I’ve read that many of the most vicious fights in relationships have nothing to do with the immediate subject. Instead, deep-seated but unrecognized disagreements are often the real source of conflict: that row over how the bed was made was really about the fact that he’s unwilling to spend Christmas at her parents! I think there’s something similar going on with the current MMT/nonMMT debate in that there is a core inconsistency that not only places the two views on very different planes, but it is largely unspoken. It’s the elephant in the room.
That elephant is the full-employment assumption. It is such a mainstay of the various nonMMT views that it is second nature to them. In fact, even orthodox economists who lean towards interventionist policies believe the economy automatically seeks full employment. Take, for example, this statement by former Obama advisor, Christine Romer:
Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever.
I’ll call this the FEA, or full employment assumption, position.
By contrast, the Keynes/Post Keynesian view within which MMT exists argues specifically that the market system is prone to systematic breakdown and extended slumps brought on by insufficient demand. That the economy regularly languishes at less than maximum capacity is absolutely critical to a whole range of Post Keynesian analyses and recommendations. It is always in the back of our minds and represents the single most important driving force behind policy. Call this the IAD, or insufficient aggregate demand, position.
Now consider the debate as it emerges from these two largely-unstated positions with respect to the overall level of economic activity. For IAD+MMTers, it’s not simply that we are arguing that deficit spending is sustainable because it is financed in currency we are permitted to print. That makes it sound as if it’s just a matter of convenience. But, there is a much greater urgency to it. In the absence of government injections of income and wealth into the economy, we experience poverty in the midst of the capacity for plenty. The IAD view argues that government spending doesn’t crowd out private spending, it expands it. Deficit spending is necessary to the very success of capitalism because it represents the supplement to demand needed to take us to full employment. While the severity of this problem may vary over time, it never goes away. It is systemic, potentially offset via deficit spending (the specific form of which would be the subject of a different discussion).
But in the FEA vision, deficit spending is discretionary, largely unnecessary except for short-term fixes. After all, the economy is eventually going to correct itself, anyway. To some extent, demand management is merely a political expedient made necessary by the fact that unemployed workers are unwilling to wait for the natural processes to reassert themselves. And so, like money borrowed for a vacation abroad, deficits are a burden (and ultimately an unnecessary one).
It is my opinion that this is responsible for a critical underlying current in the debate between MMTers and nonMMTers. While on the surface we focus on the operation of modern financial systems and central banks, the split between FEA vs. IAD means that each side is placing this discussion into a radically different framework. And because this isn’t consciously recognized, we each feel exasperation over the fact that our opponents can’t see the obvious logic of our position.
I wonder if we should be making this more explicit? Obviously, the central argument is still with respect to the financing of government spending. And I don’t deny that MMTers do, in fact, make frequent mention of the need to bring the economy to full employment. What is less in evidence, however, is a conscious recognition of the fact that this (and not just the operation of the monetary system) is an absolutely critical point of departure. Because of IAD, we don’t see deficit spending as a quick fix. Rather, it is a permanent, and completely affordable, feature of a healthy capitalist economy. We can’t afford not to do it.
[For those more familiar with MMT than Post Keynesian economics, here is an explanation of the IAD position:
Or, if you want a less technical piece, here is one I wrote for my online gaming friends:
It seems in fact that US Mainstream Economics over the last two decades, combined with the process of financialization, actively drives unemployment in developed nations such as the USA by placing all domestic labor that can be performed in other countries in price competition with the cheapest labor on the planet. That this will be compensated by the development of new, more sophisticated domestic employments is more assertion than reality.
ReplyDeletePrecisely. This is one of the many areas affected by the full-employment assumption. To the mainstream, exporting the jobs that had allowed those with just high-school educations to earn a decent living is no problem at all, they say, because other jobs will replace them. Of course, if you are an international trade theorist, this is merely an assumption of your model and not a result of the analysis. One of the very first things you do while setting up comparative advantage is say, "Let's assume full employment." You have to, of course, because comp. adv. depends on the existence of opportunity costs--which are undefined under less-than-full employment since you can have more of something without giving up anything else.
ReplyDeleteJohn, I would presume that neoliberal models assume full employment since full employment is the equilibrium state for them to which the economy return after any shock that might disrupt equilibrium.
ReplyDeleteThe Keynesian revolution lies in pointing out that taxation and saving constitute demand leakage, so the natural state of a moden economy is unemployment unless fiscal deficits offset the leakage. Is this view correct?
Close enough, Tom. I would only add that a) the Keynesian revolution never took place since the mainstream adopted a concept or two of his and superimposed it on their full-employment model and b) deficit spending, per se, has never been the core of Post Keynesian (i.e., economics of Keynes) economic policy. It's the means, but not the end. Keynes called the socialization of investment (large-scale government investment projects), while modern PKers have argued for employer of last resort schemes.
ReplyDeleteBut, yes, that was *supposed* to be the core of the Keynesian revolution: involuntary unemployment is the rule, not the exception, in a free-market economy.
John,
ReplyDeleteThis is the crux of it for many of us non-economists wrt MMT, ie the full employment issue, and how MMT shows us the way to get there.
Tom touched on it, and I get this from Prof Wray: When the govt moves in with a coercive spend/tax system in order to provision itself, everyone is immediately unemployed by mathematical definition.
This fact is hard for many to "see" or visualize. One needs highly mathematical cognition to see this abstract concept.
The problem may be historically that that same govt is the monetary authority. So you have a govt that first and foremost is just trying to provision itself (think of our ancient Roman ancestors moving into Brittania 2,000 years ago, how many denarius did they know to take with them? 4 jars per legion? 5? They didnt know how many people were in Brittania and they didnt care, they just needed their legions provisioned so they took along enough coinage to do so, probably a ratio of denarius to soldiers that they used) and spending enough to do so, but then it doesnt realize that as everyone then wants to start trading/saving in that same unit that govt has to run deficits (ie spend more than it takes in) in order to leave enough units "circulating" in the non-govt sector to allow all desired transactions to settle.
From my point of view, govts typically do not recognize this requirement for them to get more than just the amount THEY (govt) need in "circulation". Then it quickly becomes who can screw the next person out of their tax units.... and stay out of jail... etc...
This is a good point I hope you stay on it. From my experience many are attracted to MMT solely just for the full employment aspects.
Resp,
Thanks, John. I was thinking in terms of a "Copernican revolution" in economics rather than a fait accompli.
ReplyDeleteThe darn thing is that it is so second nature to the mainstream, that the assumption isn’t mentioned out loud. Hence, non-economists don’t even get a chance to say, “Whoa! What??!” because they never hear it said. Why do they so cavalierly assume full employment (or at least a strong tendency thereto)? I think there are a couple of reasons, one being that the complex mathematical models become indeterminate without it. And there are no tradeoffs. Remember that high-school level definition of the discipline? “The science of scarcity.” That’s a full-employment world.
ReplyDeleteWhat a perverse world in which those who assume that financial crises and recessions can’t really happen are the ones who get to decide how to fix them.