tag:blogger.com,1999:blog-2761684730989137546.post9183084428543621746..comments2024-03-28T07:50:06.102-04:00Comments on Mike Norman Economics: Monetarism v. Fiscalismmike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-2761684730989137546.post-1740201864080489822011-08-26T14:12:31.490-04:002011-08-26T14:12:31.490-04:00Dan, the two equations are substantially the same,...Dan, the two equations are substantially the same, but only differ in computation. There are different methods of computation of economic activity, e.g., transactions, income, expenditure.<br /><br />MV = PT, called the <a href="http://www.nolanchart.com/article5583_MVPT_A_Classic_Equation_and_Monetary_Policy.html" rel="nofollow">equation of exchange</a>, was developed by Irving Fisher in 1911, using transactions. Later, the equation was simplified to MV = PY, using the chiefly the expenditure method. See Wikipedia — <a href="http://en.wikipedia.org/wiki/Quantity_theory_of_money" rel="nofollow">The Quantity Theory</a> for a summary of the history. <br /><br />Friedman used MV = PY in his development of the <a href="http://www.economicshelp.org/macroeconomics/inflation/monetarist-theory-inflation.html" rel="nofollow"> monetarist theory</a>. Subsequent monetarists worked within this framework.<br /><br />Keynes rejected the quantity theory because it presumes that money is neutral (changes in the money supply have only nominal effects). Keynes argued that changes in money supply work through effects on aggregate demand, which impacts the real economy. E. g., if money increase is saved, it doesn't affect NAD. Subsequent "fiscalists" worked in terms of aggregate demand effects.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-77605028704917777532011-08-25T21:54:16.610-04:002011-08-25T21:54:16.610-04:00Tom Hickey:
Wrt Dan's question, I think it ar...Tom Hickey: <br />Wrt Dan's question, I think it arises from the two different uses of the symbol, Y, in the first three paragraphs of your post. In the first two paragraphs, Y is the number of transactions occurring in a given time period (widgits/time). In the third, Y is nomGDP ($/time).DanD2https://www.blogger.com/profile/17698495054224537283noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-33716279442104488162011-08-24T23:09:12.365-04:002011-08-24T23:09:12.365-04:00Dan: Would you clarify why GDP = Y rather than PY?...Dan: Would you clarify why GDP = Y rather than PY? My understanding has been that P is the average price per transaction and Y is the number of transactions. Then Y would relate more closely to demand which is of primary interest to MMT.<br /><br />MV = PY = GDP (nominal). Nominal GDP is sometimes specified as NGDP.<br /><br />This was initially written MV = PT instead, where expenditure on all transactions is summed. This would required multiplying all transactions by the price. Obviously, this is impossible to comput for an entire economy. So an average was used instead. But even so, there is no reported data on the volume of transactions across sectors. So PT was abandoned.<br /><br />IT is simpler and more practical to aggregate expenditure across sectors and adjust for inflation to get real GDP (RGDP). So PY was substituted for PT. PY in MV = PY is price level times real output, where price level is usually CPI. Some write MV = Py to show that y = RGDP.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-59186193008816284772011-08-24T19:49:55.263-04:002011-08-24T19:49:55.263-04:00Mario, interest rates fluctuate with demand. The p...Mario, interest rates fluctuate with demand. The primary demand comes from demand for capital. The prevailing rate at which firms can borrow is the cost of capital, and businesses use cost of capital as factor in decisions to invest.<br /><br />The problem with the cb setting interest rates to control inflation is that this operates through the cost of capital instead of letting the market determine it. That is inefficient and leads to distortions.<br /><br />MMT proposes using fiscal policy to control both employment and price stability, and Warren's proposal is to let the market set the cost of capital based on demand.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-77627883992877422962011-08-24T19:42:10.164-04:002011-08-24T19:42:10.164-04:00Wray '98. Classic. Tks.Wray '98. Classic. Tks.circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-68527840165509500752011-08-24T18:27:14.657-04:002011-08-24T18:27:14.657-04:00Would you clarify why GDP = Y rather than PY? My u...Would you clarify why GDP = Y rather than PY? My understanding has been that P is the average price per transaction and Y is the number of transactions. Then Y would relate more closely to demand which is of primary interest to MMT.Dan Metzgerhttps://www.blogger.com/profile/01250187365269906098noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-50923629410887900872011-08-24T18:22:05.507-04:002011-08-24T18:22:05.507-04:00@Tom
okay. So does that mean that rates would eve...@Tom<br /><br />okay. So does that mean that rates would ever fluctuate at all? And if they did, would it be b/c of "the market" for 3 month bills supply/demand? <br /><br />Would support rate fluctuations factor at all into savings rates in that scenario?Mariohttps://www.blogger.com/profile/00905402431684735610noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-64986907161226580842011-08-24T17:58:41.056-04:002011-08-24T17:58:41.056-04:00Mario: "how does MMT respond to the fact that...Mario: "how does MMT respond to the fact that a zero rate would hurt savers and help speculators? B/c I know that many people feel that way about 0 rates these days and QE, etc. and frankly I don't have a good response."<br /><br />Warren's policy proposal is setting the overnight rate to zero and letting excess reserves accumulate and eliminating issuance of anything longer than a 3 mo T-bill.<br /><br />That way the market would set rates instead of a small group of unelected and unaccountable technocrats, which is anti-democratic and anti-capitalistic.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-84807493044092233822011-08-24T17:54:39.936-04:002011-08-24T17:54:39.936-04:00circuit, the only comprehensive account of MMT tha...circuit, the only comprehensive account of MMT that I know of is Randy's book <i>Understanding Modern Money</i>.<br /><br />MMT is 1) a operational description of the modern money system, 2) a macro theory, 3. policy options based on 1 and 2.<br /><br />BTW, the ELR is part of MMT's macro theory for achieving full employment and price stability (buffer of employed/price anchor), not a policy prescription based on it.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-60661833089484843512011-08-24T14:59:30.122-04:002011-08-24T14:59:30.122-04:00interesting Ralph.
so even at zero rates banks c...interesting Ralph. <br /><br />so even at zero rates banks could set their own competitive rates for savers? I just assumed they would let them sit at some algorithmic multiple from zero that only moves when the base rate moves. I guess the other possibility is that the support rate would be moving instead from then on, so savings rates theoretically would also move in relation to the support rate just as they used to off the ffr.Mariohttps://www.blogger.com/profile/00905402431684735610noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-40737667782393794292011-08-24T14:45:10.530-04:002011-08-24T14:45:10.530-04:00Bo**ocks to fiscal and bo**ocks to monetary. Any m...Bo**ocks to fiscal and bo**ocks to monetary. Any monetary policy on its own is distortionary and is thus no good or at least sub-optimal. For example interest rate adjustments (the classic monetary policy) work only via entities that are significantly reliant on loan rather than equity finance (that’s assuming that interest rate adjustments work at all, which is debatable). What’s the logic in boosting an economy via one set of households and firms, but not the rest?<br /><br />As to fiscal, no one can agree on the extent of crowding out, so that’s not much use. Moreover, what’s the point in government borrowing stuff (i.e. money) which it can produce itself at no cost? Madness.<br /><br />The best policy is the simple Abba Lerner / MMT combination of fiscal and monetary, i.e. print money and spend it in a recession (and/or cut taxes). And when inflation looms, do the opposite.<br /><br />And perhaps that answers Mario’s question just above about interest rates. I.e. the answer is to ignore interest rates: let the market determine interest rates. Governments should not tamper with them.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-82437155216078221132011-08-24T14:45:07.146-04:002011-08-24T14:45:07.146-04:00Circuit,
Once everyone learns the operational aspe...Circuit,<br />Once everyone learns the operational aspects of MMT, the prescriptions can be debated from all points of view as one defines public purpose. Randy has stated in the NEP blog that MMT can be used by progressives, libertarians, Austrians, conservatives, etc. The important part is getting everyone on the same page regarding the realities of our monetary system.Chewituphttps://www.blogger.com/profile/05912166063718393059noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-6873392107350709972011-08-24T13:25:58.174-04:002011-08-24T13:25:58.174-04:00how does MMT respond to the fact that a zero rate ...how does MMT respond to the fact that a zero rate would hurt savers and help speculators? B/c I know that many people feel that way about 0 rates these days and QE, etc. and frankly I don't have a good response. <br /><br />Thanks!Mariohttps://www.blogger.com/profile/00905402431684735610noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-9376394690388410442011-08-24T13:20:08.262-04:002011-08-24T13:20:08.262-04:00As a follow-up to my previous comment, I should sp...As a follow-up to my previous comment, I should specify that the work of Scott Fullwiler (eg. primer on CB ops and academic papers) and Randy Wray (eg. papers and the NEP MMT primer) are good resources for understanding the descriptive aspects. However, it's the policy proposals associated with the approach that seem somewhat scattered (in Levy papers, blog posts, Warren Mosler's campaign proposals, etc). Myself, I always equated the core MMT proposals more or less with ELR and the Kansas City Rule (ie. zero nominal interest rate that Tom mentions above).<br /><br />@ Tom: Do you know of a good link/document that you believe adequately outlines the other (more specific) set of policy prescriptions associated with MMT or advanced by modern money economists? (Though, perhaps you're like me and think the descriptive is/should be the real focus, thus allowing for discussions on the different possible policy options rather than on specific proposals)circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-18116853082439560702011-08-24T11:37:24.814-04:002011-08-24T11:37:24.814-04:00Oliver, the basic challenge of macro policy-wise i...Oliver, the basic challenge of macro policy-wise is reconciling employment and inflation.<br /><br />in this broad brush summary, I was thinking of it terms of Friedman v. Keynes. So the monetarists are the Friedmanites and the fiscalists are the Keynesians. There are different varieties of both, with monetarists chiefly concerned with stability of purchasing power of the currency and fiscalists primarily concerned with stability of employment. I am representing MMT as a school of fiscalism, one among several others.<br /><br />MMT reconciles both positions in its claim to be able to achieve full employment defined rather strictly with price stability. Previously most macro folks saw as impossible without redefining key terms to fit the theory.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-11098228166504525602011-08-24T10:53:32.492-04:002011-08-24T10:53:32.492-04:00Agreed completely Oliver. Great way of putting it....Agreed <i>completely</i> Oliver. Great way of putting it.Mariohttps://www.blogger.com/profile/00905402431684735610noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-16609449426786005562011-08-24T08:05:39.793-04:002011-08-24T08:05:39.793-04:00Good post. I especially like the last part and the...Good post. I especially like the last part and the paragraph where you highlight that the system is *already* Treasury-based from an ops standpoint. I've noticed some confusion surrounding this issue in the comments following one of my posts. Perhaps Olivier is right that confusion exists between the descriptive and prescriptive aspects of the approach.circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-89139008526126147762011-08-24T06:35:54.087-04:002011-08-24T06:35:54.087-04:00Good summary!
One quibble:
You say: For fiscalis...Good summary!<br /><br />One quibble:<br /><br />You say: For fiscalists, employment is of primary concern. <br /><br />It seems you're conflating the normative and the descriptive aspects of MMT with this sentence. Could it not be said that fiscalsim is a theory about the way our current monetary system operates. And that understanding this theory, allows those who are concerned about employment to bypass the supposed constraints inherent in Monetarist and Classical theories. <br /><br />In theory, one could believe in the Chartalist analysis but not give a damn about unemployment. But, if Chartalism were the accepted paradigm, such an attitude could be better exposed for what it is, namely a complete disregard for human welfare as those who hold it could no longer hide behind the veil of the goddess NAIRU.Olivernoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-66583613606233936952011-08-24T00:04:52.762-04:002011-08-24T00:04:52.762-04:00Very clear. Well done, Tom.Very clear. Well done, Tom.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-82963487637291155682011-08-23T23:25:23.731-04:002011-08-23T23:25:23.731-04:00Thanks, Dan. Of course, there is much more to say ...Thanks, Dan. Of course, there is much more to say about this. My post was inspired by Neil Wilson's comment at Warren's on reversing the MV = PY identity to PY = MV, thereby switching the independent and dependent variables. I riffed off that.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41139677370031018182011-08-23T22:21:15.889-04:002011-08-23T22:21:15.889-04:00Good post. Thanks.
You might add the concepts of...Good post. Thanks.<br /><br />You might add the concepts of "spending multiplier" and "money multipler", which seem to be integral to the monetarist and fiscalist theories. You covered this to some extent, but it might help to spell out the contesting multipliers...Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-28621185174567617442011-08-23T13:39:33.404-04:002011-08-23T13:39:33.404-04:00I don't think the credit based approached is w...I don't think the credit based approached is wrong. Just incomplete. <br /><br />I think MMT describes both horizontal (credit-money) and vertical (net financial assets) money.<br /><br />Credit money however is not the way that monetarists describes it. Credit money is endogenous to the banking sector based on the desires of the customers and the potential profitability of the banks (loan officer analysis). Basically what Minsky has hypothesized. Minsky actually went further stating that it is inherently unstable.<br /><br />For credit-based approaches it is not Monetarism vs MMT. But rather Monetarism vs Monetary Circuit Theory (Steve Keen and Richard Werner's approach)Adam2https://www.blogger.com/profile/03710514839937913226noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41949374741824136852011-08-23T12:45:32.442-04:002011-08-23T12:45:32.442-04:00Thanks, beowulf.
I would prefer to see the Fed s...Thanks, beowulf. <br /><br />I would prefer to see the Fed set the overnight rate to zero and use this on a sliding scale wrt to the sectoral balance approach and functional finance than to have them continue attempting to micromanage the economy using interest rates and a Taylor rule.<br /><br />It's also more practical than using tax policy, especially given the sorry state of the highly partisan political process in which parties jockey for power instead of governing.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-88727092490327448912011-08-23T12:21:03.214-04:002011-08-23T12:21:03.214-04:00wow. incredible. I'm passing this one around. ...wow. incredible. I'm passing this one around. <br /><br />The hat tip goes to Neil as well for initially bringing up the equation too.<br /><br />GREAT stuff here. <br /><br />Honestly Tom, after a few typo-checks, and maybe a few scholarly references and discussions, this could VERY EASILY be submitted to economic panels and research institutions to further the MMT platform. Quite seriously I mean that. I encourage you to consider polishing this even further and submitting this "around town." This is huge and great stuff.Mariohttps://www.blogger.com/profile/00905402431684735610noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-1424597977212229332011-08-23T11:20:19.308-04:002011-08-23T11:20:19.308-04:00"MV = PY is an identity that means the amount...<i>"MV = PY is an identity that means the amount of money (M) multiplied by the turnover of money (V for velocity) is identical to the amount of economic activity (Y) multiplied by the price level (P)... taxes are seen not as a funding operation for government expenditure, but as a means to withdraw non-government net financial assets...</i>"<br /><br />The Fed can use its fee schedule on all FRS transactions as an adjustable "turnover tax" (with net earnings going to Tsy) that drains M and V.<br />http://www.law.cornell.edu/uscode/12/usc_sec_12_00000248---a000-.htmlbeowulfhttps://www.blogger.com/profile/14987548132065830204noreply@blogger.com