Wednesday, August 1, 2018

Bill Mitchell – The government is not a household and imports are still a benefit


A key post on MMT. Plus, it is short.

Bill Mitchell – billy blog
The government is not a household and imports are still a benefit
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia


26 comments:

Konrad said...

“Another core MMT proposition is that imports are a benefit and exports are a cost.” ~ Bill Mitchell

This MMT proposition is false.

Consider two scenarios…

[1] Your nation has a huge trade deficit, and your nation’s government cannot create its own currency out of thin air (e.g. Greece.)

[2] Your nation has a huge trade deficit, and your nation’s government can create its own currency out of thin air, but the currency is not accepted by any foreigners (e.g. Argentina).

In both scenarios, imports are not a benefit. Indeed, the more your nation relies on imports, the more your nation’s economy will be ruined as it falls into the death spiral of debt and austerity. Greece and Argentina are in this death spiral.

Now consider a third scenario…

[3] Your nation has a huge trade deficit, and your nation’s government can create its own currency out of thin air, and this currency is accepted worldwide (e.g. the USA).

In this case, profit-hungry American companies move their manufacturing plants abroad in order to exploit cheap labor. American jobs are wiped out, and with them, the American middle class. The U.S. economy becomes so dependent on imports, and has such a gigantic trade deficit, that if something happens (e.g. a world war) so that the U.S. dollar is no longer accepted abroad, the USA as we know it will be instantly finished.

This is evidently beyond Mitchell's mental grasp.

Bill Mitchell: “If local suppliers are expensive and imported goods and services are cheaper, then as long as quality considerations are broadly met, we will purchase the imported commodity and be better off in a material sense.”

Wrong again. If offshoring wipes out American jobs, then average Americans will not have any money to buy imports, even cheap imports.

From World War II until the mid-1970s, the USA was a manufacturing and exporting giant, and had a trade surplus. This is why the U.S. dollar became accepted worldwide. The USA sold exports to foreigners, while seeing to it that U.S. dollars found their way into foreign economies so that foreigners could buy U.S. goods and services.

After the USA fell into a trade deficit (around 1975) the USA began living on borrowed time, as jobs were offshored, while medical costs and housing costs skyrocket, and debt bondage expands exponentially.

The USA was able get away with this for a while, but China is rising, and the U.S. Empire’s time is running out.

Bill Mitchell lives in a dream world that serves neoliberals, since the USA’s import-centric economy serves only the rich, not average Americans. The USA’s import-centric economy is one reason why average Americans have been downwardly mobile since the mid-1970s.

Mitchell’s “imports are good” idiocy is like the “taxes drive money” fallacy.

MMT cultists hear such nonsense, and they defend the nonsense unto death, using all manner of absurd rationalizations.

GLH said...

Konrad; I couldn't agree with you more. I read Bill Mitchell's blog everyday for about eight years and that bullshit is why i quit. In his comments section he told a person that disagreed with him on the subject that he was going to have to ban him and that was all it took for me. The man is too smart to be so ignorant. I am beginning to suspect that he is a closet neo-liberal.

Konrad said...

@ GLH:

I didn't know about Mitchell banning people who disagreed with him. That's not acceptable.

In addition to Mitchell being demonstrably wrong in some cases (like the items above), he is a poor writer. He typically uses 100 words to convey simple ideas that can be explained in only ten. Perhaps Mitchell fears that he will be dismissed as a fool if he speaks too clearly and succinctly.

I get that impression from Bill Black too. His verbal delivery is tight and to-the-point when Black is interviewed, but Black's writing reminds me of a young child who compulsively plays with his food for half an hour before taking each actual mouthful. ("Black, can you please get to the point?")

Matt Franko said...

Both Bills are not scientific.... they both use the liberal arts methodology....ie theory comes first...

So you two guys are more scientific so you end up in somewhat disagreement with them when the observations don’t match the theory...

TofuNFiatRGood4U said...

Konrad,
can you tell me why you think 'taxes drives money' is a fallacy?

Ryan Harris said...

The external sector interacts with the domestic economy in 19 different ways. MMT looks at one dimension and autistically repeats, "IMPORTS ARE ALWAYS A BENEFIT!!!! (In real terms) Over and over pretending the eighteen other dimensions don't exist and aren't important.

If you try to argue, the MMT people lock up, throw a tantrum, and just screech and repeat how imports are always a benefit.

So if you will be a force for peace and good will and harmony, ignore everything in this one instance, with our good MMT people, forget all other aspects of the economy when it comes to the external sector analysis, the ONLY thing you should be considering is your real benefit. Clear your mind and chant, ONLY THINK ABOUT THE REAL BENEFITS over and over and then you are good to go! Picture those real benefits stacking up... breathe, slowly, in and out, in and out. Are you seeing the stacks of real benefits? Good work! You are an MMT academic. Congratulations, you understand MMT and the external sector analysis.

Footsoldier said...

Konrad and GLH and Matt

Imports are always a benefit. Your exports are the cost of your imports.

It's called the real terms of trade.

As for your 3 scenario's they've been covered extensively for over 20 years now by over 100 economic papers.

Ultimately, for me it all boils down to what you want your population doing as a country

a) Do you want them working 18 hours a day in a factory to produce goods for other countries to consume

b) Do you want to them to produce goods and services that improves the country domestically.


You export stuff you don't need and import stuff that you can't make yourselves. So your real wealth is everything you can produce when everybody’s working. That’s how you get the most real wealth. Plus whatever you import adds to your pile of stuff. Whatever you export subtracts from your pile of real stuff. Now I did not say that exports don’t help the exporters. Yeah, it helps those people. But it is a subtraction of real wealth from the entire economy. The exports are your cost of imports.

Back in the old days we called that ‘real terms of trade’. So to optimise your prosperity, you make everything you can with everybody working, and then you add to that with imports, what people export to you. Then whatever you must export, you try and get as many imports as you can.

If you can export one Ferrari and get four Mercedes, that’s good. If you can export one Ferrari and get five Mercedes, that’s better. Real terms of trade, that’s the important thing. The United States doesn’t even publish the trade deficit or surplus between the states.

Footsoldier said...

Your Argentina example has nothing to do with trade it is how you set up your central bank and commercial banks and capital controls and stopping free movement of capital. If that is done right then exporters to Argentina will always accept your currency.

As for your Greece example again covered in detail over many years. Leave the Euro and see above for Argentina.


Footsoldier said...

As for your American example the US did nothing when companies moved and had no plan in place to produce goods and services that improves the country domestically. They done the opposite they let workers rot, attacked wages and increased economic rent seeking. Which again has nothing to with trade.

The USA runs a trade deficit with most other countries in the world. This means they import more than they export. Whether this is “good” or “bad” depends on lots of factors. Factors that MMT have covered for over two decades.

There’s nothing inherently bad about a trade deficit. It doesn’t mean one side is winning and one side is losing. But understanding why one side has a deficit and the other has a surplus is an important part of understanding this discussion and whether it can be fixed with changes to trade policies.

Now, the main reason the USA runs a trade deficit with countries like China is because it’s much cheaper to make stuff in China than it is in the USA. A factory worker in China commands just $3.60 per hour versus $23 in the USA. US workers command higher wages because there are fewer workers and those workers demand higher wages to meet their higher living standards. The inverse is true in China where living standards are lower and there is an abundance of labour.

When multinational US corporations decide where they’re going to make their goods they can either choose the $23 worker in the USA or the $3.60 worker in China. In the last 30 years more and more companies are choosing the $3.60 worker in China because that results in higher relative profits in the USA. But the thing that many people don’t realise is that when those goods are made in China they are often reported as imports into the USA. So you have US companies selling US products that are made in China and reported as imports in many cases.

Of course, you might say that US workers are worse off because they have lost their jobs to the Chinese workers. This is true in some sense and wrong in another sense. When US corporations make their goods in China they are then able to sell those goods at much lower prices in the USA. So while some workers are worse off the larger consumer base is better off since the benefit to the US consumer is that they get the cheaper goods AND they have more money to spend elsewhere. Importantly, this results in demand in other parts of the economy which leads to job growth in other segments of the economy.

So let’s say you want those jobs to come back to the USA and decide that raising prices on China’s exports is a good way to do that. Well, what really happens there? In short, you end up paying higher prices for all of those goods sold in the USA because corporations will pass on the costs to their consumers. And if they decide to bring the jobs back then all those goods are now being made by a $23 worker which results in the same price increases to the end consumer. In either case, this raises the cost of things like iPhones and reduces the amount of money we have to spend in other parts of the economy. Yes, it makes some workers better off, but it makes most of Americans worse off.

Footsoldier said...

Now, Trump and his team think that making those imports more expensive is a good deal because Americans will then buy American produced goods which will increase the number of American workers building those goods. But the more likely outcome is that those jobs never come back because companies like Apple won’t just bring those jobs back to the USA – they will move them to places like Vietnam because they have to protect their profit margins.

The bottom line is it costs more to build stuff in the USA because the US are better off than many other regions of the world. And by outsourcing the production of many goods and services you make some workers worse off while making those products cheaper for everyone in the USA. This is a good trade for a country where prices are inherently higher. Raising prices on these goods via tariffs doesn’t fix the problem it tries to solve and won’t lead to a trade surplus or fairer trade. In fact, it just results in higher costs for US consumers which makes most of us worse off.

Footsoldier said...

Now just because the US did not have a plan and never had the first scoobie of what they wanted their skills and resources doing after manufacuring got outsourcd.

Letting people rot on opiods was not the answer.

Does not disprove the real terms of trade theory. That exports are the cost of your imports and that imports are a benefit.

Footsoldier said...

I'm working hard to try and get Scotland independent.

We will have a blank slate and what we are working on right now is

a) What will the central bank do

b) What will the commercial banks be allowed to do in order to get a licence

c) Capital controls and what will FDI and FPI look like. There will be no free movement of capital in an independent Scotland.

d) What will our jobs look like

e) Our trade policy


Etc, etc, the structure that we are going to put in place that will laugh out loud at your 3 scenario's they won't exist in an independent Scotland because we are going to set it up right.

So if we ever become independent we will be ready and we will prove the real terms of trade theory That exports are the cost of your imports and that imports are a benefit.

That is a 100% certainty if we get independence. You need the correct economic structures in place that's the important thing and at the moment the US still doesn't know what it wants to do a half hearted attempt is not good enough. So no wonder you don't think imports are a benefit.

Matt Franko said...

Foot,

Just keep exporting the single malt Scoch whiskey if you can swing it please....

Matt Franko said...

Foot,

“When multinational US corporations decide where they’re going to make their goods they can either choose the $23 worker in the USA or the $3.60 worker in China.”

That’s Cash Basis, the GDP is reported in Accrual or Tax Accounting Basis... iow (prior to Jan1 2018) firms would have the US division pay a price hat would result in least US taxes... which is a higher price... so US imports look higher in USD terms ...

So now we are seeing a shift in this due to tax law changes ... so Trumps big 4.1% GDP for Q2 might just be due to multinational accounting changes....and we might not really be doing much more than last year...

Jerome Brown said...

Konrad and GLH and Ryan Harris- You are wrong about Bill Mitchell. This particular post happens to be a response to questions I asked in his comment section and I argue ALL the time on his blog about trade especially, but also other things. You can disagree with his conclusions without badmouthing the man. And you can disagree with him on his blog in the comments which is something I do fairly often. And fairly often you will get a response and it is unfailingly polite and civil and intelligent even though you might not agree with it completely. So quit it with the personal insults and try to make a reasonable argument if you can.

Tom Hickey said...

Footsoldier has it right. What I would add is that MMT shows that it is possible to run trade deficits and also a full employment policy using MMT principles — fiscal policy coupled with a JG.

In summary, trade is about real terms of trade.

Under the metals and mercantilism, when the metals were used for settlement, trade was viewed as being entirely in real terms.

That view is arguable.

With a non-convertible floating rate regime, that controversy goes away. Now it is clear what real terms of trade are versus financial terms.

Real terms trumps financial terms in terms of actual (realized) national wealth.

The policy questions then become how to deal with other aspects of the deal, such as exporting capital investment and importing labor, which result in real term issues that are dynamic.

MMT shows how to fashion such a policy. That is arguable, but it should be argued on its merits rather than straw man arguments.

The rest is carping that is off-target.

Tom Hickey said...

Now, the main reason the USA runs a trade deficit with countries like China is because it’s much cheaper to make stuff in China than it is in the USA.

Again Footsoldier is exactly right. This is capitalism, where capital investment flows toward the lowest costs and greatest profit. There is nothing inherently wrong with it if dealt with intelligently.

But if capitalism is left entirely to capitalists, it results in conditions that are politically unsustainable owing to the distribution of winners and losers.

Governments need to address this in order to avoid domestic conflict.

The notion that government influence is not part of capitalism is stupid. In a monetary production economy, property relations and markets only work through government influence based on the way that capitalism has developed historically. It could have been different — Murray Rothbard provides an example of a laissez-faire economy — but that did not happen. That experiment is now off the table as utopian in the present environment.

So the issue is optimal government policy in the present context to deal with globalization in the contemporary world. This is what MMT undertakes to do.

As I practical matter, I am on board with this.

As an idealist aspiration, I would like to engage in thinking about how to improve it and, when feasible, to take the next step toward a more integrated system.

Tom Hickey said...

BTW, regarding idealist aspirations, I am fine with people taking this ideal to be something like a situation such as Murray Rothbard's.

That would not be my ideal, but as Mao said, "Let a hundred flowers bloom."

But let's discuss this in terms of a precise definition of an ideal society in terms of characteristics and necessary and sufficient conditions in a way that is clear enough to constitute rigorous thinking. Using divergent thought first and then convergent, we can apply critical thinking to the creative thinking that precedes it.

Ryan said...
This comment has been removed by the author.
AXEC / E.K-H said...

The MMT-Yawner: Government is not a household
Comment on Bill Mitchell on ‘The government is not a household and imports are still a benefit’

Everybody got the MMT meme by now. Unfortunately, neither MMT academics nor the social media sales force ever understood its full implications.

It is trivially true that “… a government is not a household. It has a wider remit (objectives) than a household and must consider a broad range of concerns when it uses its currency-issuing capacity to shift real resources (as goods and services) from the non-government sector to the government sector to fulfill its elected mandate.” (Mitchell)

The problem comes in with the ‘use of currency-issuing capacity’ because there are, as always, the good and the bad use of a capacity. It is trivially true that Organized Crime in the definition of the Organized Crime Control Act OC≅OCCA has the capacity to print money and “to shift real resources (as goods and services) from the non-government sector to the OC≅OCCA sector.”

So, from the currency-issuing capacity of the government does NOT follow that it is good policy to resort to deficit-spending/money-creation. In fact, it is bad policy. Translated into MMT jargon: government is NOT a household but it is NOT a counterfeiter either.

The crucial distinction is this. The correct way to bring additional fiat money into circulation is to finance a growing wage bill. The incorrect way is to spend the additional money on goods and services. This is analogous to going on a shopping spree with counterfeit money.

The first thing to grasp is: it is the household sector who pays in real terms in the form of a tiny price hike which is indistinguishable from a random price fluctuation. A government that resorts to deficit-spending/money-creation does NOT “fulfill its elected mandate” but in effect applies stealth taxation to the household sector.

The second thing to grasp is, because of the macroeconomic Profit Law, i.e. Public Deficit = Private Profit, deficit-spending/money-creation increases macroeconomic profit by exactly the same amount.

The correct way for the central bank to inject out-of-thin-air money into the economy is by financing a growing wage bill. The incorrect way is the counterfeit-money-printer’s way.#1, #2

True, the government is not a household. But equally true, the government is not OC≅OCCA either. Why Bill Mitchell claims that by deficit-spending/money-creation government fulfills its “elected mandate” is at anybody’s guess.

Egmont Kakarot-Handtke

#1 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

#2 The Kelton-Fraud
https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

ANC Driver said...

TofuNFiatRGood4U said...

Konrad, can you tell me why you think 'taxes drives money' is a fallacy?

From a legal perspective it is the other way around - money drives taxes - this is why non-profit organizations are tax exempt.

Egmont said...

The correct way for the central bank to inject out-of-thin-air money into the economy is by financing a growing wage bill.

Very interesting, are you able to point to any of your articles which elaborates on this? Thanks

ANC Driver said...

Egmont said...

The correct way for the central bank to inject out-of-thin-air money into the economy is by financing a growing wage bill.

I said...

Very interesting, are you able to point to any of your articles which elaborates on this? Thanks

Egmonst has not responded yet, so I have decided to take a stab myself (without cheating and going back through all my notes)

With the employment law*

An increase in wages (in aggregate) will lead to an increase in overall employment (all else equal). However, from a micro-perspective, the last thing the business owner wants to do is increase wages, in fact from the owners perspective, their whole agenda is to cut costs whenever possible.

However, if the CB finances an increase in wages (I am assuming without interest???), then the debt between the business and CB remains until the wage earners spend that money back into the business allowing the business to then settle the debt.

This way, the goals of the business (to avoid decreasing profits) is not in conflict with the overall goal of the economy, (to avoid decreasing employment and wages).


*https://commons.wikimedia.org/wiki/File:AXEC46.png

AXEC / E.K-H said...

ANC Driver

Employment theory has been dealt with elsewhere, see

Full employment through the price mechanism
https://axecorg.blogspot.com/2017/11/full-employment-through-price-mechanism.html

and for the details of the big picture see cross-references Employment
http://axecorg.blogspot.com/2015/08/employmentphillips-curve-cross.html

MMT employment theory is false. The matter is settled.

Egmont Kakarot-Handtke

ANC Driver said...

Egmont,

How should one go about presenting your material to government, who in government particularly, and what sort of responses should we expect and how do we deal with them?

Thanks

AXEC / E.K-H said...

ANC Driver

The use of AXEC: New Foundations of Economics is regulated by Copyright© and Trademark® Laws. For details see Terms of Use
https://www.axec.org/terms-of-use

This covers all publications/blog posts, in particular
AXEC
https://www.axec.org/

AXECorg blogspot
https://axecorg.blogspot.com/

SSRN and other depositories
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665

Egmont Kakarot-Handtke

ANC Driver said...

Egmont,
Have you presented your materials to your government or to any other institution which has an impact on your economy, and what were the results/feedback etc?