Democracy? Surely Not! — Peter Radford

Let’s stir things up for the New Year by continuing with one of my recent themes. A quote from an opinion piece in the NYT this morning [January 3rd]: “James Madison boasted that the Constitution achieved “the total exclusion of the people, in their collective capacity....

This post shows what MMT is up against as an institutionalist macroeconomic theory that is embedded in political economy, that is, the approach to economics as a policy science. As a policy science, MMT assumes a democratic use of government finance as a public good. The purpose of MMT as a policy science is to show the capacity and limits of economic policy beginning with legal institutions that are the outcome of governance. 

Since most practical discussions of MMT are in the context of Western nations this implies representative government that is billed as "democracy." Peter Radford argues that not only is it not democracy in the US and that this is so by design, as those responsible for the system of governance were well aware when they designed it.

Note, however, that Peter Radford is wrong in about debt monetization if he means monetary operations. Monetary operations do not affect fiscal, as "debt monetization" assumes. Monetary operations simply exchange securities and reserves without affecting the amount of non-government net financial assets in aggregate. That is, they do not have a fiscal effect. 

Monetary operations simply affect the amount of reserve balances for interbank settlement and influence the interest rate when the central bank is not setting the overnight rate ("the interest rate") by paying interest on excess reserves in the settlement system. There is a huge amount of confusion about this and those that understand MMT seem to be the only ones that get it right. 

Bank reserves are for settlement purposes and they are neither spent or lent into the economy the way many people erroneously think. Their effect on interest rates and bank lending is not as most people think either, including central bankers still under the influence of monetarism. 

In fact, from the MMT pov, central bank policy and operations often has an effect opposite to that which was intended, e.g, raising interest rates in response to inflationary pressure is a price rise that increases inflation unless the rate is jacked up so much that it stifles borrowing, contracting the economy, increasing unemployment and potentially leading to recession. Fine-tuning? Not.

While central bank independence is anti-democratic to be sure, it assumes that the central bank is in a position to command the economy, which is a wrong assumption of monetarism. The problem is with the institutional arrangements being anti-democratic. 

Moreover, monetary policy based on NAIRU, which assumes a natural rate of interest and a natural rate of unemployment, is also anti-democratic in that it seeks to reduce full employment to limit labor bargaining power, which is assumed to drive up wages and therefore prices. MMT economists have dealt with such issues in detail.

The Radford Free Press
Democracy? Surely Not!
Peter Radford
http://www.radfordfreepress.com/?p=3352