasions on libertarian blogs. I am probably the most brutal critic of Robert Murphy, you;ll find, for example. MMT has excellent insights on the history of money. I am on your side. I am offering *constructive* criticism here.

Schofield said...

Since it is now obvious that the "valuableness" of money can be manipulated where exactly do moral considerations now fall in relation to the right to a job and an equitable income to go along with that job?

Kristjan said...

"And please -- before we get into acrimonious debates, I appreciate MMT very much. This is not about MMT-bashing. I have defended MMT from idiot Austrians on numerous occasions on libertarian blogs. I am probably the most brutal critic of Robert Murphy, you;ll find, for example. MMT has excellent insights on the history of money. I am on your side. I am offering *constructive* criticism here."

I believe no one doubts that.

"But are they always beneficial?

But I am afraid this does not follow. What if an aggressive mercantilist is dumping cheap imports and wiping out your manufacturing sector?"

Not always, it is a good argument and you can probably think many cases when they are not. On the other hand if the foreign sector wants to save in your currency then it seems stupid not to let that happen.

Matt Franko said...

LK:

"If you think imports are only a benefit, look at the devastating de-industrialisation of large parts of the Western world, e.g., in the US, look at the hollowed-out inner cities, devastated crime-ridden communities,"

Well I think this could be corrected pretty well with increased flows into those communities for environmental reclamation and new local transportation projects etc... ie directed govt projects... iow if you look at Detroit, its a mess and needs to have income flows restorted and then that city wouldnt be hollowed-out... they could clean up Flint, etc...

(But you would not measure what you were doing there by looking at "the deficit!" within those communities....you would look at what you were actually spending in leading flow only...)

Tom Hickey said...

But I am afraid this does not follow. What if an aggressive mercantilist is dumping cheap imports and wiping out your manufacturing sector?

Dumping is in violation of the trade agreements that permit exporting, and it can be addressed through the appropriate channels if it is indeed dumping.

One side's "dumping" is the other sides's "competitiveness." That is the issue to be adjudicated.

Tom Hickey said...

before we get into acrimonious debates

No reason for debate to become acrimonious. This is an area of controversy around MMT and debate is necessary to clarify the issues, positions, and differing points of view.

Most of these issues involve tradeoffs, and there are different POVs concerning prioritization.

MRW said...

"On the other hand if the foreign sector wants to save in your currency then it seems stupid not to let that happen.”

Isn’t that the price you pay for being the reserve currency? Also, the foreign sector needs USD to pay for oil. Either they suffer currency fluctuations exchanging their currency for USD on an as-needed basis, or they sell to us and lock the USD rate in.

Matt Franko said...

MRW there is no law that says the USD is "the reserve currency"... that is another kind of figure of speech...

LK said...

"Dumping is in violation of the trade agreements that permit exporting, and it can be addressed through the appropriate channels if it is indeed dumping."

Right, but I am afraid that concedes my point, though.

But all you need some nuance:

"On the other hand, net imports are, generally speaking, beneficial to the economy and nation at full employment, even if there some circumstances where even First World countries would act to protect their industries from being devastated by cheap imports."

Problem solved.

Tom Hickey said...

I think that there are more qualifiers required than that. First, there is the question of national security. Some are concerned that the US is weakening its strategic position by reducing the level of manufacturing to the level it has. Russia came to this conclusion already and is restructuring. China is benefitting from it by becoming the word's factory, and some in the US are concerned about this is weakening US hegemony if not yet, then in the not too distant future. There is clearly a political dynamic to this as well as an economic and it also involves tradeoffs. US firms want to take advantage individually of opportunities, while when many firms do this, the security structure is challenged.

This is just on instance, and there are a lot more problem areas.

I have long said I agree with Ramanan that the world has to be to looked at from the systems and network POV in which everything is interconnected socially, politically and economically and each of these areas affects the others. Connected action is indispensable since natural principle of spontaneous order to "Darwinian" and this conflicts with liberal (Enlightenment) ideals, e.g., human rights. Being based on competition, it is grounded in conflict. In the age of WMD, this course is suicidal.

Socially and politically the primary criteria are security, order and welfare in that order, with prosperity a subset of welfare. The capitalistic system is not based on the but rather on the accumulation of private property by and elite, and the Westphalian system of nation states is based on power, spheres of influence and alliances. This results in a social structure in which class predominates and class structure determines distribution of status (and privilege), power, and wealth.

As a result purely economic analysis is generally either irrelevant or else skewed to class interest with the various elites competing with each other socially, politically and economically, the people at large not a consideration.

The slogan "free markets, free trade, and free capital flow" is in service of this.

What is needed is not "free trade" but fair trade, bases on comprehensive reciprocal interest rather than the interest of national elites, which are now morphing into a transnational elite through "free trade" agreements that are rendering national borders and democracy irrelevant.

So while I would say that MMT correctly describes the monetary economics involved and what that implies, it is not designed to solve everything and should not be approached that way.

The classical economics viewed economics as importantly about international trade. Conventional economics emphasizes households and firms, with governments viewed as introducing friction. External trade is not featured, and a lot of analysis is about domestic growth.

Trade is still approached from a quasi-mercantilistic POV. MMT is correct in challenging this but there is more to it than automatic adjustment through floating rates. Rates don't really float anyway, since central banks look at both the interest rate and the exchange rate and carry out operations with these in view.

There are serious tradeoffs involved and they need to be acknowledged. Then concerted action needs to be implemented globally to address security, order, and welfare with increasing prosperity that is distributed fairly. It's obvious that a small number of families owing most of the world's wealth is not an equitable distribution and it will lead to social, political, and economic disharmony.

Economically this requires jettisoning homo economicus as a foundational assumption and replacing it with homo socialis. This implies treating the social, political and economic dimensions as aspects of a single system and network made up of individuals (agents) and group (nodes) in which everything is interconnected and influences everything else. But this requires an increase in the level of collective consciousness globally. Humanity is not there yet.

Neil Wilson said...

"But are they always beneficial?"

Nobody says that they are.

The problem I have is that these straw men keep popping up like zombies and will not die. So you can never move on.

Unfortunately LK's post is littered with them.

Neil Wilson said...

"On the other hand, net imports are, generally speaking, beneficial to the economy and nation at full employment, even if there some circumstances where even First World countries would act to protect their industries from being devastated by cheap imports."

LK.

Don't take a job in marketing. :)

Economics is politics and politics is sales, marketing and persuasion. It's about being roughly right rather than precisely wrong.

The headlines are there to grab attention. If you want the detail you have to wade through about a dozen Bill Mitchell posts and several academic papers.





Neil Wilson said...

"Isn’t that the price you pay for being the reserve currency?"

There isn't "the" reserve currency. It's 'a' reserve currency.

But if you analyse systems in terms of currency zones rather than rigid political borders you'll find that 'reserve currencies' disappear into just another form of financial saving.

Again it is a fixed exchange rate term that is being used inappropriately in a floating rate era.

Matt Franko said...

"fixed exchange rate term that is being used inappropriately in a floating rate era."

Good point Neil and its more than this...

The use of such outdated terminology is only possible because the academe has NO minimally competent empirical understanding of the current regulated system...

The best appear to think the "floating rate system" is stochastic or responds to "supply and demand" (btw which is a figure of speech and which is monetarist) and it is not.

Years ago Warren looked at the TARP policy and described it in the two word phrase "regulatory forbearance" this is correct but the keyword here is "regulatory" NOT the "forbearance" which the lefties in the top end of MMT town have run with the "forbearance" part and no one is looking at the "regulatory" part...

The current numismatic system is regulated not stochastic.

Maybe the system of metals was stochastic as it was largely up to chance as to how much silver/gold mankind would happen upon... but we are not doing that anymore....

We need to examine other more mature areas of regulatory systems theory and come up with a new theory for how the numismatic system is functioning ...

https://en.wikipedia.org/wiki/Control_theory

Matt Franko said...

PS even the term "floating rate" imo somewhat implies a stochastic nature which has to be false...

Regulated systems are by definition deterministic NOT stochastic systems...

Footsoldier said...

But if you analyse systems in terms of currency zones rather than rigid political borders you'll find that 'reserve currencies' disappear into just another form of financial saving.

This is key for me and is what happens eventually.

Tom Hickey said...

But if you analyse systems in terms of currency zones rather than rigid political borders you'll find that 'reserve currencies' disappear into just another form of financial saving.

This is key for me and is what happens eventually.


This is why elites like net exporting. They are hoarders of financial wealth and get satisfaction from looking at accounts in addition enjoying to the stuff they consume and accumulate as real "investments."

Looking at aggregates presents a false picture. Distributional effects are far more significant and also the tradeoffs ("winners and losers"). The "losers" are always the "losers" aka "the little people" that don't count socially, politically and economically, except as wage labor and cannon fodder.