My new podcast episode is out.

Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy — Tracy Mott

A version of what Lawrence Summers and Anna Stansbury (2019) recently pointed to as “original” Keynesianism can be found in the work of Michał Kalecki and Hyman Minsky, Their work offers analysis of the determination of investment spending and effective demand which avoids the deficiencies found in the New Keynesian economics in which Summers and Stansbury find shortcomings. In the paragraphs below, I describe how their insights and those of other economists sharing their approach provide an answer to the questions with which Summers and Stansbury are grappling, and more....

Larry Summers awakens from his "dogmatic slumbers" (ht Emmanuel Kant on reading himself after reading David Hume).

Well, better late than never, but unfortunately not soon enough to avoid doing extensive damage.

Also, it doesn't seem that Professor Summers has gotten around to attribution yet. Or does he not even know of this previous work?

INET

Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy

Tracy Mott, Professor of Ecnomics (retired), University of Denver

So Are We All MMTists Now? — Brian Romanchuk

Larry Summers attracted a great deal of attention with arguments that post-Keynesian theories ought to be taken into account, and the ability of central banks to stimulate the economy are limited. One could argue that the zeitgeist is shifting in the direction of Modern Monetary Theory (MMT): the role of fiscal policy may be increasingly important. However, I am unsure how far actual economics debates will shift.

One may note that Summers dodged discussing MMT in his initial tweets; in fact, he referred to Thomas Palley, whose main contributions in recent years has been his sectarian attacks on MMT. My guess is that this will be a fairly standard approach...,

I have said previous, this is about control of the Democratic Party going forward — the Democratic Establishment (the Clinton-Obama camp) versus the progressives (the Bernie-Squad camp). Stephanie Kelton has put MMT at the center of it owning to her association with Bernie and AOC's endorsement of MMT.

The former is backing way from New Keynesian but is not willing to throw in the towel and support MMT. Now the battle is engaged. So far the victories are going in the right direction if one is an MMT supporter. Monetarism is effectively dead and New Keynesian is becoming untenable as a policy position.

There has been an ongoing battle between one faction of Post Keynesians and others that support MMT. Larry Summers just cast his hat with the former.

Bond Economics
So Are We All MMTists Now?
Brian Romanchuk

Whither Central Banking? Lawrence H. Summers

In an environment of secular stagnation in the developed economies, central bankers’ ingenuity in loosening monetary policy is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Throwing in the towel (but not endorsing MMT). Politically, this is about control of the Democratic Party after the transition from Clinton-Obama-Third Way. Summers is on the side of the Establishment, while Stephanie Kelton is Bernie's advisor and in league with The Squad.

Project Syndicate
Whither Central Banking?
Lawrence H. Summers & Anna Stansbury

Larry Summers — A jobs guarantee – progressives’ latest big idea

Summers comes out for a job guarantee and offers some qualifying comments. Overall positive.

Maybe not an exactly a VSP endorsement of MMT or Alexandria Ocasio-Cortez, but close enough to be considered a big win for the up-and-comers.

It is a wake-up call to establishment Democratic policymakers as well as encouraging progressives.

Larry Summers
A jobs guarantee — progressives’ latest big idea
Lawrence H. Summers | Charles W. Eliot University Professor and President Emeritus at Harvard University, 71st Secretary of the Treasury for President Clinton, and the Director of the National Economic Council for President Obama

David F. Ruccio — Laughter is the best medicine

So what are the problems according to Blanchard and Summers? In their view, “the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities.”

Only mainstream macroeconomists could possibly have thought that capitalism is self stabilizing. The rest of us—who have read Marx and Keynes as well as the work of Robert Clower, Hyman Minsky, and Axel Leijonhufvud—actually knew something about the roots of capitalist instability: the various ways a monetary commodity-producing economy might (but not necessarily) generate imbalances and instabilities based on the normal workings of the system.

Yes, of course, temporary shocks can have permanent effects. How could they not, when tens of millions of people are thrown out of work and, especially in the wake of the most recent crash, inequality has soared to new heights?

And then there are those “non linearities,” the idea that financial crises are characterized by feedback effects such that shocks, even small ones, “are strongly amplified rather than damped as they propagate.” Bank runs are the quintessential example—whether customers demanding their deposits in the first Great Depression or the run on financial institutions (including insurance companies that issued credit default swaps) that occurred in the midst of the second Great Depression. But that’s not all: when corporations, facing a declining profit rate, choose to sell but not purchase, they make individually rational decisions that can have large-scale social ramifications—for workers, indebted households, and other corporations (on both Main Street and Wall Street).

So mainstream macroeconomists appear to be waking up from their slumber and seeing capitalism as it is—and as it has functioned for 150 years or so.

Moreover, the reason that conventional economists are concerned is not economics but politics. Capitalism is not working and the result is social dysfunction that is creating a political backlash against not only politicians but also economists. I suspect that if this were not happening, everything would be just fine. Even so, they are not actually questioning basic assumptions, the adverse consequences of which heterodox economists and political theorists have pointed out from many different angles.

Occasional Links & Commentary
Laughter is the best medicine
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

The real sea change is the third one -- the reconsideration of what recessions really are. Most modern econ theories posit that recessions arrive randomly, instead of as the result of pressures that build up over time. And they assume that recessions are short-lived affairs that go away of their own accord. If these assumptions are wrong, then most of the theories written down in macroeconomics journals over the past several decades -- and most of those being written as we speak -- are of questionable usefulness....

Bloomberg View
Fixing Macroeconomics Will Be Really Hard

Noah Smith, columnist

Barkley Rosser — "Those Of You Who Are Old Enough Will Really Get This"

More for the record. Larry Summers and his uncles, Kenneth Arrow and Paul Samuelson, and the Cambridge capital debates and Joan Robinson.

Econospeak
"Those Of You Who Are Old Enough Will Really Get This"
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Bill Black — Jobs, Jobs, Jobs – Not Austerity

Democrats under the spell of Rubinomics consign themselves to the political wilderness.

New Economic Perspectives
Jobs, Jobs, Jobs – Not Austerity
William K. Black | Associate Professor of Economics and Law, UMKC

Brian Romanchuk — The Case Against Growth And Stimulus

I was tempted to comment on Larry Summers recent post, but Brian has saved me the trouble and has done a better job of it.

Note to progressives: 

Growth is the outcome of optimization of available real resources including human resources. The aim should be optimizing available real resources rather than growth per se. Optimizing available real resources involves limiting the idling of resources including human resources, which are the most valuable resource a society and its economy have. 

Aim for full employment as a job offer for all willing and able to work and the output gap will be minimal and growth maximal. 

This means replacing the conventional monetary policy that uses unemployment as a tool to control inflation with a buffer stock of unemployed with fiscal policy based on functional finance and a buffer stock of employed using a job guarantee with the currency issuer acting as the employer of last resort with respect to funding. A currency sovereign always has the fiscal ability to employ all available real resources by creating the funding.

Bond Economics
The Case Against Growth And Stimulus
Brian Romanchuk

Jörn Bibow — Of Voices in the Air and Never-Ending Dreams of Helicopter Drops

The debate over helicopter money rages on.

Good read.

Multiplier Effect
Of Voices in the Air and Never-Ending Dreams of Helicopter Drops
Jörg Bibow

Neoliberals like Larry Summers are beside themselves at the prospect of a Trump presidency

Neoliberals like Larry Summers are aghast at the prospect of a Trump presidency. He recently called it the most dangerous thing that could happen to America.

The hyperbole is overflowing like rivers of shit straight out of Summers' mouth.

Here's the guy who pushed aggressively for the deregulation of the financial sector, which eventually led to a near-total, global economic collapse. And it's safe to say that billions...BILLIONS of people have still not recovered from that.

This guy is an ass if there ever was one, but he shows you the extreme worry by his crowd if Trump ever becomes president.

Think of it, a candidate who wants to raise taxes on the rich (and who's rich, himself!), boost wages, impose tariffs on China and other trading partners and a guy who HATES Wall Street and the parasitic speculators that prey on our economy.

What horror!!!

From  the neoliberals and warmongering neocons to the corporate CEO's and the lobbyists and political establishment and elite (of both parties), Trump has enormously powerful forces arrayed against him. It is almost impossible for him to win.

What am I saying? It is impossible.

David F. Ruccio — Capitalism’s growth problem

Anyone who understands MMT or has been following MMT blogs including this one knows what the "top" economists are apparently at a loss for.

The slow down of growth is a demand problem. Investment is demand led. Lagging demand can be fixed either by increasing labor share, or (inclusive disjunction) increasing government contribution.

Increasing exports cannot do this in an open global economy in which lagging demand is a global issue, since one country's net exports are other countries net imports. Unfortunately, this has not sunk into the thinking of policymakers that are trying to export their way out their countries' doldrums, using currency devaluation, for example.

So-called secular stagnation is a fancy way of saying that economies are settling into equilibrium at under optimal potential and full employment (without defining down "full"). Keynes understood this and showed how to escape this trap eighty years ago. The General Theory was published in 1936. Abba Lerner elaborated on how to manage government contribution through functional finance. In "Political Aspects of Full Employment," Michal Kalecki explained how capitalism is about disciplining labor and controlling labor share to the advantage of capital share.

There is no mystery here. What is wrong with these people?

The issue to threefold.

1. Capital is increasingly dominant over labor and the capital share to labor share reflects this.

2. The paradox of thrift is making itself felt through the popularity of fiscal austerity in government among elites.

3. The rise of mercantilism and beggar-thy-neighbor policy, where trade surpluses are preferred by elites even though they are a cost in real terms to net exporters' economies.

Occasional Links & Commentary
Capitalism’s growth problem
David F. Ruccio | Professor of Economics, University of Notre Dame

Simon Wren-Lewis — Confidence as a political device

Now to the additional point I really wanted to make. When people invoke the idea of confidence, other people (particularly economists) should be automatically suspicious. The reason is that it frequently allows those who represent the group whose confidence is being invoked to further their own self interest. The financial markets are represented by City or Wall Street economists, and you invariably see market confidence being invoked to support a policy position they have some economic or political interest in. 

Bond market economists never saw a fiscal consolidation they did not like, so the saying goes, so of course market confidence is used to argue against fiscal expansion. Employers drum up the importance of maintaining their confidence whenever taxes on profits (or high incomes) are involved. As I argue in this paper, there is a generic reason why financial market economists play up the importance of market confidence, so they can act as high priests. (Did these same economists go on about the dangers of rising leverage when confidence really mattered, before the global financial crisis?)

The general lesson I would draw is this. If the economics point towards a conclusion, and people argue against it based on ‘confidence’, you should be very, very suspicious. You should ask where is the model (or at least a mutually consistent set of arguments), and where is the evidence that this model or set of arguments is applicable to this case? Policy makers who go with confidence based arguments that fail these tests because it accords with their instincts are, perhaps knowingly, following the political agenda of someone else.

I generally agree with this based on facts on the ground.  At the same time, Keynes emphasized the role of business confidence. Keynes held that business confidence was a function of effective demand and that a government's fiscal policy could address that potential loss of confidence by supplementing demand should effective demand contract owing to demand leakage resulting from increased liquidity preference.

There is a huge difference between inflation fighting, especially when there is little inflation in sight, "sound finance," monetary "discipline" and fiscal austerity, and bolstering effective demand by loosening the fiscal stance to address demand leakage to increased private or (inclusive) external saving desire, whether this is due to domestic private saving or a trade deficit.

Those who are monetarists of one sort or another hold that business confidence is chiefly a function of central banks' monetary policies.  Fiscalists of whatever sort that follow Keyes, at least, connect business confidence with effective demand and see fiscal policy as the tool to address it, shifting the government's fiscal stance as appropriate to shifting non-government saving desire. For one thing, fiscal policy can be tightly targeted, whereas monetary policy is a shotgun approach.

Mainly Macro
Confidence as a political device
Simon Wren-Lewis | Professor of Economics, Oxford University
ht Random in the comments

Brad DeLong — When and why might a “confidence” shock be contractionary? Karl Smith’s approach can bring insights

Sectoral balances.

WCEG — The Equitablog

When and why might a “confidence” shock be contractionary? Karl Smith’s approach can bring insights

Brad DeLong

Robert Waldmann — Is there a model in which a Country which borrows in it’s own currency has a Greece style crisis ?

Here is my comment. I tried to put it up at the comments there, but it doesn't seem to have gotten through.

1.
A loss of confidence in the US Treasury would also cause capital flight as domestic entities send their wealth abroad.
I am curious as to how financial wealth is sent abroad other than by taking cash out in suitcases. There are two side to every trade and if one party sells currency to purchase another currency, someone has to buy the currency. A currency cannot leave its currency zone other than by taking cash abroad as far as I can tell.

If sellers of a currency are more anxious to sell a currency than buyers are to buy, the exchange rate will decline (cet par), and the domestic currency will fall relative to other currencies in which the sellers of the currency prefer to save. But there is no actual outflow barring taking cash abroad.

And what happens when foreigners hold balances (save) in another currency? They purchase government securities in order to reap the interest. For example, the PBOC has in effect a large time deposit at the Fed.

It seems to me that terms like "capital flight" and "outflow" do not represent the reality. Rather, assets simply change hands in the market and don't actually "go" anywhere. The changes occur on books denominated in that unit of account. If it is in USD it transpires in the USD currency zone, etc.

2.
The reduction of demand for US public debt could be greater than foreign holdings of US public debt.

QE demonstrated that the Fed has the power not only to set the policy rate independently of the monetary base, but also it has the power to increase its balance sheet without limit, and if it chooses to set the prices it desires along the yield curve by standing ready to increase quantity as necessary.

Angry Bear

Is there a model in which a Country which borrows in it’s own currency has a Greece style crisis ?
Robert Waldmann

Brad DeLong — Martin Sandbu: Free Lunch: On Models and Making Policy

Models are tools. They are not religious dogmas.

Larry Summers is absolutely right that economists and policymakers need to take into account important factors that models do not adequately capture if they even consider them in the assumptions. Whether business confidence is one of them is debatable but Keynes is on the side of those arguing for it.

However, the recent financial crisis that went global that economic models did not detect developing and were unable to adequately address by way of remedy proves beyond the shadow of a doubt that the Fed was remiss owing to erroneous assumptions that only models count. 

The Fed is the chief regulators of the financial system and years before the crisis broke, the FBI (Federal Bureau of Investigation) warned of massive fraud in the mortgage markets. Alan Greenspan, who was the Fed chair at the time, disregarded the warning because his conceptual model ruled out the financial sector acting against its longterm interests for short term gain.

This has not only been exhaustively documented but Greenspan himself admitted that he had been wrong about this assumption.

As Bill Black has noted, however, the work of George Akerlof and Paul Romer was already on record.

Three Passages From Akerlof & Romer’s 1993 Article That Should Have Prevented The Crisis

Finance Refuses to Take Akerlof and Romer Seriously about Looting

From this perspective, the crisis was no "black swan" event that could not be foreseen. 

Another proof lies in conventional economists' disregarding of Hyman Minsky's work. Only a few, notably L. Randall Wray, who was Minsky's student, were saving red flags. Why os few? Minsky's model was not formalized and was "merely" conceptual. It was only after the crisis that the economics profession discovered Minsky. It remains to be seen what will come of that. So far, the results with respect to reform are not encouraging.

WCEG
Martin Sandbu: Free Lunch: On Models and Making Policy

Brad DeLong

Larry Summers — A response to Paul Krugman and Brad DeLong and A postscript to Delong and Krugman

The Washington Post — Wonkblog
Larry Summers: A response to Paul Krugman and Brad DeLong
Lawrence H. Summers

larrysummers.com
A postscript to Delong and Krugman
Larry Summers

Lars P. Syll — DeLong, Summers & Krugman on models

Larry Summers, Brad DeLong, and Paul Kugman are having an extended discussion on the role of models in economics on their blogs this week.

That’s good. Since the model is the message in economics today, that is actually the most important discussion possible to have in economics.…

Lars P. Syll’s Blog
DeLong, Summers & Krugman on models
Lars P. Syll | Professor, Malmo University

Brian Romanchuk — Policymakers And The Confidence Fairy [Paul Krugman, Larry Summers, and Brad DeLong]

The trio of Paul Krugman, Larry Summers, and Brad DeLong once again are arguing about policy. And once again, they are showing the limitations of the blinkers that mainstream economics imposes upon its true believers. Larry Summers in this article defends the Fed Reserve rate hike on the grounds of the need of monetary policymakers to preserve "confidence" in the currency, which generated this response by Brad DeLong. Throughout the debate, the factoid that rate hikes improve investor confidence is assumed, without any reflection whether this is actually the case.…

Bond Economics
Policymakers And The Confidence Fairy
Brian Romanchuk

Brad DeLong — Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models

Larry Summers on monsters under the bed.

LS: Paul asserts that a damaging confidence crisis in a liquidity trap country without large foreign debts is impossible, because if one developed the currency would depreciate, generating an export surge.

Paul is certainly correct in his model, but I doubt that he is in fact. Once account is taken of the impact of a currency collapse on consumers’ real incomes, on their expectations, and especially on the risk premium associated with domestic asset values, it is easy to understand how monetary and fiscal policymakers who lose confidence and trust see their real economies deteriorate, as Olivier Blanchard and his colleagues have recently demonstrated. Paul may be right that we have few examples of crises of this kind, but if so this is, perhaps, because central banks do not in general follow his precepts.

I do not think this is a pressing issue for the US right now. But the idea that policymakers should in general follow the model and not worry about considerations of market confidence seems to me as misguided as the view that they should be governed by market confidence to the exclusion of models.

WCEG — The Equitablog
(Early) Monday DeLong Smackdown: Larry Summers on How We Know More than We Write Down in Our Lowbrow (or Highbrow) Economic Models
Brad DeLong