Stephanie Kelton — Modern Monetary Theory Is Not a Recipe for Doom

In this post, Stephanie Kelton takes on Paul Krugman. She appears to agree with Paul Krugman's assumption that monetary policy that is built on raising interest rates to address inflation is not backwards. Actually, central bank interest rate setting is a form of price setting, the policy rate being a variable that sets the cost of borrowing (price of money). Higher interest rates are also inflationary to the degree that increase the income of holders of securities, as Warren Mosler has observed.

Instead she addresses the interest rate simply as a policy variable under central bank control, so the central bank can always insure that "r" is less than "g" to prevent interest on government debt from growing faster than the economy. While that is true, wouldn't it be preferable to show how Krugman's assumption about monetary is more fundamentally mistaken.  This is especially germane since it is not just Krugman's mistake. It is the most commonly held assumption.

Note that Stephanie Kelton does mentions the expansionary impact of higher interest rates directly to Krugman in Paul Krugman Asked Me About Modern Monetary Theory. Here Are 4 Answers. However, it is mentioned in passing rather than being elaborated, as it really need to be in order to finally bury monetarism in any form, strong or weak.

Stephanie Kelton finally addresses this point in another response to Krugman, The Clock Runs Down on Mainstream Keynesianism.

My suggestion is for the MMT economists to put together an elevator speech on this, along with a more complete explanation that is accessible to non-economists and a tightly argued paper for economist and financial types. It's all there in the MMT literature but it needs to be more tightly co-ordinated.

Bloomberg Opinion
Modern Monetary Theory Is Not a Recipe for Doom

Stephanie Kelton | Professor of Public Policy and Economics at Stony Brook University, formerly Democrats' chief economist on the staff of the U.S. Senate Budget Committee, and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders

Lars P. Syll — Functional​ finance — how to cope with inflation

Abba Lerner quote.

Lars P. Syll’s Blog
Functional​ finance — how to cope with inflation
Lars P. Syll | Professor, Malmo University

Lars P. Syll — The money ‘trick’

"Modern money" is state money. Abba Lerner explains the "trick" by which a state creates its money.

Imposing taxes and accepting its own liabilities in payment creates demand for the currency. In this sense, state money is "monopoly money" in the truest sense, since modern have a monopoly on the issuance of currency, regardless of whether or how they choose to exercise it.

Monopolists are prices setters rather than price takers. Hence, the value of the currency is established based on what the state is willing to pay in markets to move private resources to public use. 

Or the state can choose to fix the price for it to exchange a real resource for its currency, such as fixing the conversion rate for gold under a gold standard. A state can also choose to peg the value of its currency to another currency. If the state fixes the price, then it loses currency sovereignty, since it must obtain the good to meet demand for conversion.

A state is a currency sovereign if and only if it lets its currency float and doesn't create obligations that are out of its control, such as borrowing in a currency that it does not issue and must obtain to meet its obligations. Then the state becomes a currency user of that currency.

Presently, the one price that most  modern states that are currency sovereigns is the own rate of the currency (along with the discount rate) that is set by the central bank. MMT proposes setting the own rate to zero and providing liquidity as necessary for the payments system to clear. This obviates the ned for a discount rate. 

MMT proposes anchoring the price of the currency to the value of a unit of unskilled labor  (MMT JG). The price anchor sets the MMT JG proposal apart from other job guarantee proposals that do not anchor the currency, which risks inflation if the wage is indexed, for example.

Lars P. Syll’s Blog
The money ‘trick’
Lars P. Syll | Professor, Malmo University

Michael Roberts — MMT, Minsky, Marx and the money fetish

This is a good historical backgrounder and it should be read for that reason alone. But Michael Roberts also brings up other issues that follow upon this history that are relevant to the current debate, at least some of which that have been brought up previously in the comments here. Highly recommended.

As Maria Ivanova has shown, there remains a blind belief that the crisis-prone nature of the latter can be managed by means of ‘money artistry’, that is, by the manipulation of money, credit and (government) debt. Ivanova argues that the merits of a Marxian interpretation of the crisis surpass those of the Minskyan for at least two reasons. First, the structural causes of the Great Recession lie not in the financial sector but in the system of globalized production. Second, the belief that social problems have monetary or financial origins, and could be resolved by tinkering with money and financial institutions, is fundamentally flawed, for the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure “balanced” accumulation.

None of the ‘money fetish’ schemes have worked or will work to get the capitalist economy going. Instead such measures have just created financial bubbles to the benefit of the richest. That’s because these “tricks of circulation” are not based on the reality of the law of value.

Now that we are in the midst of a debate over capitalism and socialism, these issues are coming to the fore. Michael Roberts provides perspective from a Marxian POV.

We are going to hearing a lot of Marx as this debate unfolds and also learn about the rich history of socialist thought. Here is a quick reference on socialism.

Michael Roberts Blog
MMT, Minsky, Marx and the money fetish
Michael Roberts

Bill Mitchell — Operationalising core MMT principles – Part 2

This is the second and final part of this cameo set, which aims to clear up a few major blind spots in peoples’ embrace with Modern Monetary Theory (MMT). This is all repetition. I don’t apologise for that and it does not reflect a slack or bad editorial approach from yours truly as some critics have claimed. Repetition is how we learn. Reinforcing things in different ways (aka repetition) helps people come to terms with concepts and ideas that give them dissonance.

MMT is certainly about dissonance as the current level of hostility towards our work is demonstrating. It is also challenging existing ‘fiefdoms’ in the academy and beyond, which also creates aggression and retaliation. The problem is that most of the current criticism merely rehearses the same tired lines of inquiry. A stack of mainstream (New Keynesian) economists now regularly claim they ‘knew it all along’. The short and truthful response is – ‘no they didn’t. The standard mainstream macroeconomic theory cannot accommodate MMT principles unless it jettisons its core propositions and becomes something else. 

At any rate, as noted in – Operationalising core MMT principles – Part 1 – I am happy to help clarify quandaries that newcomers have with MMT if they are genuinely trying to work out what it is all about. I have no desire to interact with ‘critics’ who are just defending mainstream macroeconomics in its death throes and have no genuine interest in really understanding MMT beyond the superficial and no penchant for reading the now lengthy body of work we have generated in the academic literature. Yesterday, I considered a typical inquiry about an important operational detail of implementing a Job Guarantee.

Today, I consider a related topic. If a government is facing a situation where it needs to shift workers to the Job Guarantee pool to stabilise inflation, how does it do that? The ‘critics’ often claim we only advocate tax increases to fight inflation and because they are politically tricky to engineer MMT essentially fails to have an effective price anchor.

Today, I bring together many past blog posts to summarise the MMT position on counter-stabilising fiscal policy for those that might be struggling to put it all together.…

[Paragraphing added.]

Bill Mitchell – billy blog
Operationalising core MMT principles – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brad DeLong — By Popular Demand: What Is “Modern Monetary Theory”?

In most ways, Modern Monetary Theory—Functional Finance—is just macroeconomic common sense:

• We do not like high unemployment.
• We do not like excessive inflation.
• Thus the government should make it its first priority to use its tools of economic management so that we do not experience either.
• And maybe the government needs to be a little bit clever in how it uses fiscal and when and how it uses monetary policy to keep the task of financing the national debt from becoming an undue or even an unsustainable burden.

So what can go wrong with MMT?
Three things can go wrong;

1. MMT implicitly assumes that the debt market is efficient—that if the government debt gets on an unduly burdensome and unsustainable path, we will see that immediately in high interest rates. If that is not true, the government and the economy can face one hell of a mess should a bubble in government bond prices develop and then collapse. Cf. Greece.
2. MMT implicitly assumes that wealth-owners react rapidly when they see trouble ahead—that when investors conclude that the government cannot or will not balance its books without ultimate high inflation, inflation will jump immediately.
3. MMT implicitly assumes that extra financial leverage generated by the high values of collateral assets does not serve as a significant source of risk—that it is only on a small scale that investors will borrow foolishly just because they can....

"Implicitly assumes"? I'll be interest to see what MMT economists think of this.

Grasping Reality
By Popular Demand: What Is “Modern Monetary Theory”?
Brad DeLong | Professor of Economics, UCAL Berkeley

Lars P. Syll — Abba Lerner and the nonsense called ‘Ricardian equivalence’

Abba Lerner versus Robert Barro.

Lars P. Syll’s Blog
Abba Lerner and the nonsense called ‘Ricardian equivalence’
Lars P. Syll | Professor, Malmo University

Brad DeLong — Sunday Morning Twitter: Functional Finance/A Better World Is Possible Tweeting...

This is a good Twitter thread and I suggest reading it. I am sure MMT economists will jump in.

Here's an excerpt.

... 

Brad DeLong: MMT is Abba Lerner's Functional Finance with bells & whistles & some confusions. Manipulate G to stabilize Y & π, manipulate M to get an i to make debt finance sustainable, and rely on π to tell you if your policies are sustainable... If π↑ need G↓

 Suresh Naidu: Clearest exposition of MMT in a tweet. Fight me deficit owls! 

...

BDL has thought this through. That means taking MMT seriously.

Grasping Reality
Sunday Morning Twitter: Functional Finance/A Better World Is Possible Tweeting...Brad DeLong | Professor of Economics, UCAL Berkeley

Lars P. Syll — Rethinking public budget

The balanced budget paradox is probably one of the most devastating phenomena haunting our economies. The harder politicians — usually on the advice of establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour. And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as “the sole solution.”

There are three budget views.

1. Balanced budget in every fiscal year. (Sound finance, debt phobes and deficit hawks)

2. Budget balanced over the cycle. (John Maynard Keynes, many Keynesians, deficit doves)

3. Budget determined dynamically by economic need and opportunity rather than financial rules. (Abba Lerner, functional finance, MMT, deficit owls)

Lars P. Syll’s Blog
Rethinking public budget
Lars P. Syll | Professor, Malmo University

Tom Streithorst — The Radical Left-Wing Theory That the Government Has Unlimited Money

Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don't.

Surprisingly decent article on MMT considering the dismissive headline. Covers most of the bases.

Vice
The Radical Left-Wing Theory That the Government Has Unlimited Money

Tom Streithorst
ht Ralph Musgrave

Lars Syll — If only Trump had read Abba Lerner!

Keeper Lerner quote.

I would not limit it to Trump, but extend it to almost the entire economics profession and policy advisers. If they get it wrong, politicians are unlikely to get it right.

Lars Syll's Blog
If only Trump had read Abba Lerner!

Lars Syll

Lars P. Syll — Abba Lerner and functional finance

Must-read for anyone interested in MMT.

Lars P. Syll’s Blog
Abba Lerner and functional finance
Lars P. Syll | Professor, Malmo University

Brad DeLong — Yes, expansionary fiscal policy in the North Atlantic would solve many of our problems. Why do you ask?

Brad DeLong on MMT as functional finance.

In my view, the economics of Abba Lerner—what is now called MMT—is not always right: It is not always possible for the government to spend freely to attain full employment, use monetary policy to keep the debt under control, and rely on rising inflation as the only signal needed of whether and when policy needs to be tightened. Why not? Because it is possible that the bond market can get itself into an unsustainable position, in which underlying inflationary pressures are masked until it is too late to rebalance government finances without a financial crisis.

But, in my view, right now the economics of Abba Lerner is 100% correct. The U.S. (and Europe!) should use expansionary fiscal policy to rebalance the economy at full employment and potential output. And interest rates are so low that doing so does not require any additional monetary policy steps to keep the debt under control.

WCEG — The Equitablog
Yes, expansionary fiscal policy in the North Atlantic would solve many of our problems. Why do you ask?
Brad DeLong

See also

Economist’s View
'MMT and Mainstream Macro'
Mark Thoma | Professor of Economics, University of Oregon

"We all knew this all along." Uh huh.

James Montier — Market Macro Myths: Debts, Deficits and Delusions

In the context of the role that debts and de cits play in overall economic policy, in this paper I focus on the philosophy known as “sound nance,” which includes adherents who believe that governments should seek to balance their budgets. I, however, take a different view, and believe that the role of government when dealing with budget deficits should be one of “functional nance,” which ensures that the policies implemented help to reach the overarching goals of macroeconomic policy (generally held to be full employment and price stability).

This paper attempts to show why the proponents of sound nance are mistaken by defining and unpacking a series of “myths” that are foundational to, or at least helpful to, convincing us that sound nance requires that governments run a balanced budget.…

James Montier goes full "functional finance," and MMT without referring to it specifically. He does mention Randy Wray ad Bill Mitchell.

… Bill Mitchell – one of the few living economists whom I respect deeply. 

Word is getting around.

GMO White Paper — January 2016
Market Macro Myths: Debts, Deficits and Delusions
James Montier

Bill Mitchell — Currency-issuing governments have unlimited financial resources to fight recession

The elites are gathering for another junket aka the World Economic Forum, in the frosty, but salubrious surrounds of Davos this week (January 20-23, 2016). The Monday morning temperature there is forecast to be -22°C. According to the Forum’s Home Page – Searching for the 21st century dream at Davos – the delegates are going to be reimagining life under the theme “Mastering the Fourth Industrial Revolution”, which is spin for eating a lot of gourmet food, drinking a lot of expensive wine, and, denying the presence of the very large elephant in the conference venue. I suppose it is easy for them to live in denial when the sort of policy regimes they have influenced have categorically failed and will continue to do so with the result that millions remain unemployed and poverty rates are rising. Apparently, the elites have to “‘defetish’ … dialogues about future technologies” and the “onset of a new era of ‘limits’ is a chance we must not miss to imagine and engineer the futures we want”. Here is some gratuitous advice to the elites – forget the robots; forget worrying about the so-called “inflection point … where social, economic and political crises meet rapid technological change, where progress feels like disruption, not promise”; and, instead, more fully understand why this obsession with “a new era of ‘limits'” (by which they mean fiscal limits on governments) has sidetracked any hope of progress and deliberately disrupted people’s lives in a way that dwarf the impacts of technological change.…

Bill Mitchell – billy blog
Currency-issuing governments have unlimited financial resources to fight recession
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Recessions are always a problem and can always be avoided

There was an article in the Fairfax press this morning (December 1, 2015) – ‘Australia headed for recession’: Yanis Varoufakis, former Greek finance minister – which featured the erstwhile finance minister stating the obvious. Last week’s investment data, which I analysed in this blog – Australia – investment spending contracts sharply, recession looming – makes it clear that unless is a substantial shift in the austerity mindset of the fiscal policy makers then the continued and accelerating contraction in private capital formation will drive the economy into recession. That conclusion is not rocket science – it is staring us in the face. When tomorrow’s National Accounts data is released we’ll know more about the trajectory of the economy in the September-quarter. But it is clear that real GDP growth is declining, and the non-mining sector of the economy is not taking up the slack that has been created by the end of the commodity prices boom which drove the mining sector strongly for several years. What was objectionable about the Fairfax article was the assertion by the erstwhile finance minister that “the recession itself would not be the problem … because some recessions are necessary”. No recession is necessary and they are always extremely damaging especially to those who disproportionately bear the consequences – aka the most disadvantaged citizens in the society.…

Bill Mitchell – billy blog
Recessions are always a problem and can always be avoided
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brad DeLong — Must-Read: Has Simon Wren-Lewis just become a Lernerian--a devotee of and an evangelist for MMT?

Has Simon Wren-Lewis just become a Lernerian--a devotee of and an evangelist for MMT? It looks to me as though that is the case! Mirabile visu….

Come on in, Brad. The water's fine.

Grasping Reality
Must-Read: Has Simon Wren-Lewis just become a Lernerian--a devotee of and an evangelist for MMT?
Brad DeLong | Professor of Economics, UCAL Berkeley

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance ...

Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, "printing money", etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability.

— Abba Lerner, "Functional Finance and the Federal Deficit" (1943)

Bill Mitchell — There is no need to issue public debt

This blog was drawn, in part, from an edited version of a submission that I made with Warren Mosler in 2001 to the Commonwealth Debt Inquiry, which sought to justify why the government should continue to issue debt when it was in fact running increasing surpluses.

 ••••••••••••••••••••••

At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.…

Great post.

BTW, the US Treasury already issues Savings Bonds on demand in small denominations through Treasury Direct, quite sufficient for US workers to use as safe assets, for example, for retirement, if they desire. This issuance is independent of a fiscal deficit.

Bill Mitchell – billy blog
There is no need to issue public debt
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Jesse Livermore — Fiscal Inflation Targeting and the Cost of Large Government Debt Accumulation

The insight that fiscal policy can be used to manage inflation, in the way that monetary policy is currently used, is not new, but is attributable to the founders of functional finance, who were the first to realize that inflation, and not the budget, is what constrains the spending of a sovereign government. Advocates of modern monetary theory (MMT), the modern offshoot of functional finance, notably Scott Fulwiller [sic] of Wartburg College, have offered policy ideas for how to implement a fiscally-oriented approach. 

My view, which I elaborated on in a 2013 piece, is that the successful implementation of any such approach will need to involve the transfer of control over a portion of fiscal policy from the legislature and the treasury to the central bank. Otherwise, the implementation will become mired in politics, which will prevent the government’s fiscal stance from appropriately responding to changing macroeconomic conditions. 

There are concerns that such a policy would be unconstitutional in the United States, since only the legislature has the constitutional authority to levy taxes. But there is no reason why the legislature could not delegate some of that authority to the Federal Reserve in law, in the same way that it delegates its constitutional authority to create money. In the cleanest possible version of the proposal, the legislature would pass a law that creates a special broad-based tax, and that identifies a range of acceptable values for it, to include negative values–say, +10% to -10% of earned income below some cutoff. The law would then instruct the Federal Reserve to choose the rate in that range that will best keep inflation on target, given what is happening elsewhere in the economy and elsewhere in the policy arena.

Ultimately, the chief obstacle to the acceptance and implementation of fiscal inflation targeting is the fear that it would lead to the accumulation of large amounts of government debt. And it would, particularly in economies that face structural weakness in aggregate demand and that require recurrent injections of fiscal stimulus to operate at their potentials. But for those economies, having large government debt wouldn’t be a bad thing. To the contrary, it would be a good thing, a condition that would help offset the weakness.

The costs of large government debt accumulation are not well understood–by lay people or by economists. In this piece, I’m going to try to rigorously work out those costs, with a specific emphasis on how and in what circumstances they play out. It turns out that there is currently substantial room, in essentially all developed economies that have sovereign control over credible currencies, to use expansive fiscal policy to combat structural declines in inflation, without significant costs coming into play.

The reader is forewarned that this piece is long. It has to be, in order to make the mechanisms fully clear. For those that want a quick version, here’s a bulleted summary of the key points:

Philosophical Economics
Fiscal Inflation Targeting and the Cost of Large Government Debt AccumulationJesse Livermore
ht Phillipe in the comments

Winterspeak — Krugman out of paradigm

Warren Mosler versus Paul Krugman. in which Mosler wins.

A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.

His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.

Warren defines nongovernment net financial assets in aggregate:

Mosler: …  the US public debt, for example, is nothing more than the dollars [as tax credits] spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’.

Currency as tax credits are liabilities held by nongovernment as financial assets. In aggregate, these assets are net of nongovernment creation of the unit of account through lending (loans create deposits). Borrowing and lending in nongovernment in a unit of account must net to zero as an accounting identity. Any net financial assets can only come from the currency issuer as a liability of the issuer that is correspondingly the asset of currency users. 

This is why payment of taxes with tax credits cancels the liability of the currency issuer and "destroys" that amount of the unit of account, that is, reduces the "monetary base" in Mosler terms, which includes government securities, as the total amount of liabilities of the currency issuer held by currency users in aggregate in the currency zone.

Winterspeak.com
Krugman out of paradigm
Winterspeak