"To sum up: MMT is wrong about money. Even supposing that it’s right, its impact is fiscally marginal. The government does have a budget constraint."
He is reasonably well informed about MMT and has presented an argument that has attracted Scott Fullwiler, Warren Mosler and JKH's comments, among others. Good discussion.
UPDATE: This is a good place to mention a previous post by Jack Sparrow at Seeking Alpha, The Trouble With Modern Monetary Theory. It is not as well argued as the post by Rognlie, who is familiar with the MMT literature while Sparrow is not. Scott Fullwiler, Warren Mosler, and Pavlina Tcherneva comment briefly. There are over 300 comments.
26 comments:
Hmmm. Both of those posts were rather obnoxious and arrogant. I don't know why critics focus on "seigniorage" as the only net gain to deficit spending. Isn't seigniorage in modern terms just the interest "refunded" to the treasury when the fed buys its bonds? The point is the money put into the economy via the original spending, or so I thought.
The author of the latter post reminds me of a boss I once had who said he couldn't understand why anyone would want to study philosophy. The answer I wish I had given him is (quoting Friedrich Schiller) philosophy means love of wisdom, but to love wisdom one must first be wise. The revolutionary thing about MMT is that a few economists are taking the trouble to educate the public about the possibilities a sovereign currency provides to advance the public good. Because they, well, care about society and its current and future welfare. This really seems to upset the people who like things the way they are.
Yes David there is a tone of arrogance there.
Look, for anyone new to MMT, what this fellow does that is a complete waste of time is he actually is concerned about the concept of "money supply". TIP (learned the hard way): Dont waste any more of your time studying or worrying about "money supply" measures such as M1, etc.. complete waste of time.
This fellow looks like he is enrolled at the MIT. His dismissive comments in his intro are textbook cognitive dissonance. MIT which I used to think was an engineering and hard sciences school apparently has an economics department. So of course an econ curriculum there will include a lot of math I'm sure.
To do math you need quantification. Measures of "money supply" fit the bill. Once you start keeping track of these numbers you can start to do all sorts of mathematical analysis on them, correlations, etc... But just because something can be measured or quantified and analysed does not mean it is relevant.
This fellow is in a position where he is now looking at MMT and starting to realize that he has spent the last 3 or 4 years of his life doing the academic equivalent of crossword puzzles or soduku when he thought he was doing something that was actually relevant to the study of how an economy operates.
He is probably still young and can change course if he wants to...
He is probably still young and can change course if he wants to
Its never too late to study military history. I recently came across a fascinating Civil War story about Union General Benjamin Butler (in peacetime, the sharpest lawyer in Massachusetts), whose unilateral decision precipitated the Emancipation Proclamation.
http://cwemancipation.wordpress.com/2011/04/02/benjamin-butler-contrabands/
Wanting to learn more about Butler, I came across his memoirs online and was delighted to learn he was a monetary reformer. Both as occupying general of New Orleans (who knew entirely too much about the banking industry for the city's bankers liking)--
http://books.google.com/books?id=0LIBAAAAMAAJ&pg=PA504#v
and later as a congressman (and Greenback Party presidential candidate), he was rather ahead of his time. A pity he turned down Abraham Lincon's VP offer in 1864.
http://books.google.com/books?id=0LIBAAAAMAAJ&pg=PA941#v
Can someone explain to me what this guy is talking about?
He seems to boil down to this:
"Even in the utterly implausible case where annual tax increases lead to a commensurate rise in the demand for money, the extra revenue from seignorage is just a fraction of the revenue you raised from taxes in the first place—this fraction being the nominal interest rate.
To sum up: MMT is wrong about money. Even supposing that it’s right, its impact is fiscally marginal. The government does have a budget constraint."
I am totally lost. What is he talking about? Where is his disagreement?
Andrew here is this "seignorage" again, this is the word Krugman used and for me at least it is not clear what they are talking about.... I'll try to look into it a bit more....
From intro econ I remember it bring the revenue the govt makes from creating money.
But what that has to do with MMT and any of its potential fallacies I have no idea.
He seems confused, like he thinks that MMT says the deficit isn't an issue (which as we all know MMT doesn't say that) because seigniorage takes care of it...?
You're right, Andrew, about what his post boils down to. Unfortunately, it's a complete misinterpretation of MMT, as the link I provided in my comments there demonstrates.
As others here have explained, it's rather commonplace to believe you've found "the fatal flaw" in MMT long before you actually understand MMT.
I think seigniorage for them is the same thing as net private holdings of treasuries.
Or "real" interest paid on that debt.
Or if too little interest is paid it is the inflation because of it. Or something like that.
It looks to me like Matt Rognlie was not well informed at all about MMT at the time of his original post. When MMT was explained to him, he seemed to agree with most, if not all, of MMT. Excellent work by Fullwiler, Mosler, JKH, and others in bringing up to speed in a respectful manner...
Agreed Dan. I'd like to hear is opinion now that he is more informed. It's not clear where he stands. Same with Nick Rowe.
Steve Waldman seems to be in the MMT camp...
As I recall, Nick Rowe was similarly dismissive about MMT when he first commented in Steve Waldman's blog (Interfluidity). As he began to realize that MMT made sense, he turned to obfuscation. Others say that he is very smart, but he lost me through the manner of his discussion. Instead of, "Oh now I get it", it was more "That was I've been saying all along, but you didn't notice". At least Rognlie was straightforward in repeatedly saying "I actually agree with almost all of it"...
Yes, I thought that Matt was engaging and respectful. He had misinterpreted, but most do at first.
Yes, but at the same time, he was pretty disrespectful in the original post (creationism, windmills). It'd be nice if he now retracted those statements.
Andrew,
"Creationism/Windmills": This is the undergraduate language equivalent of what Krugman has written.
Resp,
Beowulf,
interesting about Butler. I wonder if his biographers tend to dismiss his reformist ideas as "aberrations in an otherwise brilliant career" as they do with Tolstoy's and Alfred Russell Wallace's.
Another point about history that seems to escape people who like to pontificate about it (using carefully selected examples) is that the great preponderance of evidence shows that man has suffered more, by orders of magnitude, from too little money rather than from too much. The periods called "renaissances" were brief respites in the general gnawing scarcity in Western Europe.
Note in the comments, Rognlie says I don't disagree with MMT per se.
Case closed.
Before I got that far in reading the article and comments, I made the following remarks whilst reading: He says MMT is to economists as creationism is to biologists almost as if he had been reading Rodger Mitchell's blog which makes that point about debt hawks.
Next he only "refutes" MMT in an American context. It is not as if MMT only applies to the US. Australia has been paying Interest on Reserves for years.
Rognlie neither accepted nor denied that taxes create demand for money, he dismisses it as irrelevant. Something that MMT more or less is based on.
Lastly he applies nonsensical fiscal/tax responses to a federal budget without any connection to real resources in the real world that MMT would.
Aside from that even Casual Reader, willingly or not was making a cogent case for MMT against what Rognlie was throwing out.
Regards,
Senexx
Dear all,
I have responded extensively to comments at the original post.
About the "arrogance": in the post, I was criticizing (vociferously) the claim that the ability to create base money relieves fiscal pressures on the US government in any meaningful way. I still believe that this claim is wholly wrong, and I am happy to use whatever arrogant and hyperbolic adjective is necessary to capture its wrongness: bizarre, insane, and incomprehensible come to mind.
At the same time, I recognize that different people have different ideas about what the fundamental tenets of "MMT" really are. (This is always one of the difficulties with criticizing an abstraction!) Many people have made cogent points that they have placed under the umbrella of "MMT". I would like to be very specific about what I am critiquing: I am responding to claims that the government can use its control of base money to avoid fiscal constraints. I am not open-endedly criticizing every belief that has ever been assigned the label "MMT".
At the time I wrote the post, I felt that it was legitimate to cast my criticism of MMT-ers' claims about fiscal policy as a general critique of "MMT", since it seems to dominate the MMT perspective on political issues---I can't tell you how many long-winded diatribes I've seen (from apparently respected members of the MMT community) about how silly economists and policymakers fail to recognize that they don't need taxes to raise money. Apparently, however, many people disagree with my characterization of this belief as a fundamental tenet of MMT. If they are right, then I suppose I was using the wrong acronym.
David, not really, I guess because his whole career was a series of brilliant aberrations. Since we're OT, I'll just suggest you read this great story.
http://www.civilwarhome.com/butlerwomanorder.htm
By the way, I would like to extend an invitation for anyone here to explain to me why the ability to issue debt in the form of base money is so fiscally beneficial. I agree (as I have stated at length in the comment section of the original post) that it is theoretically possible for the government to issue all of its debt in the form of interest-paying bank reserves, but I don't see how this justifies claims that the government can act freely of any budget constraint. If it's paying interest on reserves, there's a still a cost to financing its debt! (And there will still be limits to how much investors are willing to hold, much as these limits exist for debt in the form of bonds.)
Even if the government pays a very low nominal rate of interest of reserves, this doesn't mean that the real costs are any lower. Economists almost universally agree that the real interest rate, in the long term, is pinned down by real factors like investors' preferences for intertemporal substitution and opportunities for capital investment. If you disagree with this, and you have some competing theory by which the Fed can change the long-term real interest rate through purely nominal manipulations, then I'm happy to hear your case. Otherwise, a decrease in the nominal interest rate (enacted via a decrease in interest paid on reserves) will simply manifest itself as a decline in the long-term rate of inflation, with no fiscal benefits whatsoever.
Welcome, Matt. I am going to promote your question to a separate post.
I agree with Scott F. that the exchange in the comments at your place was civil, and we are glad that you are interested in what is going on wrt MMT. Everyone learns from informed debate. What MMT professionals object to is being criticized by those who have not informed themselves about the MMT literature. For example, there is a widespread but erroneous idea that MMT'ers hold that "deficits don't matter." What MMT'ers have said is that deficits don't matter in the way that many people think they do. But they do matter very much. Getting the fiscal balance right is a significant aspect of MMT.
To summarize a basic insight of MMT in terms of sectoral balances and functional finance, the appropriate government fiscal balance is determined by changes in the nongovernment balance (domestic private sector and external sector). The three balances sum to zero as a national accounting identity. When nongovernment is in surplus (like now), then government needs to offset this with a corresponding deficit, if the economy is not to underperform owing to demand leakage. That is to say, to the degree that both the domestic private sector and the external sector wish to net save, the government fiscal balance has to make space for this by providing the net financial assets in offset, which it does through deficit expenditure.
MMT holds that government can act independently of an interest rate constraint because it is the currency monopolist, controlling price and quantity. It can set not only the overnight rate but also influence the yield curve, e.g., by declaring the rate it desires to set, say, on the long bond, and then standing ready to purchase any quantity necessary to hit its target. Then, POMO is similar to OMO wrt setting and hitting the target rate. Now the Fed is using quantity rather than price. Generally speaking though, MMT'ers are interested in fiscal more than monetary. However, Scott Fullwiler holds that the core issue is the interest rate on the national debt and how it is set.
BTW, did you see Galbraith's latest, which is on the IGBC? Is The Federal Debt Unsustainable? Jamie claims it is not unsustainable. Here are some MMT links I posted about MMT and the IGBC.
Admittedly, this is sketchy, and I am not an economist. We are in the process of putting together an MMT wiki to make it easier to find articles and posts by MMT professionals, but the project is in its infancy.
If you want to get MMT from the horse's mouth, so to speak, I recommend you drop in over at Warren's place. If you ask a question or make an objection, Warren always answers. Warren posted on Galbraith's article on debt here, and that would be a good place to jump in with your questions above. I also recommend looking at the mandatory readings (in the menu bar), especially 7 Deadly Innocent Frauds.
I hadn't realized the discussion had spilled over to here. But since it has, I'll re-post my comment made after I asked Matt whether he still believed that MMT was "nonsense" and creationist. Matt then doubled-down and I replied with this:
Thanks for clarifying that, Matt. You said:
"I still think the notion that control of the monetary base relieves the government of the need to satisfy a budget constraint is absurd, and akin to creationism. Since I viewed this belief (based on my previous interaction with MMT advocates, as well as an examination of their positions in public debate) as a central tenet of MMT, I felt that it was reasonable to call MMT “nonsense”.
I agree that it’s a central tenet of MMT that there is no Governmental Budgetary Constraint on nations with non-convertible fiat currencies having floating exchange rates and owing no debts in currencies other than their own, except for self-imposed budgetary constraints. But I don’t think your arguments earlier have shown that this view is "nonsense." MMT economists say that such nations are always capable of spending by marking up private sector accounts since there are no constitutional limits on their ability to spend. Now, I think that this is a fact. Can you really sensibly challenge this?
I know you can say that the unlimited exercise of this authority by the Government can have terrible effects. And, I don’t think any MMT economists either disagree with you on that, or that the Government ought to engage in unlimited spending. What MMT people do say, instead, is that all Government spending should be assessed from the viewpoint of its impact on the economy and society and should be evaluated in terms of whether it fulfills public purposes.
Government deficit spending that created inflation would not fulfill such purposes, so generally MMT is opposed to such spending unless there’s good reason for thinking that any ensuing inflation is counter-balanced by other positive benefits of that spending.
Now one may look at deficit spending after the output gap is closed as a Governmental Budgetary Constraint, if one wants to. But that’s not what President Obama is talking about when he says we can’t afford this spending or that spending because we are running out of money. No, he’s saying that the Government can only fund its spending by taxing or borrowing, and this, not to put too fine a point on it, is either a lie, or a gross display of ignorance. Surely you would not endorse such a distortion?
Above, in replying to Warren you said:
“On Fraud 1: I agree that the government cannot formally default on nominal debts if it is willing to inflate away those debts.”
You may think the above, but Warren has never said that, so he does not agree either with you or that this is something that MMT economists advocate. In fact, I dare say that he probably thinks that any such construal of what MMTers think is pure nonsense and a result of being unwilling to read MMT texts very carefully.
What Warren says is that whatever the level of accumulated Government debt, the Government’s capacity to spend in the here and now is exactly the same as if it had accumulated no debt at all. Whether it’s spending in the here and now will inflate away its debts, is an entirely different issue. MMTers think that as long as an output gap exists in the economy demand-pull inflation will not occur, and so the currency will be not be inflated.
They also think that if the output gap is closed and such inflation does follow because of unwise continued deficit spending, that it will occur because of that excessive deficit spending, regardless of the level of previously accumulated debt.
I’ll end now because it’s late. But I also advise that you reconsider each of the comments you made on Warren’s frauds. Each and every one is either demonstrably wrong-headed or terribly unclear or both. Anyway, goodnight for now. Hopefully, in the next few days I’ll have a chance to reply to your post with one of my own.
I note that Matt also thinks that the Randy Wray's recent advice not to listen to "S & P" is "ridiculous"; which suggests that he denies the view that the Government, including the Central Bank and the Treasury, can control interest rates on debt instruments. I also think that this denial is one of the reasons why he thinks there is a GBC.
Also, I don't think that Matt is open-minded about whether or not there is a GBC. Perhaps I'm wrong about this, but if I'm right, the implication is that no amount of discussion will result in changing Matt's mind about MMT. He's just invested in the idea that there must be a GBC.
I hadn't realized the discussion had spilled over to here. But since it has, I'll re-post my comment made after I asked Matt whether he still believed that MMT was "nonsense" and creationist. Matt then doubled-down and I replied with this:
Thanks for clarifying that, Matt. You said:
"I still think the notion that control of the monetary base relieves the government of the need to satisfy a budget constraint is absurd, and akin to creationism. Since I viewed this belief (based on my previous interaction with MMT advocates, as well as an examination of their positions in public debate) as a central tenet of MMT, I felt that it was reasonable to call MMT “nonsense”.
I agree that it’s a central tenet of MMT that there is no Governmental Budgetary Constraint on nations with non-convertible fiat currencies having floating exchange rates and owing no debts in currencies other than their own, except for self-imposed budgetary constraints. But I don’t think your arguments earlier have shown that this view is "nonsense." MMT economists say that such nations are always capable of spending by marking up private sector accounts since there are no constitutional limits on their ability to spend. Now, I think that this is a fact. Can you really sensibly challenge this?
I know you can say that the unlimited exercise of this authority by the Government can have terrible effects. And, I don’t think any MMT economists either disagree with you on that, or that the Government ought to engage in unlimited spending. What MMT people do say, instead, is that all Government spending should be assessed from the viewpoint of its impact on the economy and society and should be evaluated in terms of whether it fulfills public purposes.
Government deficit spending that created inflation would not fulfill such purposes, so generally MMT is opposed to such spending unless there’s good reason for thinking that any ensuing inflation is counter-balanced by other positive benefits of that spending.
Now one may look at deficit spending after the output gap is closed as a Governmental Budgetary Constraint, if one wants to. But that’s not what President Obama is talking about when he says we can’t afford this spending or that spending because we are running out of money. No, he’s saying that the Government can only fund its spending by taxing or borrowing, and this, not to put too fine a point on it, is either a lie, or a gross display of ignorance. Surely you would not endorse such a distortion?
Above, in replying to Warren you said:
“On Fraud 1: I agree that the government cannot formally default on nominal debts if it is willing to inflate away those debts.”
You may think the above, but Warren has never said that, so he does not agree either with you or that this is something that MMT economists advocate. In fact, I dare say that he probably thinks that any such construal of what MMTers think is pure nonsense and a result of being unwilling to read MMT texts very carefully.
What Warren says is that whatever the level of accumulated Government debt, the Government’s capacity to spend in the here and now is exactly the same as if it had accumulated no debt at all. Whether it’s spending in the here and now will inflate away its debts, is an entirely different issue. MMTers think that as long as an output gap exists in the economy demand-pull inflation will not occur, and so the currency will be not be inflated.
They also think that if the output gap is closed and such inflation does follow because of unwise continued deficit spending, that it will occur because of that excessive deficit spending, regardless of the level of previously accumulated debt.
I’ll end now because it’s late. But I also advise that you reconsider each of the comments you made on Warren’s frauds. Each and every one is either demonstrably wrong-headed or terribly unclear or both. Anyway, goodnight for now. Hopefully, in the next few days I’ll have a chance to reply to your post with one of my own.
I left this late comment 5/9/11 @11:00 PM on Matt's post and the related exchange.
"I’m not saying that economists can predict the long-term equilibrium real interest rate—just that it exists."
Well, if you don't have a coherent theory to explain past long-term "equilibrium real interest rates" and you also can't predict the current "long-term interest equilibrium interest rate," then what reason do you have to believe that is remotely scientific that an "equilibrium long-term interest rate" exists. You've accused MMT theorists of "creationism," presumably because you believe that certain aspects of MMT theory are "metaphysical", even "religious" in character, as is creationism. But what then of your belief that "equilibrium long-term interest rate" exists? isn't that a "metaphysical," even "quasi-religious" belief motivated by your seeming commitment to the neo-liberal economic paradigm with its unquestioning faith in the ultimately determinative influence over the international economic system of the bond markets? So, who's the creationist now?
More importantly, since your disagreement with MMT seems to be coming down to your belief in the existence of an "equilibrium real long-term interest rate," shouldn't you be trying to devise a crucial experiment or test of the theory that such a rate exists? And, if you can't imagine how to do so, doesn't your continued belief in its existence, come to down to a metaphysical belief without practical utility? And, if that's so, if we were to reject MMT-based policies because of this belief of yours, wouldn't we as Trader's Crucible recently said in connection with his recent criticism of the IGBC, be:
". . . little more than cave people sacrificing the lamb and burning it on a stone altar to hold back the wrath of the always angry gods for another year. . . ."
You also said:
"By the same token, any economist who told you that he could predict the path of oil spot market prices over the next 50 years would be crazy. That doesn’t mean that oil prices aren’t determined by supply and demand, or that government intervention into the market would have more than a transitory impact."
While this is true. it doesn't mean that oil prices in the spot market are entirely determined by supply and demand either. While I'm no expert on the spot market, it appears to me that the Saudi monopolist sets the boundaries of prices on the spot market, and that the ling-term path of these prices will be determined very much by whether we choose to remain dependent on oil, and to the extent that we do where the Saudis decide to set the prices.
Finally. as you can gather from my previous comments, I believe that your earlier comments that the MMT view asserting that ". . . control of the monetary base relieves the government of the need to satisfy a budget constraint is absurd, and akin to creationism," was quite unreasonable and also irresponsible. I asked you earlier whether you still believed that after a lengthy exchange with MMT supporters. You replied by doubling down.
Now there has been much more discussion of the differences between your views and MMT, and the result is that your contention that there is a GBC comes down to the truth of your belief that an "equilibrium real long-term interest rate" exists, and you have shown us that 1) you have no good theory accounting for the existence of such a rate, and 2) you cannot predict the long-term path of this so-called real interest rate constraint in order to test any theory you do have. So, since, at best, the validity of your own view that an IGBC derived from this constraint exists, is as much a hypothetical as the MMT theory that there is no such constraint, are you ready now to give up the "absurd" and "creationism" which were surely designed to marginalize MMT?
I stumbled across this website and noticed that it was the same guy (Mike Norman) who so famously ran his big mouth talking about how there would be no housing bust and lambasted those who said otherwise. Mike, you are arrogant/delusional on a new scale. Yes, MMT has some interesting points but for all those who believe that a country that can issue its own currency can have no large problems, you will be in for a rude awakening in due time. Is it interesting that all these so called "new" economic theories always come about when the world is on the verge of blowing up? Keep that in mind.
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