An excerpt: "But who cares if the dollar value of “Gross Domestic Product” goes down? If prices fall even more, then Americans’ standard of living goes up. For example, if the Tea Party activists actually held Republicans’ feet to the fire and Uncle Sam didn’t raise the debt ceiling, then the government would have to slash $750 billion or so from this year’s spending to avoid default on the existing debt".
"That would mean that there was a sudden loss of $750 billion in income to various people in the economy. A large part of it would probably be made up by income generated in the private sector, as the government’s deficit disappeared and people expected lower future tax burdens. But even if it didn’t, so what? The quantity of skilled workers, raw materials, and machine tools wouldn’t decrease just because Uncle Sam started living within his means. After prices adjusted downward, Americans would find they could buy more with their lower incomes".
On the comment, "A large part of it would probably be made up by income generated in the private sector, as the government’s deficit disappeared and people expected lower future tax burdens."
ReplyDeleteWouldn't that basically be opinion of other's people's opinion?
It's very clear that Murphy doesn't know what he is talking about.
ReplyDeleteSaying that private sector will generate increased dollar incomes during deflation is like saying that if the local Drug Store reduces the number of coupons in its mailers then people will use more coupons.
Like most radical laissez faire economists, Murphy seems to think that government spending is so barren, wasteful and vacuous, that all it does is chase up higher prices with no influence one way or another on the level of production. He first halfheartedly defends the Ricardian substitution idea. But his central point is apparently that the withdrawal of government spending would represent a pure withdrawal of money, with no impact at all on real economic activity. So prices would drop, output would stay where it is, and Americans would suddenly find themselves richer in real terms.
ReplyDeleteThis is idiocy. Governments purchase with tax revenues a large number of goods and services on behalf of their constituents; and they also produce some of these goods and services themselves. Government is not just a mechanism for bidding up prices on goods and services that would be produced anyway. There is no empirical or rational basis at all for Murphy's crazed libertarian-Austrian dogma that a drop in government spending would represent a pure drop in monetary exchanges, affecting the price level but nothing else.
So ultimately the Austrian argument has to come down to Ricardian and other substitution arguments: that drops in government spending on goods and services will be quickly made up for by even more sizable increases in private sector activity. He says:
"Deficit spending makes things worse because the politicians transfer resources out of the beleaguered private sector and direct them into boondoggle projects."
Apart from the fact that he is ignoring MMT and other post-Keynesian calls for spending financed by high-powered money creation rather than taxation, he just shows little appreciation for the actual and potential productivity and importance of government spending. There are certain kinds of spending that governments do very well and effectively, and that the private sector can't approach. This includes spending on large, national-level or state-level public investment projects that require commanding capital and property resources on a scale that a decentralized, localized and fragmented private sector can't manage. (The decentralization of the private sector is, indeed, its strength and the source of its adaptability; but that same decentralized adaptability means there are very important things the private sector can't do.)
The public sector also has the capacity to employ and distribute incomes to large numbers of people rapidly - whether it does this via money creation or redistibutive taxation on the wealthy. This is important, because unregulated private activity in a financial economy exhibits self-destructive and productively inefficient global tendencies in upward wealth re-distribution that need to be redressed by deliberate countervailing action. A certain portion of private activity consists in little more than clever quantitative schemes for leveraging the power of existing wealth to transfer even more wealth from the accounts of more productive people to less productive people, in exchange for no actual productive work, and to pay service fees to the administrators of these schemes.
Austrians are guility of a lot of old-fashioned "ecological" equilibrium thinking in their economics. Unlike people like Minsky, they don't understand the dynamic, self-destructive instability built into unregulated market activity. Capitalism tends to impoverish and underemploy larger and larger percentages of its own customers over time as individual capital owners pursue activities that are individually rational and self-interested but collectively destructive to the interests of even the capitalists themselves.
So one of the roles of economically enlightened government should be to preserve the incomes and bargaining power of working people, and that requires maintaining both full employment and a system laws that prevent the the gradual upward flow of wealth concentration through speculative and Ponzi finance - and simple flim-flam and fleecing.
Good one, Dan, but you left out what Austrians say about the real business cycle. When the bust comes, "liquidate, liquidate, liquidate" to purge malinvestment, which, of course, transfers massive real wealth to creditors due to foreclosures and settlements. What they don't get on the upside, they get on the downside. Why anyone but the very wealthy would think this is a good idea beats me.
ReplyDeleteThanks, Kevin. Mind-boggling stupidity. No concept of effective demand, where money comes from (debt), and financial fragility if the public decided to borrow on that scale privately. And it it didn't, then crash and burn.
ReplyDeleteI gave up arguing with Austrians a long time ago. They are Exhibit A among people who build their conclusions into their assumptions. If the economy flourishes, they say, "Look how successful the market is! It's growing wealth!" Then, when the economy tanks, they say, "Look how successful the market is! It's purging malinvestment!" They simply define the market as that which does good things and government as that which does bad things. Then they crow about the wonders of the private sector.
ReplyDeleteWhy anyone but the very wealthy would think this is a good idea beats me. There would be a lot fewer "Austrians" if these "Austrians" realized that for all but a very, very few, they themselves are malinvestments in the Austrian mind.
ReplyDeleteAnti & Calgacus sum it up perfectly. They guy is a waste of oxygen as it is, and giving him 'airtime oxygen' is just futile.
ReplyDeletethe interesting thing is he admits that prices would fall if the US stopped spending as it has been. He knows that he's wrong and that the US is going to crash farther if that were to happen.
ReplyDeleteIt seems like every day here in my town (Los Angeles) I see new and more severe and seemingly permanent examples of homelessness and poverty everywhere I go....and this is LA for crying out loud!!! And quite frankly when producers lower their prices in a deflationary setting it's not by THAT MUCH in comparison to not having a job at all or getting your paycheck cut in half!!!
freaking idiot.
Mr. Fathi, thanks for linking to my article. I'm glad your readers will get both sides. If you want to see my full-blown critique of MMT, it is here.
ReplyDeleteIncidentally, my colleague alerted me to your post, saying, "Is this guy calling you a douche?"
I dissented, thinking that you were merely saying a "good, cold douche" was necessary to flush away my toxic views.
We would greatly appreciate a clarification.
Hi Bob,
ReplyDeletePleasure to have you join us. Sleight of hand name calling aside, let's talk economics & MMT.
Please note that my post here is in two parts b/c it exceeds the limit. Consider this Part 1 while part 2 immediately follows this post.
I have read your article at least twice now and I find it fascinating. In my view, you do a noteworthy job of explaining the accounting identities and sectoral balances. You really do understand what MMT is saying in that regard and that was stated very well in my view.
However in part 2 of your article you seem to forget all of that and what MMT is saying.
For one, you seem to think that MMT supports higher taxes at this current time. You make a flawed argument against MMT here when you state,
"But what is the point of accumulating bonds that will only be redeemed when Uncle Sam coercively raises the necessary funds from the same group of Taxpayers in the future?"
YES...MMT agrees with you!!! Taxes decrease net financial assets of the private sector. Not only this but MMT states that raising taxes on the private sector is equivalent to the government cutting spending. Depending on the state of an economy, these actions can be helpful or destructive...right now for example it would be and is destructive. So the fact that Uncle Sam taxes the private sector which there-in takes away from the private sector their net financial assets is EXACTLY WHAT MMT HAS BEEN SAYING. In other words, we agree with you my friend. You are attempting to debunk MMT by stating one of the very premises of MMT...that ummm...doesn't work...or make sense. Also it is noteworthy to add that MMT would go even further than you in regards to taxes and say, with actual reality to back it up, that the government does NOT NEED to "raise the necessary funds" as you falsely state in the above quote. This is b/c the government is the issuer of its own currency in a floating exchange rate system that is non-convertible. I am sure you've heard that statement before considering how well you understand MMT sectoral balances. Do you disagree with that premise? If so, how and on what basis?
Part 2
ReplyDeleteThe second point you seem to be attempting to make, though you never prove it or expound on it, is that "private sector" money is somehow better than nasty "government money." You state:
"It's simply not true that $1,000 in private consumption or investment spending is an equivalent amount of "real output" to $1,000 spent by bureaucrats who raised the money without the consent of their "customers" and who MAY [my emphasis] very [well?] operate under a "use it or lose it" appropriations process."
Really? How is it "simply not true"? I ask b/c first off the sectoral balances, accounting identities, and the various ways in which we measure and gauge our economy all disagree with you on this point. Period. The economy does not make "value judgments" on money so long as it is legitimate, legal tender. Heck many of the wealthiest "private sector" businesses get a substantial amount of "money" from the US government directly!!! And not only this but ALL money comes from the government as a simple point of logic to begin with. So ummm...on what logical basis do you make such a claim?
But none-the-less let's cast these fundamental economic realities aside for a moment and address your "logic" on its own terms. We all have our political differences, and quite frankly I don't support useless spending or misappropriations either...however to equate such misappropriations with government spending is just as ludicrous as to think all private sector spending is some sort of manna from heaven and can do nothing inefficient, ineffective, or even destructive...umm...I think we have evidence that may suggest otherwise...yeah?
Not only this my friend but you fail to realize that money is money...truly a US dollar from this person IS NO LESS VALUABLE than a US dollar from that person (or government body, etc.). For example, if you are a teacher and you work in a school that is funded by the government and they pay you $45,000 a year. And then all of a sudden that school is now run by a private institution that pays you $45,000 (if you're lucky of course!!)...do you think ANYONE in their right mind (I know that's a big assumption but bear with me) would think that the "private sector" dollar is somehow "better" than the "public sector" dollar? They both pay the same amount on the mortgage, ice cream cones for the kids, medical bills, and etc., etc. They contribute the SAME AMOUNT to the macro economy, to consumer spending, to demand, etc. One is NO LESS VALUABLE than another. To deny this economic fact is to literally laugh and sneer in the face of logic himself.
Based upon how well you explained MMT in the first half of your article, I am confident that you would agree with these points or at least be able to provide more relevant and sound evidence and logic for all of us to consider in order to constructively discuss these points further. If not, would it be illogical to consider that possibly you have a conditioned bias for some personal/private reason that does not allow you to actually understand or publicly admit the way your economy actually works?
Thank you and I look forward to hearing from you...as I am sure we all do here.
All the best
"Really? How is it 'simply not true'? I ask b/c first off the sectoral balances, accounting identities, and the various ways in which we measure and gauge our economy all disagree with you on this point. Period."
ReplyDeleteThe fact that government created economic measures might give undue weight to government spending is not really very surprising, is it?
A thousand dollars spent by a private company has a profit / loss check built in that tends to ensure it is not really wasted. Government spending has little in the way of such checks.
I mean, really, this was brought up by the rather left-wing macro textbook I taught from last semester. It's not as though Dr. Murphy has made some startling "Austrian only" point here!
Hi Gene,
ReplyDeleteA profit/loss check doesn't make one dollar more valuable than another.
$1,000 from a dividend pays you no more than $1,000 from social security. Period.
And if what you say really is true, how would you explain the value of a stimulus check? There's no profit/loss attached to that either. So is it worthless? And in fact, what if a private company goes bankrupt? Does that mean that their money is less valuable now compared to a more solvent company? P/L checks are not applicable in this discussion Gene. In reality the equivalent for a profit/loss check in business is an inflation/deflation check for our government. In other words, is the government spending up to and beyond its own output gap and into actual inflation? If so, it could be considered to be in a "loss" at that point. MMT recognizes this fact and addresses it head-on.
These points have nothing to do with Austrians or left/right politics. The only politics that I can think of that wants to completely deny the contribution of government to an economy would be an anarchist state correct? Real left/right politics (even fascist and communist for that matter) all agree that government can and will play a valid and necessary role in the economy...the question becomes to what extent. But I have never heard anyone actually suggest that the government's $1 is less valuable than the private sector's $1. No one that I know would turn down a check from the government on the grounds that it is less valuable than a check from a bank or a business (which all get their money from the government mind you...everyone gets their money from the government!!).
Bob seems to actually think or at least wants us all to think that $1 from a corporation is worth more than $1 from the government. That's just utter nonsense. A profit/loss check only speaks to efficiency and effectiveness NOT to value. Not only this but remember that a businesses can be making "profits" on their p/l check while the people are losing out big time (that kind of sounds like today don't you think?). So once again, the p/l check is not applicable here. And again as I said before in my post, I personally, nor my understanding of MMT at large, supports misappropriations (aka inefficiencies) in government spending. That is another topic of discussion which would be wonderful to have...however in order to get to that point, we all need to actually understand the economic facts and fundamentals regarding the monetary system we exist in. We need to at least all realize that $1 in this land is of the same value no matter where it comes from, so long as it is legal. And we also need to realize that the government cannot go bankrupt and why/how that works. From there we can start to actually draft and brainstorm changes and ideas that actually aren't so fear-based, let alone embarrasingly false. Government spending is not synonymous with misappropriations, just as private spending is not synonymous with solvency.
This comment has been removed by the author.
ReplyDeleteMario wrote: "A profit/loss check doesn't make one dollar more valuable than another."
ReplyDeleteYou misrepresent Dr. Murphy's correct point that as a measure of economic value government spending is less accurate than private sector spending and replace it with all MMT is capable of doing, re-stating accounting tautologies such as one dollar equals one dollar.
MMT is accounting, not economics. As such it lacks the tools necessary to grasp the obvious point that Dr. Murphy has made. Since everyone I have shown the below blog post that I wrote earlier this week has responded very similarly to how Gene Callahan responded above to you, I have re-posted it here as it seems you could actually benefit from the point I am making.
I've attempted to post this comment multiple times but it doesn't seem to be showing up in the thread. I'll try linking to the blog post now instead of copy and pasted the contents into my reply this time.
http://robertfellner.blogspot.com/2011/06/debunking-importance-of-gdp.html
So why does consumer spending work well in this regard, where government spending fails? The answer lies in the prices. In a free market, all participants are subject to the profit and loss test. Namely, if one consistently spends more than he earns, he eventually becomes bankrupt and removed from the market altogether. In order to prevent this "death by free-market" one must learn to generate a profit; which is done by allocating resources efficiently. As all market participants engage with one another in this task, prices emerge for all the various goods and services within the economy that reflect their valuation to the economy as a whole (the price of course being derived both from the subjective valuation of the good as measured against the scarcity of the good, put more simply: supply versus demand).
ReplyDeleteThis is precisely what gives prices such significance in the measuring of value. They have emerged organically as beacons of information about both the relative scarcity of the good contrasted with the market's intensity of demand. Thus, when we look at all of the spending that has occurred within an economy, we are provided with an aggregate of the wealth or utility that is gained precisely because the prices used to comprise "C", are prices that emerged from the free market and under the profit and loss test.
Government spending is a measure of spending that occurs outside of this profit and loss test. Since government and only government is in the unique position of being able to exist via taxation and the printing of money, it is not constrained by the profit and loss test and thus routinely overbids for goods. This results in government spending being less accurate as a measure of true wealth and value of the underlying goods purchased as the prices paid tend to be always higher than the existing market prices. Some examples include paying 200k to design a website and so on. I'm sure everyone has their own favorite anecdote of absurd government spending.
ReplyDeleteConsequently, all the interwoven factors that result in the prices that emerge within the free market and enabling spending to be an accurate measure of wealth, are completely manipulated if not outright destroyed under government spending. This inherent nature of government spending and its direct contrast with all that makes consumer spending meaningful in the first place is why G is a corrupted and inaccurate measure of wealth, and consequently the GDP = G + I + C formula is invalid when used as such.
Said another way, consumer spending is meaningful because it is very closely, if not exactly, accurate as a reflection of the underlying value of the goods purchased (produced). Conversely, government spending is significantly less accurate as a measure of wealth because its correlation to the underlying value of goods purchased is much weaker due to the lack of a constraint on spending and thus a tendency to overpay (sometimes quite drastically!) for goods and services.
"A thousand dollars spent by a private company has a profit / loss check built in that tends to ensure it is not really wasted. Government spending has little in the way of such checks."
ReplyDeleteThis presumption is gratuitous. Wall Street "inefficiencies" lead to the most serious recession since the Great Depression and could yet turn into Great Depression II. Even Alan Greenspan admitted that his presumption that the financial sector was inherently efficient was wrong.
Hi GrimHogun (is there a new person each time I post a comment...what happened to Bob anyway? LOL),
ReplyDeletesure. I understand what you're saying. But you have now admitted that government spending is not an issue for you so long as it does not overbid market prices. It's not difficult to bid at market prices for purchases with or without a p/l check. This is not a fundamental issue at all. You have also admitted that the government cannot go bankrupt either since you state they don't have a profit/loss check, therefore any "insolvency" arguments are now out of the question. You still seem to think however that taxation is "revenue" for the government. Could you please explain how an entity can have revenue but not a profit/loss check? ;)
You also implicitly admit that the government's $1 is still just as valuable as any other $1, you just assume that since the government does not have a p/l check that they will always overbid the price, causing imbalances in the market. That's VERY DIFFERENT than saying $1 from x is less valuable than $1 from y. However the government does not HAVE TO overbid prices, therefore you are setting up a straw man and then debunking it.
It is not difficult for the government to properly bid on its purchases. In fact, do you have any actual statistical evidence to show us all just how much, when, and where the US government overbids on its purchases? I'd be very interested to see figures beyond your "website" anecdotes.
What's even more interesting is that if you read Warren Mosler's 7 Deadly Sins you would find that he actually agrees with you and says the exact same thing! The simple solution is to simply not overbid on prices, which is easily accomplished. Frankly your argument is weak at best and has no relevance in debunking MMT, since the concept of government spending is not an idea found only in MMT.
Again, you are attempting to de-bunk MMT by simply re-stating MMT premises and stating nothing of relevance at all. That doesn't work. You should try reading up more on MMT and thinking it through more carefully, you might benefit from the points they are making. ;)
This is the Murphism I love most in the link above:
ReplyDelete"But who cares if the dollar value of “Gross Domestic Product” goes down? If prices fall even more, then Americans’ standard of living goes up. For example, if the Tea Party activists actually held Republicans’ feet to the fire and Uncle Sam didn’t raise the debt ceiling, then the government would have to slash $750 billion or so from this year’s spending to avoid default on the existing debt.

That would mean that there was a sudden loss of $750 billion in income to various people in the economy. A large part of it would probably be made up by income generated in the private sector, as the government’s deficit disappeared and people expected lower future tax burdens. But even if it didn’t, so what? The quantity of skilled workers, raw materials, and machine tools wouldn’t decrease just because Uncle Sam started living within his means. After prices adjusted downward, Americans would find they could buy more with their lower incomes."
Mind-boggling stupidity. Of course the quantity of real resources would not decrease. They would just be idle, unemployment would skyrocket, debt-deflation would kick, and we would be in another Great Depression. Nutty.
@Bob Murphy:I was referring to the quote from Joseph Schumpeter:
ReplyDelete"Gentlemen, a depression is for capitalism like a good, cold douche"
I was not calling you a douche.
LOL that is one heck of a quote eh?!?! LOL
ReplyDelete@Bob: However, I find the views of most Austrian School advocates to be morally repugnant and innumerate.
ReplyDeleteCase in point: “It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history".--Ludwig von Mises
ReplyDelete@Bob Murphy:
ReplyDeletehttp://politicalchili.com/2010/03/origins-of-the-tea-party-movement-part-1/
@Bob:
ReplyDeletehttp://tpmlivewire.talkingpointsmemo.com/2011/06/colbert-by-rand-pauls-own-standards-hes-a-terrorist-video.php
Your Mises’ quote is taken completely out of context. Mises was clearly (and merely) pointing out that (in his opinion) the pre-Hitler form of fascism had halted the spread of Stalinist mass murdering Communism in Italy. But he also makes clear that fascism is a brutal and ignorant movement because fascists cannot even argue or engage in debate (just like socialists) and that fascism will lead to a civilization-ending war:
ReplyDelete“Fascism can triumph today because universal indignation at the infamies committed by the socialists and communists has obtained for it the sympathies of wide circles. But when the fresh impression of the crimes of the Bolsheviks has paled, the socialist program will once again exercise its power of attraction on the masses. For Fascism does nothing to combat it except to suppress socialist ideas and to persecute the people who spread them. If it wanted really to combat socialism, it would have to oppose it with ideas. There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism. ****
So much for the domestic policy of Fascism. That its foreign policy, based as it is on the avowed principle of force in international relations, cannot fail to give rise to an endless series of wars that must destroy all of modern civilization requires no further discussion. To maintain and further raise our present level of economic development, peace among nations must be assured. But they cannot live together in peace if the basic tenet of the ideology by which they are governed is the belief that one's own nation can secure its place in the community of nations by force alone.
It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. But though its policy has brought salvation for the moment, it is not of the kind which could promise continued success. Fascism was an emergency makeshift. To view it as something more would be a fatal error.” Pages 50-51
http://mises.org/books/liberalism.pdf
"A profit/loss check doesn't make one dollar more valuable than another."
ReplyDeleteMario, no one ever said it did! That was not Murphy's original contention nor was it my subsequent one. The point is that if a manufacturer spends $1000 on a new machine, we have the $1000 spent AND A NEW, PRODUCTIVE MACHINE. If some Congressmen spend $1000 on a junket to Las Vegas, we have the $1000 spent and some hungover congressmen. That doesn't say government always wastes money and private actors always spend it well. But we can play the odds, can't we?
This is really elementary economics, Mario. If you don't get it you really ought to stick to English lit.
Tom Hickey: "This presumption is gratuitous [that government has no profit / loss checks]."
ReplyDeleteSo you think government DOES have profit /loss checks?! The rest of your remark sets up a strawman. I never said that private spending is always perfect or government spending always wasteful.
Look, let me repeat: I taught macro from a leftist textbook last semester, and the authors made this same point. It's just standard economics: the profit / loss motive promotes efficiency. These authors said there are OTHER reasons we still might want government spending (and I agree with them), but efficiency ain't one of them.
Look, when Bob comes back, ask him: I am a frequent critic of libertarians, and argue with him a lot. I am not a Murphy fanboy come here to defend him. But this criticism of him is STUPID, and Mario's dumbfounded incomprehension of the obvious point being made makes me wonder if I have wandered into the "economic-IQ-under-70-only" blog.
Tom Hickey: "Mind-boggling stupidity. Of course the quantity of real resources would not decrease. They would just be idle, unemployment would skyrocket, debt-deflation would kick, and we would be in another Great Depression."
ReplyDeleteWell, Tom, did you miss Bob's point about "If prices fell even further?" I am not aware of ANY economic theory, Keynesian, Friedmanite, Austrian, whatever... this holds that a drop in nominal GDP will produce a depression *even if prices can adjust fully*. The Keynesian mechanism by which a depression arises from a drop in nominal GDP is that quantities adjust instead of prices. (But of course, you knew that, right?)
What I see here is someone lacking the most basic economic education calling someone with a PhD from a top-ten school "mind-bogglingly stupid." It's a bit like watching a bar team softball hack telling Tony Gwynn he knows nothing about hitting.
@Bob Roddis:
ReplyDeleteFascism is not justifiable even as an 'emergency makeshift'. I also reject the Manichaeistic framing that liberalism is the counterforce to socialism. Why not a blend of both as in the mixed economy model?
okay Gene's coming out swinging...I guess that's what happens when you trap a dog into a corner. ;)
ReplyDeleteSo Gene are you trying to back peddle now and say that when you explained to us all that the government "overbids" on prices and creates imbalances in "the market," you are REALLY talking about all those purchases the guberment makes to fly and put up politicians at Vegas "junkets"? And that those same dollars spent on such "junkets" are "less valuable" than the dollars spent on a "machine" in the private sector? Is that what you have been trying to say all along???? I had no idea!!!! LOL You guys sure do expect us to read ALOT between the lines when you state,
"It's simply not true that $1,000 in private consumption or investment spending is an equivalent amount of "real output" to $1,000 spent by bureaucrats who raised the money without the consent of their "customers" and who may very operate under a "use it or lose it" appropriations process."
And I'm a literature major no less and I completely missed that sub-narrative on vegas junkets! I must have dozed off for a second, b/c reading this passage again I don't know how I missed that!
None-the-less, even if your conspiracy-laced logic is true, I am still sure that the hotels and airlines and restaurants that received those "overbid" prices for those politicians really appreciated those dollars spent (and private nfa would have increased...though I doubt any prices at those establishments did...even with "overbid" prices...I've been to Vegas and you can get some good deals there man)...wouldn't you agree Gene? But then again my anecdotal stats on Vegas don't exactly have much weight against the stats that you have provided us all on exactly how many "junkets" the gubernment really does spend and overbids on year over year. I must admit that evidence really tipped the bill for me. I'll tell ya Gene if you are a PhD in Economics then I should be expecting the nobel prize any day now!!!!
You are really very interesting to observe Gene. I believe some debate theories state that the first person to throw ad hominem attacks knows they have no substantive argument. Have you ever read that before?
You're a good guy Gene you really are, but the senseless personal jabs don't suit your character very well. I'd encourage you to stick more with the buffered "logic" that makes you feel all warm and fuzzy inside.
Unless more honest, thorough, sincere, and humane communication opens up in this "discussion," I doubt you will be hearing much from me again on this thread. I don't exactly have time for people that behave the way you are Gene...this is actually a rather important subject and I don't appreciate your flippant attitude towards it quite frankly. As Francis Bacon states in his Essays of 1597, "men that are great lovers of themselves waste the public. Divide with reason between self-love and society, and be so true to thyself as thou be not false to others, specially to thy king and country. It is a poor centre of a man's actions, himself."
You can contact me during my office hours if you need help with understanding it.
I did not question the fact that in general, markets make the private sector more efficient that government, which is not revenue constrained and has no cost of capital since it funds itself directly. I was implying that this is "in general" and cannot be applied to specific cases. The private sector can become wildly inefficient to the degree of creating economic havoc, and government can also go berserk in a variety of ways. That proves nothing other than human fallibility.
ReplyDeleteUnder normal circumstances, we, e.g., as shareholders, expect business to operate efficiently because competition requires it. We as citizens don't expect government to operate efficiently in the same way, because advancing public purpose is entirely different and government is neither revenue constrained, nor capital constrained, nor interest rate constrained, other than voluntarily, which it can change at will.
Private purpose is different from public purpose and the two cannot be compared on the same criteria. A chief purpose of the private sector is the increase of private wealth, real and financial. Owing to competition, efficiency is a fundamental requirement to continue to operate.
The sole purpose of government is advancing public purpose. In this government is expected always to be effective, even if not always efficient. The purpose of the military is to win, whatever it takes, and economic efficiency is not always a consideration to do so, nor should it be. Similarly, when the state of the economy is resulting it massive human suffering and degradation of resources, government is expected to act effectively rather than efficiently under these circumstances. Of course, in the larger picture, what the government does that may appear inefficient may be highly efficient given the alternative of social unrest, or even foregone opportunity that could have been captured with wiser policy. There is a different calculus operating here that is organic rather than mechanistic.
Secretary Meilon famously advised President Hoover to "liquidate, liquidate, liquidate." This is essentially Prof. Murphy's advice. (I won't go into the price theory that presumes that falling prices will save the day, other than to say that it ignores debt-deflation at a time of high private indebtedness due to corresponding lower wages and plunging asset values.) President Hoover wisely did not take this advice, although he also did not understand that the root of the problem was the culmination of a financial cycle rather than a business cycle and failed to initiate an appropriate remedy.
The politicians of today are well advised not to take Prof. Murphy's either, based on understanding that MMT provides. It will be a repeat of 1937, when stimulus was withdrawn too early, since non-government was still rebuilding savings and deleveraging at a rate greater than the budget cutting provided for.
The US has the financial ability to deal with the crisis forthwith, and had this ability from the outset, as MMT economists pointed out. The only reason that we are experiencing a near depression is due to ignorance of potential and perverse politics and ideology.
Mario: "So Gene are you trying to back peddle now and say that when you explained to us all that the government "overbids" on prices and creates imbalances in "the market,"
ReplyDeleteMario, I never said anything even vaguely resembling that. You have me confused with someone else.
Like you appear to have economics confused with, perhaps, bridge or lacrosse.
Mario,
ReplyDeleteYou appear to be way too ignorant of economics and dogmatically attached to MMT for me to be of any help to you. Good luck.
Ok so I clearly can't resist this one:
ReplyDeleteMario wrote: "It is not difficult for the government to properly bid on its purchases. In fact, do you have any actual statistical evidence to show us all just how much, when, and where the US government overbids on its purchases? I'd be very interested to see figures beyond your "website" anecdotes."
Here's one of 50 I found in less than 10 seconds of searching:
Washington has spent $3 billion re-sanding beaches -- even as this new sand washes back into the ocean.[27]
That reminds me of what's happening here. Nuggets of economic thought keep getting thrown at you, while never seeming to stick and just being relentlessly washed out to sea over and over again! Zing!
"Some people are just idiots and are unworthy of attention, other than ridicule."
ReplyDeleteLet me make my position here clear: I am a colleague of Dr. Murphy's. My positions used to be much like his, but I moved away from those, and now much more often I am a critic of his views.
BUT, he is a brilliant man and excellent (if mistaken!) economist. So I was shocked to come here and find a bunch of people who seemed to know nothing at all about economics, who obviously could not even interpret what Murphy had said correctly enough to begin to criticize it, engaged in a hate fest.
And now Mario makes this hilarious remark: "You are really very interesting to observe Gene. I believe some debate theories state that the first person to throw ad hominem attacks knows they have no substantive argument. Have you ever read that before?... Unless more honest, thorough, sincere, and humane communication opens up in this 'discussion,' I doubt you will be hearing much from me again on this thread. I don't exactly have time for people that behave the way you are Gene"
Mario, when I arrived at this site, here is what people were saying about my colleague:
"It's very clear that Murphy doesn't know what he is talking about."
"This is idiocy."
"Mind-boggling stupidity."
"freaking idiot."
"The guy is a waste of oxygen as it is..."
Gee, Mario, where were your complaints about the lack of "honest, thorough, sincere, and humane communication" when all that was going on? You were happy to join in the criticism, without a word of complaint about its tone.
So long as this hate fest was directed at someone you don't like, you were pleased as punch. But the minute someone turned a TENTH of that harshness at YOU, you started whinging about "honest, thorough, sincere, and humane communication"! In other words, you are a dishonest coward, Mario.
Oops, somehow the first of the quotes from the "thoughtful, honest and humane" commentators here wound up above my intro. This one was directed at Murphy as well:
ReplyDelete"Some people are just idiots and are unworthy of attention, other than ridicule."
As with 99.99% of all anti-Austrians, this present cohort of critics appears completely unfamiliar with any basic Austrian concepts such as the central concept of economic calculation.
ReplyDeleteokay but what happens when the market is going through massive de-leveraging and not spending? Do we just sit through it and wait it out...or better yet cut spending and tighten our belts even further? Why in God's name should we do that?
ReplyDeleteAnd what resources do you hear MMT economists propose be distributed by the government exactly?
As far as I have heard, it's not resources they propose, but rather tax cuts and continue with their normal business as usual...in other words keep the government involved in the economy as it is now and has always been and not lay people off in all the various agencies across the board and in fact create a jobs program so people that can work are able to work. I have yet to hear an MMT proposal for distributing resources and effecting market sentiment in the ways you suggest. Rather I hear MMT proposals for supporting the population and helping to bolster demand while everyone is delevaraging after a massive credit bubble. Am I misunderstanding something?
At least tell me this...do you think the government should cut taxes, raise taxes, or keep them as is...and why?
And welcome to the discussion too. How many of you are there exactly? LOL
also remember MMT recognizes that government spending will naturally vary and alter depending on the state of the economy. In other words, MMT is not just pro-government spending...that's not accurate. If we were overheating then you'd hear MMT economists saying to raise taxes and/or cut spending. In other words MMT accepts the fact that government is a huge contributor to the economy like it or not and works with that reality.
ReplyDeleteIt seems that Austrians on the other hand, principally hate the government involved in anything. It's just another instance of beliefs flying in the face of reality. And it appears we have many people attempting to change reality to fit their beliefs rather than change their beliefs to fit reality...and at the dire expense of many people it appears.
BTW, Gene, FYI MMT is not Keynesian and rejects New Keynesianism. It is more closely related to Post Keynesianism but disagrees with some prominent Post Keynesians, including Paul Davidson, on some key points.
ReplyDeleteMMT economics and sympathizers have also written about Austrian economics, dismissing key assumptions. So I don't think that my analysis is much different from what MMT economists would say about the presumption that austerity is appropriate under present circumstances.
I thought the debate initiated at Mises by Prof. Murphy was cordial and respectful. I apologize for being disrespectful here, but I am incensed, actually enraged, at suggestions that the solution to the crisis is to liquidate malinvestment when the level of human suffering is so high and the global economic stakes so precarious. It just seems to be to be way over the top. Not only that, I interpreted the particular quote I link to above as extremely cavalier and insensitive, adding fuel to the fire.
But I could have expressed my disagreement more appropriately. If you think my criticism of Professor Murphy was unkind, you should hear what I have to say about the current crop of politicians, including the president, who are fiddling about irrelevance while the middle class and poor burn unnecesarily.
I apologize for being disrespectful here, but I am incensed, actually enraged, at suggestions that the solution to the crisis is to liquidate malinvestment when the level of human suffering is so high and the global economic stakes so precarious.
ReplyDeleteThe essential core concept of the Austrian School is economic calculation. Keynesian-style money dilution fatally distorts economic calculation so that no one knows what anything is worth and people invest in unsustainable lines of production that only seem profitable due to the price distortions of the money dilution process. The essence of the Austrian Business Cycle Theory is that the unsustainable price, investment and capital structure is CAUSED by Keynesian-style money dilution. See:
http://mises.org/resources.aspx?Id=3081&html=1
Government spending merely adds to the distortions:
http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics
The reason why liquidation ASAP is essential is so that we might learn ASAP what the true value all of the mis-priced items actually is. Otherwise, society is flying blind, like under Stalinism. I would think that you MMT “scholars” and “educators” would already know this about the Austrian School. Obviously, you know absolutely nothing about the Austrian School despite Hayek winning the Nobel Prize for his work on the ABCT.
I’ve been an Austrian since 1973. Personally, I am incensed, actually enraged, by the human suffering inflicted by misguided Keynesian-style money dilution and government debt policies and schemes.
@ Bob, yes, and MMT economists disagree, holding that Austrians are mistaken in this.
ReplyDelete@Tom Hickey:
ReplyDeletePlease direct me to an article or other writing where an MMTer (or anyone, for that matter) has ever addressed the Austrian concept of "economic calculation".
"Lord Keynes" has done a lot of critical writing of Austrian economics.
ReplyDeletehttp://socialdemocracy21stcentury.blogspot.com/
Keynesian-style money dilution fatally distorts economic calculation so that no one knows what anything is worth and people invest in unsustainable lines of production that only seem profitable due to the price distortions of the money dilution process.
ReplyDeleteMany if not all MMT-ers I know agree that the bailouts should not have happened and that those companies that failed should have failed. Just so that we are clear on what we are talking about when we speak of government spending and stimulus it is not bailouts and what have you. Letting those companies fail and die off would have been far better for the economy...that is not government spending however according to MMT as I know it. For MMT government spending is cutting taxes and keeping the government active and alive as normal and likely create a jobs program for anyone, everyone, all the time. Personally I prefer first to cut taxes to an appropriate level and then see where the economy stands after that to decide how to move on further.
Government spending merely adds to the distortions
I understand your framework...however the government, like it or not, is a part of the market...therefore it cannot be considered a distortion without committing a fallacy of composition. In other words the market includes the government within itself. The existence of something, by definition, effects an economy. Therefore if you have a government, it will be included within that economy...even if it is just to acquire a chair or a podium for a person to speak from. Those acquisitions are economic like or or not. The existence of the government proves that it is a legitimate and valid aspect of the economy. Therefore the mere act of government spending does not "distort the market" YET...however it is possible for the government to distort the market just as it is possible for private investment or consumption to distort the market. Again to attempt to argue away the existence of the government in an economy is a futile and vain exercise. It would be far more effective for us to consider the proper bounds of a government's involvement in our economy...especially considering that it accounts for more of our total economy than private investment does. Don't you think?
Bob, how does an Austrian reconcile the fact that so many businesses in the "private market" are directly and/or indirectly profitable b/c government is their client? How do you frame that phenomena in your macroeconomic view? I am asking in general earnestness and interest. I'd like to know how you frame and handle that reality.
Cheers
infrastructure investment would also be a key aspect of government spending as well. However in my framework of MMT, cutting taxes is the best place to start and should really be the prime modus operandi.
ReplyDelete@ Bob, "Lord Keynes" is a Post Keynesian and MMT sympathizer who he has a standing offer to debate with Austrians.
ReplyDeleteSee, for example, The Different Types of Austrian Economics
Have it out with him if he is up for it. I am not since I regard the "economic calculation" argument mounted chiefly against socialism as outdated. The global economy is now made up of mixed economies with varying mixes and observable outcomes. The more socialistic economies of Scandinavia enjoy the highest standard of living.
Moreover, under the present monetary system governments that issue nonconvertible floating rate currencies are currency monopolists operationally. The question then becomes policy-wise how to exercise that monopoly. Or argue to take away the monopoly either by a return to fixed rates or imposition of political restraints.
There are advantages and disadvantages to these various positons. MMT holds that the policy advantages outweigh the disadvantages.
But in general, MMT is suspicious of central planning other iaw democratic elected representatives appropriating funds and levying taxes for public purpose iaw their constitutionally granted powers. A democratically elected government is competitive in the sense that it can be replaced by voters and political candidates compete for votes in the political marketplace.
This is a reason that MMT prefers using fiscal policy over monetary policy. Some MMT economists recommend consolidating the central banking function with the Treasury function to put it under democratic control instead of delegating monetary policy (interest rate setting) to an unelected and unaccountable small group of technocrats.
Mario, the argument over money dilution is based on there being a fixed stock of money as under a gold standard. There is no fixed stock of money under the present monetary system, and most of the variability is generated by private sector borrowing from banks and other financial institutions.
ReplyDeleteI've tangled with "Lord Keynes" many times. I see no evidence that "Lord Keynes" understands the concept of "economic calculation" or even addresses it. His fall-back line is generally that “free banking” in 1890s Australia where there had been a 30% reserve requirement (which, of course, led to a catastrophic boom and bust as predicted by Austrian theory) disproves Austrian theory. He’s also big on focusing upon disagreements between various free market factions regarding non-core Austrian type concepts. As if the existence of multiple schools of “Keynesianism” disproves your particular version per se.
ReplyDeleteCalculation issue means that the govt should not be in the business of organizing or planning economic activity. But it doesn't nullify arithmetics or accounting. If the economy grows or shrinks, it needs varying amount of net financial assets. Accounting tells us that these cannot be produced by the provate sector alone. They have to be supplied by the government. MMT says this should be done automatically, via automatic stabilizers etc as to avoid human error (which is your calculation result right there - govt clerks should not be in charge of making too many economic decisions). By restricting the govt from responding to those changng desires of the private sector to save liquid assets the Austrians exactly put themselves in the shoes of a govt appartachik who "knows best" that the economy needs a constant stock of money.
ReplyDeletePlease share with us your theory from which this conclusion follows.
If the economy grows or shrinks, it needs varying amount of net financial assets.
ReplyDeleteWho says? Why?
Accounting tells us that these cannot be produced by the provate [private] sector alone. They have to be supplied by the government.
Accounting tells us that? Accounting tells us we need SWAT teams to threaten people with arrest and prison because they cannot voluntarily figure out how to create these allegedly necessary financial assets? And we know a priori that the folks running the SWAT teams know how to do this better than the victims? For all population groups at all times? Please explain.
Further, what does this have to do with the Austrian concept of "economic calculation"?
Do you understand the word "accounting"? It really has little to do with SWAT teams. It tells us that the transactions within the private sector necessarily create as much assets as liabilities.
ReplyDeleteCare to prove me wrong? Go ahead. I bet the Austrian "school" has it all worked out.
Economic calculation debate shows that the private sector knows better how much money they need than any number of Austrians that think they know that the answer is "constant".
If "the government" doesn't have, use or threaten to use SWAT teams, arrest and prison, in what way is it "the government"?
ReplyDeleteRoddis is a troll.
ReplyDeleteAn old troll who gives meaning to his life squandering stolen gas on public roads.
Right, MamMoTh. As opposed to some twerp who makes idiotic comments about me squandering gas in my 30 mpg car.
ReplyDeleteI've made a concerted attempt to be nice to you, MamMoTh.
That may end.
Bob, You don't like the idea of a government, fair enough.
ReplyDeleteLet's talk economics though, shall we?
How about my accounting statement? Please prove me wrong. I think we are all waiting.
And also, please tell us how Austrians want to overcome the limitations of the calculation theorem. How can you know better than the private sector what stock of money is required?
Although I cannot answer truly "what IS government?" I can say that in terms of economics, the government (our government) is the sole issuer of its currency and therefore is truly the "creator" of all money in the economy. It cannot go bankrupt b/c it owns all of its own currency and can print and un-print that currency as it pleases. MMT states that it can and should print and un-print money based upon inflation/deflation levels in the economy, output gap levels, and the rate and level of accumulation of net financial assets in the private sector generally speaking. MMT states further that it can accomplish these goals essentially by raising/lowering taxes and/or increasing/decreasing government spending and that these methods are likely more effective than monetary policy as they more directly effect the economy generally speaking. Does this sound radical to you in anyway? It sure doesn't to me. Tax cuts are helpful. Raising taxes hurts. If the government stopped paying on business contracts that's going to hurt those business, if the government didn't pay social security people would be seriously devastated, etc., etc.
ReplyDeleteWhat sounds radical to me is the thought that the government should never again spend a penny b/c the economic calculation will become distorted. Not only that but it sounds to me like it has a high probability of being largely false and/or inaccurate based upon the obvious influence, like it or not, government (any government) has upon an economy. Not only this but as Peter aptly points out, the existence of automatic stabilizers in the economy greatly reduces the risk which the economic calculation attempts to reveal. Again, I think it is vital to note that MMT does NOT support a central economy where the private sector is destroyed and all activity is run through a socialist-military state based out of D.C. as well as various satellite cities across the US. LOL
MMT really is not that radical at all. We are not looking to do alot...in fact these days, many of us would be at least somewhat relieved if only much of what is being suggested would simply go away...i.e. no more slashing government spending by $4 trillion, no more China owns the US, no more medicare must go, no more the US is Greece (aka bankrupt), etc., etc., etc.
In short, I think Peter's point about automatic stabilizers significantly addresses your point about the value of the economic calculation, and I'd really, really, REALLY like to hear you comment about that...if at all possible of course. Thank you and all the best.
@Peter
ReplyDeleteI frankly don't know what you are getting at and you clearly don't understand what I mean by economic calculation.
Bob,
ReplyDeleteYour constant attempts to veer off topic make an impression that you are very insecure in your beliefs.
We are waiting your criticism of my accounting statement.
Bob I am confused with what you mean by economic calculation. Do you think that government spending is equivalent to a socialist state rationing and pricing items in the market from the top down?
ReplyDeleteB/c as far as I understand the economic calculation...it is a theory that states that the market itself knows better how much of a certain good is best for that market, which then in turn decides its price through supply/demand principles, etc. This was an argument that came out in the 20's and 30's in reaction to a very socialist economic culture at that time and it was an attempt, and a worthy one at that, to show that a socialist state would just never be able to accurately and effectively price and provide all the products wanted by a market. It is just too complex and too idiosyncratic that it is nigh on impossible for any one human brain to do.
Am I wrong about this at all? If so, please advise me.
My question to you then is where do you see the government setting prices and/or rations on goods and services? B/c I don't see it...other than the price of money through the Fed...but actually you may not know this but many MMT'ers support a 0% Fed Funds Rate forever which is actually directly in line with your economic calculation theory and so in actual fact MMT-er's in some respect agree with you on the economic calculation...however we are all failing to see the relevance to this economic calculation in relation to government spending and/or taxation.
My question to you is how is the government setting price and rations from the top-down upon our markets today? More specifically, how does writing a social security check or hiring another IRS accountant or another FBI investigator or signing another Boeing contract the military needs actually relate to the economic calculation? I just don't see it. We do not live in a socialist state, as much as some may think we do, we most assuredly do not. The government does exist in this physical world and must do physical things, therefore it must use resources to operate and function and therefore is by definition a valid and relevant part of this economy...like it or not...it's not a socialist statement...any and all governments fall into their economy so long as they physically exist and use resources.
Please advise and thank you.
and yes we are awaiting your response to Peter with great interest....
ReplyDeleteYou people are amazing in your ability to bootstrap your “government” (SWAT TEAM) sector into existence. A society which through law and mores precluded the initiation of force would not have a “government” sector at all except for a police force and courts to address murder, robbery etc... You would then have to explain to them why they should abandon their system for one where the government can create money out of thin air. Convince me.
ReplyDeleteBob,
ReplyDeleteNobody is talking about use of force. We need a system operator that administers/issues/destroys money as needed for the private sector to realize their savings desires. It doesn't need to be a "government", it may be whatever you want to call it.
We need a referee in a game to award points, you wouldn't want to give each team the right to award points to itself, right?
Once you understand the accounting, that an external to private sector source of money
is required for the private sector to be able to save/dissave, then we can talk about who should be in charge of it. We are still waiting for some rational discussion of the accounting from you.
The calculation debate which you failed to understand shows that the private sector knows better how much they want to save/dissave in any given period. You claim you know better, that this desire is constant. But when asked for a theory to back this claim you go into an emotional rant about SWAT teams, which only shows that you feel insecure in your beliefs and you cannot calmly present rational arguments, with emotions in check.
Please:
1.Show us how our accounting is wrong.
2. Tell us how the limitations of the economic calculation don't apply to Austrians who may tell the private sector it should have constant savings.
hint: try not to use references to weapons of any kind when discussing accounting, math and economics.
We need a system operator that administers/issues/destroys money as needed for the private sector to realize their savings desires.
ReplyDeleteNo “we” don’t. Prove it.
And if your “administrator/referee” cannot force its will on its victims and can only ask “pretty please” (and can be safely ignored), it’s not a government. Thus, there is no “government sector” that needs to be accounted for in any accounting.
And you still don't know what I mean by economic calculation.
Rob,
ReplyDelete, No “we” don’t. Prove it.,
I did prove it, but you didn't notice: each private sector transaction creates as much assets as liabilities. Correct? Thus the private sector cannot save/dissave by itself. Correct? Please tell us what you think. Because you seem not to get it.
Hint: to disprove us please invent a private sector transaction that net creates/destroys financial assets. Simple!
First let's understand if we need the system operator at all before we discuss how it should operate.
And you still don't know what I mean by economic calculation.
I know what Mises meant, so what you mean by it is irrelevant, because you clearly don't understand the implications of that debate. You don't understand that the limitation applies to you the same way it does to the government. You think that the government cannot calculate, but you sure can! It is paradoxical for someone who injects economic calculation into every comment not to understand what it means. Please look in wikipedia.
[E]ach private sector transaction creates as much assets as liabilities. Correct?
ReplyDeleteAl trades his horse for Biff’s promise to provide Al with three baby cows this September. Each party supplied something. Each party “demanded” something. Al valued the future cows more than his horse today and vice versa based purely upon their individual preferences and analysis. Absent that, there is really no meaning to the idea that the horse was “as much” as the cows. If gold or silver coins had been used in the exchange, you could account for how much money was exchanged but the accounting is merely a helpful exercise attempting to get some meaningful grip on what had happened. The accounting itself has no independent force and does not change the nature of the underlying event accounted for.
Thus the private sector cannot save/dissave by itself. Correct?
That’s preposterous on its face. People voluntarily have saved, can save, and do save (forego consumption) without a gun to their head all of the time.
Further, both Al and Biff plan to use the respective animals in their businesses to make profits. Each could have sold them for liquor and whores but instead “saved” them for use as capital goods. They do this voluntarily and in “the private sector”.
Ah yes! A fallback to a non-monetary economy. I knew this would come. Yes, I can find a dog scat and save it, but this does not involve money.
ReplyDeleteNotice I said "please invent a private sector transaction that net creates/destroys financial assets."
Austrians definitely mastered a barter coconut economy in a country without civilisation.
How about when Al and Biff want to move out of the cave and use money? I guess Austrian theory doesn't reach that far.
I've previously linked to "The Essential von Mises" by Murray N. Rothbard. I now do it again:
ReplyDeletehttp://mises.org/resources.aspx?Id=3081&html=1
I don't expect you to agree with it. It clearly covers the concept of money.
If it covers the concept of money and you familiar with it, you could come up with a private sector transaction that net creates/destroys financial assets?
ReplyDeleteBoB, this is a site at which we dicuss MMT primarily, not other economic theories other than in relation to MMT. You have clearly not take the trouble to understand MMT before criticizing it. Prof. Murphy had the professionalism to do his homework before writing on MMT and his criticism was therefore worthy of a response, and many on both sides participated in the discussion at Mises.
ReplyDeleteIf you want to engage MMT, please do your homework first. I suggest beginning with the mandatory readings at The Center of the Universe (link). You will also find summaries of key concepts at the MMT Wiki, with references. What you will find a macro theory based on an operational description of how the present monetary system works and policy options that follow from this. Then, if you make a coherent case, someone here might take you seriously. Now you are just spouting nonsense and coming across as a troll, as was already pointed out to you.
However, we really are not interested in debating changing the monetary system and present form of government to a Libertarian utopia here. There are other venues like Mises .org devoted to that.
Tom,
ReplyDeleteHe knows nothing not only about MMT (which he has full right to), but also about the supposed tenets of the Austrian school, like the economic calculation debate. He just uses "economic calculation" instead of "lalalala I am not listening to you!". It may sound smarter, but it is really all it is.
On the other hand, his link to Rothbard on Mises is nice and I will check it out. Thanks Bob.
[W]e really are not interested in debating changing the monetary system and present form of government
ReplyDeleteI fully understand that. I've simply been trying to extract a justification from you for your support of the present system. I never expected to be successful in that endeavor.
Prof. Murphy and I are extremely engaged in that debate because the present system is the cause of our problems. If you (admittedly) refuse to engage in that debate, stop making uninformed remarks about the Austrian School of which you know nothing.
the one point that Bob does make that is actually in line with MMT is that the government does use force to be the sole issuer of currency. Even Mosler admits that without the fear of penalty and jail we would not pay our taxes. Therefore, at a core level, one could argue that the government does force us to use this currency. We can look to Greece currently to see a glimpse into what it looks like when people don't want to continue in a chosen currency...it wrecks havoc on a society to say the least...this could be considered a justification alone for the government enforcing its currency through taxation since the alternative is even worse, and eventually some type of currency will gain monopoly. Regardless this is a moral/political issue NOT an economic one and NOT one that has any relevance to disproving MMT or to solving the current state of affairs in our country.
ReplyDeleteThe point still stands in the real world, that we all pay our taxes b/c the government tells us to, and that will not be changing anytime soon. MMT recognizes the role taxation and spending play in an economy between the private and public sector. Admittedly it is a jump to understand that when the government spends, the public benefits and when the public spends amongst itself it only exchanges assets for liabilities...the government then stands outside and actually referees net financial assets. This happens whether we like it or not and whether the government spends or not. By not spending the government is referring by default (no pun intended!!). It's the old adage of "no choice is also a choice." Never-the-less it is necessary to understand this dynamic no matter how politically repulsive it may be to a person...denial gets a person nowhere FAST.
Bob you can also check out the Modern Monetary Primer which can be found here at this site:
http://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html
Professors explain MMT in clear, thorough, and concise ways to be more easily accessible to all audiences. They do a post every Monday and then answer all questions in the comments on Thursdays. I really recommend you check it out. I am checking out your links myself and appreciate you sharing your views. I have learned something myself and hope that you too will learn from us so that we can all collaborate even more on these issues and find even better solutions. If we can't learn and grow from each other, how else will we advance? Cheers
Prof. Murphy and I are extremely engaged in that debate because the present system is the cause of our problems.
ReplyDeleteMMT-ers agree whole-heartedly with you on that point Bob! We just differ on the solutions.
However Prof. Murphy's critique of MMT is not sound and that is what this article and discussion has been all about...attempting to prove to us that MMT is false, wrong, flawed, etc. So far all have failed to do that. We are still waiting to hear how MMT is flawed...I'd love to hear it in fact!!! The soundness of MMT is a very separate and unrelated issue to the reasons for the GFC. Discerning that is vital to maintain this discussion and stay focused on the argument at hand.
It is also important to note that MMT recognizes that convertible currencies CAN WORK...they just work differently than non-convertible currencies. In other words, MMT-ers can comprehend your world of a gold standard, but you cannot comprehend ours (which is in fact yours as well since it is the monetary system you live in!). As Tom said, we are not interested in debating a change of the monetary system, b/c MMT does believe that a non-convertible floating exchange (NCFE) is the most optimal currency type for a government/economy as it offers the most authority, flexibility, and opportunity for an economy of any given size. Of course all systems have their set backs and particularities and an NCFE is no exception...particularly in a "democratic" political system like ours that exists within a very powerful global financial community.
None-the-less being able to understand each other is crucial and I feel that we understand you and your points of view however I do not feel that you understand ours and what is worse...that you really do not care to. It is unfortunate for all to say the least.
stop making uninformed remarks about the Austrian School of which you know nothing.
ReplyDeleteBob, as evident from the above we understand the calculation issue better than yourself. We also understand the accounting of whatever transaction the Austrian School depicts better than its adherents. We can tell you which of your notions ported from barter economy apply in monetary economy and which don't, something you cannot even fathom could be a problem. Austrian economics is just a special case of monetary economics, a barter one. Turns out you yourself don't understand Austrian economics.
As Mises explained in 1917, Knapp’s “state theory of money” was acatallactic and “cannot be fitted into any theory of catallactics”. Which we’ve again shown here although I’ve given it a shot. See pages 461-469 (a 24 MB pdf file):
ReplyDeletehttp://mises.org/books/tmc.pdf
Bob you're just using fancy words to say that you can't compare apples to oranges. We agree with you and have never tried to convince anyone otherwise.
ReplyDeleteIn fact quite the contrary, we are actually more fully describing the differences between a convertible and non-convertible monetary system. We can explain the dynamics to you and the ramifications and PROVE IT TO YOU mathematically. You cannot. You can just simply say that one is acatallactic and the other is catallactic and that you've never been able to fit the one into the other. Well of course not Bob!!!! That's like trying to get a square peg into a round hole!!! It cannot be done. Also by the way I don't know if you realize it but the large majority of our economy IS actually catallactic!!!! LOL
You still have yet to answer my question as to how government spending always and forever equates to the government setting PRICES and RATIONS in the market. You cannot do it, which is why you ignore commenting on it. Sure if the government continued to overbid on its purchases then yes it could possibly be setting prices and yes it is true that if the government set up a jobs program that this jobs program would naturally set a FLOOR for wages....however that is the point of a jobs program! I mean surely you don't think that setting a minimum wage should be eradicated simply b/c in some ways it "sets price" do you? The government can actually be just like any other market participant in an economy and not set prices or rations. They have demands too you know.
@Mario I've been studying Austrian economics for a few years. I'd like to help Bob Roddis answer some of these questions.
ReplyDeleteMaybe it would help if I start with the financial assets question. When MMT'ers say we cannot "grow the economy" without increasing the quantity of financial assets, I'm not sure what point is being made. First, does MMT define "size of the economy" as the sum of the marked values of all financial assets? [a stock measurement] Or is it the transaction money sum of all the trades done over some time period? [a flow]. This is just a definitional question. We could have a discussion about either.
Let's suppose that it's the former. If "size" is defined as the sum of marked values, then I would say we cannot increase the size without increasing that sum. Duh! This just follows from your definition. The disputes are really questions of (1) how the non-definitional concepts are related, and (2) what ends should be pursued by "economic policy."
Murphy's MMT article (linked above) outlines a dispute of type (1). The dispute stems from the fact that an identity does not convey causal knowledge. Any causal relations must come from other conceptual relations. Here is an example of a dispute of type (2):
Most of us want the economy to "improve." But that does not necessarily mean that we want the size (as defined above) to increase. I claim that very few people actually care about THAT specific target. If they did, we could achieve it quite easily. We'd just double every number in the system. We'd give every dollar holder twice what he currently owns, mark up all assets (including the balances of outstanding debt and the sizes of the payments required over its term) to twice their value, etc. If we did this in a synchronized way, I think the 2x world would look very similar to the current world. We'd still have the same unemployment levels, the same uncertainty about what investments are worthwhile, etc. Yet the new economy would be "twice as large" [as defined above] as the previous economy.
This 2x thought experiment is not meant to convey any deep truth. It's just meant to show that the accounting identity above, although it may precisely define a measurable thing, does not convey any knowledge per se about what we *should* do. To do so, we need to bring in other concepts (means and ends, subjective value, appraisement, uncertainty, etc). The thing most people want to analyze/change/fix is not the scale of the numbers floating through the system (although it's possible that some nutty guy has a preference about this ;-). It's the use of non-specific resources, actor knowledge, property/ownership, the size of each actor's cash balances vs. anticipated prices and values, etc.
I also noticed some questions about economic calculation, which in my opinion, is one of the more complicated parts of Austrian economic theory. I can try to answer questions on that in a separate post. If anyone cares.
Hi marris nice to meet you (and then there were 5).
ReplyDeleteNo MMT, as I know it, is not saying to just double everyone's money...as you state, nothing would change...all ratios would still be in place. That's not at all what MMT is talking about.
Rather yes it is about flows...in particular sectoral balances and how the dynamic in an economy works...particularly one were there is a sole issuer of currency (aka the government) in a non-convertible exchange rate system...in other words we can print and un-print money as we wish. ;) In fact Robert Murphy explains sectoral balances quite well in his article which you cite...the first half of that article is quite accurate as to what MMT is saying as far as I can tell. His criticisms of it however have yet to be fleshed out let alone materialized...indeed they have yet to hit the page as far as I can tell...not to mention the pronounced lack of explanations from the last 3 people I've talked with on this post regarding the "inaccuracies" of MMT. Please if I am wrong...educate me as to the flaws of MMT.
As for hearing more about your economic calculation that is fine. I'm all ears...just keep it as simple and direct and relevant as possible please. Remember the whole reason we are talking about economic calculation is b/c it supposedly debunks MMT, however based on the conversation so far I'm not sure if said peoples even understand MMT, let alone can they debunk it.
Cheers and all the best
@ marris
ReplyDeleteThe objective of MMT is not growing the economy. It's aim is achieving full employment along with price stability. If you would enlighten us about how Austrian economics has a plan for achieving that, we would be all ears.
The entire gist of the Austrian Business Cycle Theory (and Hayek won the Nobel Prize for his contributions thereto) is that money dilution in excess of real private voluntary savings of gold and silver distort the price, investment and capital structure by impairing economic calculation which leads to unsustainable booms followed by the inevitable bust.
ReplyDeleteAbsent the fiat interventions, prices would be stable or slowly falling over time and there would be little unemployment. The problems of unemployment and the boom/bust cycle are caused by fractional reserve banking, especially fiat money.
Deal with it.
The world is now running a nonconvertible floating rate monetary system.
ReplyDeleteDeal with it. MMT is.
@mario OK, then let's move on to the next identity. When you talk about sector balances and flows, these are also identities, right? If I have 5 units in bucket 1 and 10 units in bucket 2 and I move 3 units from bucket 1 to bucket 2, then bucket 1 will end up with 2 units and bucket 2 will end up with 13 units. Is this what you mean by sector balances? I don't think there is anything Austrian economics (or any other flavor of economics) which contradicts this either. It is just arithmetic applied to homogeneous units.
ReplyDeleteWe can extend this mathematical analysis further. If bucket 2 were structured to flow into bucket 1 until both reached the same level, and we knew the rate of flow, then we could compute exactly how long it takes for the initial 5, 10 state to reach an equilibrium of 7.5, 7.5.
Now from what I can tell, all MMT statements are basically just statements about (1) what buckets exist, (2) which buckets are connected, (3) rates of flow, etc. I *think* it's just these concepts applied to money. Is this the basic idea? In principle, there's nothing preventing us from making similar statements about apples, or air molecules, or files on a harddrive. If we had the technology to create and destroy apples at will, then we could probably formulate "modern apple theory" with its own set of identities. (Not being snarky here. Just making sure that I grasp the basic stock/flow concepts).
If we accept these MMT identities, then I think that "criticisms" (that I or anyone else could make) could take these forms (may not be exhaustive):
(1) Arithmetic error. Basically, this would amount to one person adding or dividing incorrectly. You make a statement like 5+5=9 or something and I point it out.
(2) Mapping error. Basically, you set up some set of connected buckets and correctly derive conclusions from it. However, I say that the result cannot be mapped onto some real-world measured thing because the "real buckets" have different sizes, shapes, or connectedness from the buckets in your model.
(3) Normative error. You set up a bucket model and use it to show that moving 3 units will create a flow of 2 units per second or something. I agree (to my best estimation) that this WILL happen. However, we disagree on whether the 3 units *should* be moved (whether the flow should be created, etc).
It's a bit presumptive to call this an "error." You may simply prefer the state of the world where one flow exists and I may favor a state of the world where it does not (maybe I want another one to exist instead). It is important to point out that (3) cannot be "resolved" within MMT itself. Any "resolution" would require reaching out to some shared (or similar) norm.
I think we agree that discussions of type (3) have a different... flavor from the discussions on buckets. If we don't "value" the same norms, then no "agreement" may be possible. This does not mean of course that we can't discuss them. For example, we could probably even come to an agreement over whether action X conforms to some norm Y. We just disagree on whether we "should" follow Y.
It is also worth pointing out that analysis of a type (3) error requires some kind of teleological model. I don't think it's possible to really endorse one state of affairs over another without expressing it as a "goal" that should be pursued. Austrian (and I guess much of neo-classical?) economics is the use of such a telelogical model to explain the means-ends aspects of choice.
@tom Could you fill in more details about what you want the "full employment" world to look like? Keynes had some hacky definition of full employment which which I never found useful. I'd like to hear what you think it means.
ReplyDeleteAs a first approximation, let's suppose that there are one million people out there who are looking for work. A simple full employment world may be one in which all these people stop looking for work because the "monetary system" is arranged to add $1000 to their cash balances every week. There is nothing contradictory about this hypothetical world, and I think we have the technical means to create it (with or without any MMT identities).
My objection to this world would be of type (3). I don't see why we would want this world. Why should we value that world as "better" than the current one?
[I just offered this auto-payment world as an example. If this is not what you mean by full employment, then we could talk about your alternative.]
The MMT proposal for full employment is a job guarantee with the government as employer of last resort setting a floor wage and benefit for anyone willing and able to work that cannot find work in the private sector. The JG floor wage would set under the private minimum wage.
ReplyDeleteThe wage floor serves a a price anchor and is an aspect of the MMT aim of achieving full employment along with price stability. It involves a buffer of employed rather than a buffer stock of unemployed as is the case presently under NAIRU and Taylor rules.
There's a summary and references at Wikipedia and the MMT Wiki.
As you say, the difference is over norms. MMT would also argue that the cost of an output gap and unemployment is huge in terns of foregone opportunity that cannot be recaptured. Underperformance is very costly and the more so if it can be avoided without incurring greater disadvantages.
"The entire gist of the Austrian Business Cycle Theory (and Hayek won the Nobel Prize for his contributions thereto) is that money dilution in excess of real private voluntary savings of gold and silver distort the price, investment and capital structure by impairing economic calculation which leads to unsustainable booms followed by the inevitable bust."
ReplyDeleteAnd that theory is ridiculously flawed by its reliance on the pure myth that is the Wicksellian natural rate of interest, and its inability to deal with the fact that in capitalist systems there are frequently significant idle resources. Even if were true that an increase in credit from fiat money or fiduciary media not backed by prior savings of commodity money caused investment in higher order capitals (and that is NOT even clear), it won't cause the cycle effects imagined if real idle resources were available in an economy, with idle labour etc. Also, you could import your capital goods, factor inputs without drawing away resources from lower orders of production. This is a theory that falls flat on its face as well, because it doesn’t even consider an open economy importing commodities.
For anyone, wanting more info:
Austrian Business Cycle Theory: Epicycles on Epicycles, June 6, 2011
ABCT and Idle Resources, June 6, 2011
The Natural Rate of Interest: A Wicksellian Fable, June 6, 2011.
Austrian Business Cycle Theory: Its Failure to explain the Crisis of 2008, October 18, 2010.
Sorry, marris but I have to do this in a few posts. This is #1.
ReplyDeleteIf we had the technology to create & destroy apples at will, then we could probably formulate "modern apple theory" w/ its own set of identities.
as long as the apples are not consumed or used as a barter system...in other words as long as the apples are currency & only currency, then yes what you are saying is accurate. Now that you're clear on that, let's drop the barter system format & just talk money, since that is what we use & have.
I don't think there is anything Austrian economics (or any other flavor of economics) which contradicts this either. It is just arithmetic applied to homogeneous units.
First off, yes you are accurate & correct w/ your bucket analogy. That's well put. However Bob, you, Grimhorn, Gene, Robert, & many, many others ARE arguing w/ the bucket system...aka the sector balances!!!! To be clear they are stating that government spending (recall that government is one of the buckets) DOES NOT COUNT whenever it transfers money (or apples) to another bucket. That transfer doesn't count. It's not valid. So far the reasons that government spending money doesn't count is b/c it is either not as valuable somehow (b/c of profit/loss checks apparently--even though every month people receive millions of dollars in social security checks all across the country which are received & recognized as legal & valid tender & appear to be just as valuable as a dollar from any other bucket--aka the private sector bucket). The other reason is b/c the bucket of government spending is not a valid transfer of money b/c somehow the "economic calculation" tells us so. Neither of these points have been legitimately explained or proven to any level of logic or reason as far as I can tell. In fact I know for a fact that the first point is wrong as I just proved it as such, the second one I am 99.999999% sure that it too is wrong. I leave open that 0.0000001% possibility so that I can learn more from you about what you say economic calculation is & how it actually applies to our monetary system today...I am doubtful that it will apply very much at all.
Post #2
ReplyDeleteNow addressing the possible ways of finding a flaw in MMT as you outline:
1) There is no arithimetic flaw in MMT's analysis of sectoral balances. In fact there are many charts & figures & stats that all come from the US government that prove that private sector wealth is completely mirrored to public sector deficits (& vice-versa). The math is sound. This is real live stuff. To quote Bob & Tom, we all must just "deal w/ it."
2) There is no false connection. Remember that MMT didn't create sectoral balances...we just underst& them. LOL. It's all algebraic & totally valid & alive.
3) There may be differences of opinion of what to do & how to use our economic/monetary system, of course...however the system must first be UNDERSTOOD in order to disagree w/ it!!! Sectoral balances & the accounting identities that exist w/in them are at play in our economy. Once that is understood, many economic ideas become completely WRONG & FALSE. In carpentry, for example, two carpenters may disagree on how to build a cabinet, but they can NEVER disagree about long an inch is. In economics today we are arguing how long an inch is. For example, once our monetary system is understood (which MMT illustrates) it becomes absolutely preposterous to claim that the US needs to pay off its debt or it will go bankrupt, or that since homes & businesses are tightening their belts the government has to as well, or that reserves create loans, or that the government needs to raise revenue to pay its obligations, or that China is funding our economy, or that our children are inheriting mountains of debt, etc., etc., etc. The list goes on & on & they are ALL LIES & ALL FALSE & can all be proven by economic, accounting, & monetary realities. Another real-world example of what we are dealing w/ would be equivalent to argue today that the sun revolves around the earth (not the other way around). To argue such a position is NOT a "normative error." It is just false & wrong. Period. It is not legitimate logic to cop out & say that we will never resolve this argument b/c our beliefs just differ on this matter. That is ludicrous & flies in the face of all reality, fact, & knowledge. I assume, possibly incorrectly, that Austrians, or anyone, do not want to knowingly hold such a ridiculous & insane position...right?
OK, I think I understand the JG (job guarantee?) world. Why should we prefer that world to the current one? Is it because the dollar amount flowing through the system is larger [and we like large dollar flows]? Or because each person receives a minimum income stream [and we prefer economic systems in which the streams have a minimum size]? Or for some other reason? I agree that we have the technical means to create a JG world. I don't see why we'd want to create it.
ReplyDeleteNetworks of money streams may have all sorts of characteristics that you perceive and have preferences about. You may want a minimum number of streams, a minimum stream size, a maximum stream size, a minimum ratio between the sizes of the smallest stream and the size of the largest one, etc. Why should we care about one set of characteristics over another? What characteristics does the system described above (JG wages slightly less than the private minimum wage) have that you like?
I could be wrong about this, but I don't think that anyone *really* cares about minimum wage and JG sizes per se. I *think* you're really advocating a system in which each unemployed JG person has a stream that is "large enough" for him to be able to bid goods and services away from other employed market participants. Is this the characteristic that you really want?
If so, then why not express the norm in those terms? Why do we need to consider output gaps and of GDP [which we already mentioned can be achieved with price scaling]? Is there some ratio characteristic that we need GDP to express? [For example, the JG stream size may be some function of dollar GDP and population and ...] Is there some two-phase valuation thing where minimum good quantity constraints are expressed in phase 1 and GDP constraints in phase 2? [That is, we may want a system where all people have the ability to bid away A units of good X, B units of good Y, C units of good Z, ... AND the measured streams have such and such aggregate conditions...]
I don't really think the "less costly" and "underperformance" statements express anything that cannot be expressed in the terms above, right? I think it just means our norm should look at some numerical property/properties of the system (the "cost", the "performance", whatever). The normative question is why we should care about one numerical characteristic instead of another.
and finally Post #3 ;)
ReplyDeleteTo be clear, the fundamentals & foundations of MMT are really nothing special or particular to MMT...they are simply stating the REALITY of what already exists. It is not an economic policy nor is it political or anything else...it is just FACT. There really is no argument w/ the data...just understanding.
The jobs program & the intention for full employment in an economy & max productivity are all MMT-eque policies that stray beyond the reality of the economic facts & get into policy proposals. They do seem to be what many MMT-ers believe in & support. However, quite frankly, I think many MMT-ers would be quite pleased & happy if everyone just understood & openly admitted to the reality of how our economy actually works. At least then we could start to draft actually productive proposals & be able to get the ball rolling. Clearly though, once these realities are understood, the concept of poverty through unemployment becomes a nigh-on impossible political stance, since we have the ability & capacity to reach full employment...naturally & completely...not just some "socialist" state of digging ditches, filling them up, & then digging ditches again. Remember that once the MMT principles are understood, taxes can legitimately be lowered to increase savings & investment tendencies & speed up the de-leveraging process so that the business cycle can move along faster & w/ less pain & (dear God) austerity of all things! A jobs program is not intended to employ everyone, it is intended as backstop for society so that people that are able & willing to work CAN work & at least provide something for themselves & get health care too. They can then transition into higher paying jobs in the real private sector & the fact that those jobs pay less than minimum wage allows them to exist w/out effecting the private sector work force...it would however create a new floor for health care services for workers, which frankly, MMT sees no reason why the government also can't provide as well. But again these are all policies & of course debatable...but they must be debated on the proper playing field of reality & objected to for legitimate & noteworthy reasons. MMT does not claim that they "know all the answers" to societies woes, but rather that they at least can explain the function of the economy. The more people that actually understand & how our economy works, the more real & productive & functional our policies can be...why not participate in such a venture?
hey marris, good questions for sure on the JG. I just posted some comments about the JG right below your post that may answer some of your questions.
ReplyDeleteFor some reason you keep returning to the concept of obtaining a certain "dollar amount." MMT is not about that. The output gap compares actual GDP of an economy to its potential GDP. In other words, how much idle labor, resources, potential, does this economy have. In a deflationary environment the answer is ALOT!!! Have you noticed all those closed down shopping stores around your house for the past 3 years? Yeah that's potential GDP. Austrians seems to always love "lower prices" but lower prices are not always good when you have idle resources. In fact if we really crunched the numbers, I think we'd find that the rate of change of aggregate income in the private sector (in a deflationary scenario) drops much more than the rate of change of prices, thereby making the "drops in prices" to be relatively no drop at all since incomes are falling precipitously! Deflationary environments are NOT fun. Inflation of course has its own pitfalls as well, which MMT recognizes and understands how to combat. The goal really is to find a more stable economy that adjusts with itself, much like how monetary policy is supposed to adjust with the economy...only with MMT the focus is on fiscal policies. MMT has some of the best understanding (if not the best) of monetary policy as well but that's another discussion.
MMT is NOT about achieving some nominal amount of income or GDP. Printing money until we hit a number is not an MMT idea AT ALL.
we must define "government spending" more accurately so that we are all on the same page.
ReplyDeleteAs far as I can see there are two main types:
government as a market CUSTOMER
&
government as a market INFLUENCE
Currently there is a raging debate on if the government should raise the debt ceiling and how to deal with our "mountains of debt." So the issue of government spending is important to clarify.
The government is a customer/user of goods and resources in this economy. Fact. Whether you like it or not the FBI exists, the White House exists, there are buildings and call centers and staff and planes and cars and utilities and services, etc., etc., etc. When the government purchases these things for itself from the market it is really NOT effecting the market, so long as their prices are at market values. In this case the government is simply only adding liquidity to the market. That's all. It's great for the economy as many business benefit from the government as their customer both directly and indirectly. Economic calculation is NOT at play here.
Now if the government is an influence in the market than that is a different dynamic and can be said to effect the markets. Social Security falls into this category...but the public value and purpose of social security is good and valid! So just b/c it effects economic calculation doesn't mean that it is not good. In fact it helps the economy. Imagine where we'd be if all social security wasn't there for people to fall back on...the homelessness, the job situation, the crime, the fear, the strain on the next generation financially, etc.
This is not to say all the government does is good. MMT does not say that. It is also important to note that MMT considers taxes a part of "government spending." For MMT, one way to perform government spending is to cut taxes. This is b/c for MMT the focus is on full employment and the private sector nfa NOT on what the government is doing. This is vital to understand.
@mario
ReplyDeletePer apple thing. I don't see why consumption would somehow violate a stock identity. If I eat one apple, then my personal apple stock will go down by 1. The "national apple stock" will also go down by one. It will still be the case that the national apple stock is equal to the sum of individual apple stocks. This identity still holds. Identities which relate flows and stocks are a bit more complicated, but they too could incorporate consumption. Consumption is just an outflow from the "system." If we could really create and destroy apples at will, then we need not be "concerned" about any stock/distribution characteristics. Don't like some outflow? Create some more apples and give them to the people who consumed them. Don't like some inflow? Destroy the new apples.
It's even less clear why it would matter whether apples were used as a barter system. Identities still hold, right? If you start with 5 apples and 5 more apples "flow to" you, then you end up with 10 apples. Why do we care whether oranges "flow away"? A comparable orange stock-flow identity holds there as well. In a money economy, such flow-stock identities hold for money AND for every non-money good. If you have 2 computers and you buy 1 more, then you have 3 computers, etc.
(1) This wasn't meant to claim that MMT theory suffers from some serious arithmetic errors. It was just meant to convey that a particular application (a graph/chart/table) may be criticized if it exhibits one. This is not meant to imply anything deeper than that.
Indeed, I would expect the money sums to mirror each other. In every transaction, some "trade money" flows from the buyer to the seller. The trade money is a flow. It reduces the buyer cash balance by it's size. It increases the seller cash balance by its size. "Sector balances" are just aggregations of these individual account balances, right? If we take any subset of all accounts, then we would expect the change in balances within the subset to "mirror" the change in balances of the accounts outside it...
(2) This type of error is slightly more subtle than the one above, but not by much. For a really simple example, consider a scenario where the money stream network was disjoint and we could only "see" one partition. The point is simply that any bucket model we build from that view will not capture all "real-world" money flows. Any statistic we computed from our conceptual network may not correspond to real measures, even though we add/subtract correctly (commit no errors of type 1).
To put it another way, we *think* we know how many/what accounts are in the economy and how they are connected, but we *don't*. As a simple example, suppose two individuals were trading off the books and fed no information to the stat guys... the measured statistics (account sizes, totals, etc) would not reflect the "real" account sizes, totals.
(3) This one's a bit trickier.
[Sorry, this is not related to your overall points, but I can't resist. The Sun DOES revolve around the Earth, and the Earth revolves around the sound. The orbits are mutually determined by the gravitational law (another functional relationship governed by identities!) A better example may be that the other planets don't revolve around the Earth. And what if one of the carpenter's is moving really fast...? OK, now I'm done. ;-]
see post 2
I think your non-normative points are consistent with the MMT model. But I think you run up against some non-MMT stuff pretty quickly.
ReplyDeleteTake "the government must pay off its debt or it will go bankrupt." I think the US government could print money to pay off its debt. But that's as far as we get with MMT. MMT does not tell us anything about whether the US should print money, should pay off its debt, default, borrow more, etc. You definitely need norms to answer those questions, right?
There's also the question of what effects a course of action may bring about. For example, it *may* be the case the that US creates a bunch of new money, pays US bondholders, and those bondholders (for whatever reason) decide to run to the nearest Sotheby's and bid up the prices of art. It's possible. It's also possible that they will roll this money into new debt. Or that they will just sit on the cash. The sizes of any resulting flows will CONFORM to MMT identities. However, their STRUCTURE is determined by norms. Specifically, the economic valuations/norms of the people who receive the new money.
I think that structure is what most people care about. Many Austrian statements about calculation/business cycles/etc are statements about these actor-valued norms, how we can reason about them, the fact that government actors can only really express their own norms, etc.
So Mario, let me repeat: Where were your complaints about the lack of "honest, thorough, sincere, and humane communication" when all that was going on? You were happy to join in the criticism, without a word of complaint about its tone.
ReplyDeleteTake in what marris has explained:
ReplyDeleteThere's also the question of what effects a course of action may bring about. For example, it *may* be the case the that US creates a bunch of new money, pays US bondholders, and those bondholders (for whatever reason) decide to run to the nearest Sotheby's and bid up the prices of art. It's possible. It's also possible that they will roll this money into new debt. Or that they will just sit on the cash.
Or they may spend it all on liquor, dope and whores. Or, having been led to believe that $300 is worth a baby cow, they will now likely believe that they and everyone is suddenly richer than they previously believed and they will embark upon investment schemes based upon that false perception of new-found wealth. These schemes will be unsustainable because the actual amount of wealth was unchanged. Having invested money and their lives in the employment of these unsustainable lines of production, they will be shocked when the bust ensues and they find themselves poorer than before, the owners broke and the workers unemployed.
The sizes of any resulting flows will CONFORM to MMT identities. However, their STRUCTURE is determined by norms. Specifically, the economic valuations/norms of the people who receive the new money.
It is the very creation ex nihilo and artificially of this new money that causes the above referenced fatal distortions which result in the boom/bust cycle. All MMT can do is provide a rather mindless accounting of the nominal value of economic exchanges using the new money. It cannot and does not account for Cantillon Effects about which MMTers have no understanding at all, or the distortions of the price, investment and capital structure that must ensue from their mindless schemes.
Post #2
ReplyDeleteNone-the-less bonds and issuing bonds has been around for QUITE SOME TIME now...do you have any data that suggests your claims that bond holders are "distorting" the market through consumption? I don't. In fact, I am so confident in that analysis that I am going to guess that there is no such data out there. Remember, bond rates follow and track inflation anyway so the "returns" are not going to be colossal anyway, and therefore your concern is of very little magnitude to say the least. In fact, MMT goes the other way and says that bonds, aka savings desires, are a DRAG ON CONSUMPTION and a drag on demand in the economy!!! That’s money that otherwise would be spent into the economy!!! That is why MMT states, that with “demand leakages” like savings desires, the government NEEDS TO step in and add that income back to the private sector (either through tax cuts or spending) to compensate for those “losses.” A deflationary spiral where there is intense de-leveraging is just a more severe example of this very process. This is why MMT is so infuriated by these outrageous claims of austerity and government deficits and slashing spending…it’s disastrous to say the least for America!!!
Now think about the government as a customer. What makes you think that an FBI agent is going to spend his government issued paycheck on "whores, liquor, and dope" any more than the guy that works for JP Morgan? Seriously. And what makes you think that a computer firm that supports a government call center is going to take that revenue and net income and just “waste it”? Seriously.
The government is a part of our economy. It is a necessary part of our economy...like it or not.
Frankly, I really like and agree with what you guys are saying about the business cycle, booms/busts, economic calculation IN THE PRIVATE MARKET, etc. I really agree with that stuff. I really do. I am NOT for a centrally planned government. I do believe in adaptation and growth and demand and evolution and changing sentiment. I do however also realize that the Austrian area of expertise does not fully comprehend the entire dynamic of the economy in which they exist. Bob's points about fractional reserve lending more than highlight that fact. There is validity to the Austrian business cycle and to letting the markets decide what businesses they want and what goods and services and at what price and for how much. I love all that stuff and think it's great. But you can't really appreciate those ideas until you admit that many of those businesses have the government as a loyal and faithful customer among many others as well. And you really can’t appreciate these dynamics until you realize that fractional reserve lending has been dead for nearly 50 years!!! OMG!!!
If ex-nihlio creation causes "distortions" in our economy as Bob is suggesting then our entire economy and everything in it is one giant distortion!!!...b/c that's how our money is created!!! Even the money from bank loans!!! LOL To say such a thing is like to say that any air that is already available to us on its own is bad air and unhealthy. Well ummmm all air is already available to us!!! It just is!! Money in our system is the same way…the government holds the tap and controls the flow. If no one is lending b/c no one is borrowing…what happens next? We just “wait it out”? For how long? I am reminded of the phrase, “crazy is doing the same thing and expecting different results.”
In fact, as I think more about things, the MMT use of taxes in particular to stabilize the economy is really a great combination with Austrian economics. This is b/c Austrians, rightly so, are very interested in the private market and its free flow and movement. It's an incredible thing the way the private market moves and undulates and takes care of itself. However, as Austrians admit, it moves through booms/busts, and the natural business cycle....and throughout that cycle the economy obviously changes and therefore in order to stabilize the economy we attempt to do various things...MMT is simply suggesting the real and proper use of taxes and government spending to do that. Warren Mosler, one of the main MMT fathers, for example, is far more eager to use taxes to regulate our economy than for the government to create "programs" out of thin air or just keep hiring people, etc. I agree with him. He does agree that infrastructure is valuable to invest in of course, and I also agree with him. I add in universal health care and a universal pension program for seniors as well. Regardless, what I am trying to say is that there are two worlds...private and public. Austrians, really get how the private sector functions on its own and in a rather "closed circuit" world. And that is awesome and I am with you guys...and want to learn more quite frankly. MMT-ers are more big picture and understand the relationship between private and public sectors and how they do relate and interact. This is vital for Austrians b/c the private sector is not closed off on its own...it exists alongside the public sector...and always will.
ReplyDeleteCombining our knowledge of these two camps of private sector and public sector together with Austrians and MMT is really a very powerful and comprehensive (and accurate imho) approach to our economy both at the micro and macro levels of both the private and public sectors. I think it's the way to go, and I want to learn more about Austrian Economics. I'll just have to side-step around all the fixed currency, gold standard, fractional reserve lending, debt to gdp ratio jargon and get into their real area of expertise in the private sector. ;)
Edward Harrison over at www.creditwritedowns.com is one such individual who combines Austrian and MMT economics together in wonderful ways. Check him out perhaps.
Warren Mosler also supports the Jobs program, which I do as well. And full employment of course...that is a crucial aspect of MMT as I know it, and I love the thought of full employment. If I thought it meant that everyone worked for the government then I too would resist that notion as Austrians seem to do. However MMT seems to more be along the lines of a job of last resort so that people can at least do something rather than just get an unemployment paycheck and/or just be homeless. I think the jobs program is by far more sustainable and logical. It actually would likely fuel the private sector as they would have a more able and full labor pool to pull from. Wages might even lower to support business, and with lower taxes overall generally speaking, that would be okay. Plus a universal health care system and pension program, companies save even more...how about them apples!!! The government creates the arena for the private sector to thrive in. Yeah man. ;)
ReplyDeletehmmmmm...what could we call the combination of Austrians and MMT? hmmmmmm
I must say that Bob's link to Rothbard on Mises is quite a literary jewel, some quotes:
ReplyDelete"It seemed increasingly that Austrian economics would be the wave of the future, and that Ludwig von Mises would at last achieve the recognition that he had so long deserved and never attained. But, on the point of victory, tragedy intervened in the form of the famous Keynesian Revolution. With the publication of his General Theory of Employment, Interest, and Money (1936), John Maynard Keynes’ tangled and inchoate new justification and rationalization of inflation and government deficits swept the economic world like a prairie fire. Until Keynes, economics had provided an unpopular bulwark against inflation and deficit spending; but now with Keynes, and armed with his cloudy obscure, and quasi-mathematical jargon, economists could rush into a popular and profitable coalition with politicians and governments anxious to expand their influence and power. Keynesian economics was beautifully tailored to be the intellectual armor for the modern Welfare State, for interventionism and statism on a vast and mighty scale."
"Despite these sad and unfortunate conditions, Ludwig von Mises conducted his seminar proudly and without complaint. Those of us who came to know Mises in his New York University period never once heard a word of bitterness or resentment pass from his lips. In his unfailingly gentle and kindly way, Mises worked to encourage and stimulate any possible spark of productivity in his students. Every week a stream of suggested research projects would pour from him. Every lecture of Mises was a carefully crafted jewel, rich in insights, presenting outlines of his entire economic vision. To those students who sat silent and overawed, Mises would say, with the characteristic humorous twinkle in his eye: "Don’t be afraid to speak up. Remember, whatever you say about the subject and however fallacious it might be, the same thing has already been said by some eminent economist."
This is powerful stuff. Reads like the New Testament.
If ex-nihlio creation causes "distortions" in our economy as Bob is suggesting then our entire economy and everything in it is one giant distortion!!!...b/c that's how our money is created!!! Even the money from bank loans!!! LOL
ReplyDeleteYes, smart guy. Our entire economy and everything in it is one giant distortion. Money is created ex nihilo through fractional reserve banking. If anything other than 100% gold and silver reserve requirement banking is considered fraud, that problem disappears. Ron Paul explained in Chapter 2 of “End the Fed”:
http://mises.org/daily/3687
However, as explained by our “educator” Tom Hickey, I understand that you MMTers have no interest in this analysis whatsoever. Being the intellectual heavyweights that you guys are and all.
Bob there is no longer a gold standard in the USA. There is no fractional reserve banking...there's no reserve to fraction!!! When a loan is created at the bank that becomes a liability on bank's books (and an asset for the person/business). The Fed simply electronically deposits the necessary reserves in that bank's account at the Fed to satisfy that loan amount. That's all. It's not a distortion at all. The banks are fully capable to provide loans to everyone in America if they needed to b/c of this...now if those loans should be made in the first place is another story altogether!!! A gold standard does absolutely nothing to limit the amount of bad loans made...it just limits the amount of loans possible...big difference.
ReplyDeleteRegardless, we are talking about our current economy and monetary system...not the one 50 years ago...nor a hypothetical one that suits our own personal views, however misinformed those views may be...rather we are talking about our current state of affairs, how best to handle them, as well as how MMT approaches both of those points...and if that MMT approach is flawed in any respect. To all these points, your most recent comment is completely inapplicable and irrelevant...I am sorry to inform you of these realities.
Mario:
ReplyDeleteAn intelligent person could and would compare and contrast the two systems. You MMTers would lose in such an analysis so you want to preclude and short circuit such a debate/analysis. If nothing else, that's your M.O.
You've done it again. Be proud.
The "valued characteristics" analysis can be pushed further. It is not limited to money flow/stock. When you drive past an empty shopping mall and "wish" that it were open and busy, what are you really saying? Are you saying that you wish the physical objects were moving around rather than staying still? It's possible that this is what you care about, but I don't think so. What is it about the "idleness" of the resources that bums you out? Are you bummed out when you see a backyard or a tranquil pond? What makes the shopping mall different?
ReplyDeleteNow suppose you owned (could allocate) the shopping mall. If you really just cared about the fact that stuff inside the mall was not moving, then you could allocate it in various ways that would "improve" the state, right? You could run around and physically move things around. You can offer other people reasons to come and move stuff around. You could even give them Monopoly money and ask them to play "Mall," a game in which buyer players pretend to buy things and seller players pretend to sell them. All pieces could get returned to their original positions once the game is over. You could even pay them in "real money" to convince them to play. Or you could "pay" the buyers by letting them walk out with whatever goods they "purchased" when the game is over. If you owned the mall, would you do any of these things? Clearly the idleness does not bother the current owner so much that he attempts these alternate uses!
I don't think there are many people who care about the "idleness" (no motion) of that shopping mall and its contents. If/when they "wish" it were non-idle, they are really expressing a normative preference for a world with different, specific characteristics. What characteristics do you care about?
@libertarian89
ReplyDeleteI don't see your post here but I got it via email. Here's the way I frame it...you tell me what you think.
#1. Would you rather have the state/feds pay out unemployment OR would you rather have the people doing something to generate cash flow for themselves, gain work experience, get a job when they cannot find anything (and without this program they would have no recourse left but poverty)? Which do you think sounds better?
#2. As for the economic calculation, the way I see the jobs program effecting it is that people will still be able to pay their rent, pay for food, for gas, and for keeping their family going. This I guess you could say, "distorts" the economic calculation in that it continues to show that there is demand for these products and items in the market at their current price. Ummmm is that a bad thing?
#3. At the same time the economic calculation does not apply b/c the wages for this program are below the minimum wage. The only way it effects the market is that health benefits are provided to those workers, and it is possible that there are jobs out there that pay minimum or better but no health benefits, making the jobs program work possibly more attractive. This would effect the economic calculation accordingly and I DID MENTION it before in my post above. However if there was universal health care provided, this would be a moot point altogether. ;)
I read this tiny little book on Mises, I tried to get past the fawning tone.
ReplyDeleteMises prescriptions for banking are self-contradictory: he wants "free banking" without the Fed, yet decries that the Fed lets banks expand credit. If we desrired to impose 100% reserve requirements without the Fed like Mises wants, to impose this requirement we would need a ... government, gasp!!! SWAT teams, oh horror! Actually Mises thinks it is "logically inevitable" that market would impose this on banks: but if banks need to keep all deposits in case someone wants to withdraw, they can never lend any money. Unless they use their private money as reserves. I wonder what interest would they have to charge to make this business model profitable.
That is why, contrary to Mises' fable, even before Fed came into existence banks never had full reserves, otherwise they'd go out of business. That is why we had bank runs in the first place. I guess that was logically impossible.
Mises's story that money necessarily comes from a commodity just proved all fiat currencies and all Monopoly games out of existence: players strive to get the paper trash money the Mnopoly bank issued, why? Because to stay in the game they need to pay fines from time to time in this very money. So they'd better have some handy. That may be the reason the players don't spontaneously dump the paper money for some commodity like shirt buttons. Same is true in any economy. If the governmen't doesn't tax, people dump the state money, but not for gold, usually for dollars (although they have no backing!) or some other popular, yet inconvertible currency.
Mises story is simple: for 1000 years people used gold as a commodity and one beatiful day (he litterally says it was one day) they start treating it as money. Nothing else is logically possible. QED.
We never hear why constant quantity of money should be sufficient for any economy, he just "knows" (calculation theorem anyone? I guess Mises is exempt). Hmm, humble people who looked at math think that the economy may need different amounts of money at different times to have a constant GDP, but hey, Mises doesn't do math, he just "knows"!
"Logical" statements like "more money has less value" implicitly assume that more demand doesn't entice entrepeneurs to produce and supply more, maybe we are at full capacity all the time and not a widget more can be produced, what a happy world!
I would never have thought reading Rothbard would be so much fun!
http://mises.org/books/evm.pdf
Bob I would be open to having such a discussion...I am just explaining that your points are not relevant to THIS discussion. It is not a cop-out or anything like that on my part...it is just discerning relevance.
ReplyDelete@marris
Are you saying that you wish the physical objects were moving around rather than staying still?
no I'm not saying that. That is silly (possibly insulting?).
What is it about the "idleness" of the resources that bums you out? Are you bummed out when you see a backyard or a tranquil pond? What makes the shopping mall different?
first off it's not that I am "bummed out" about it that is the issue. Second I am not going to insult your intelligence and explain the difference economically between a shopping mall, a tranquil pond, and your backyard.
Clearly the idleness does not bother the current owner so much that he attempts these alternate uses!
you're joking right? This is a joke surely? If I were the owner of that shopping mall, I'd be concerned about how I was going to pay the mortgage on the property without a renter. Or if it was paid off, I'd be concerned about how I was going to increase my ROA and my business revenues in a community where there are no jobs, no incomes, and therefore no business. I'd be very concerned about losing all the capital investment I put in my business and real estate and how I was going to handle all of that. I would also be incredible pissed off about WHY this is happening to me, my community, and my business (aka corruption of the highest degree). THAT is what I mean by idleness and by deflation and by output gaps. I am NOT talking about a shopping mall in a ghost town...I am talking about shopping malls all across the country and as a more personal example, one in the middle of a very prosperous and busy part of my town...Los Angeles. The kind of recession/depression we have on our hands today has a spiraling effect to it...it is dangerous...especially when the "tap" is turned off at the source (government), taxes are raised (to pay the debt back of course!), and everyone in the private sector is de-leveraging, sitting on all their cash, unemployed, licking their wounds (still), and waiting/wanting to see more demand in the market...while certain major giant businesses report profits and do nothing but lobby at the highest places in DC.
If/when they "wish" it were non-idle, they are really expressing a normative preference for a world with different, specific characteristics. What characteristics do you care about?
yes and can that normative preference be fulfilled? In case you didn't know, there are alot of unemployed people out there that REALLY, REALLY WANT JOBS...there is an expressed normative preference outstanding right now as we speak. Why isn't it getting satisfied?
A stable economy, private sector nfa, a closing output gap, and full employment are the types of characteristics that I care deeply about...yes the very same points that I have been talking with you about this whole time.
Based upon these laughable statements and questions about "idleness" of malls and ponds and paying people to move items around in a store...I am wondering if I may have spoke too soon about combining Austrians and MMT and that Austrians really get the business cycle and private market dynamics. I don't like to be wrong, but if this is all you've got then what choice do I have? Seriously.
gasp!!! SWAT teams, oh horror!
ReplyDeleteHow long have we been at this? 36+ hours? And took you this long to "issue spot" the subject of the appropriateness of siccing the police on somebody. I generally prefer that the police limit their activities to catching real criminals like thieves, embezzlers and murderers as opposed to threatening peaceful market participants.
I think he was being facetious Bob. How many SWAT teams have you heard about "taking down" tax evasion criminals? Yeah me either. And like I pointed up much earlier in these posts...the government does "force us" to pay our taxes so we do pay them (MMT recognizes this fact)...look at Greece today and you can get a taste of what it would be like if the government didn't enforce tax payments. If you want hyper-inflation, which I assume you don't, then a sure-fire way to do it would be to take away all taxes...I think Ron Paul is suggesting something of the sort in regards to no income tax right? Well funnily enough, his proposal would do far more than the Fed ever could to get us on the road to hyper-inflation. LOL Granted there are other taxes besides income tax but the general principle of what Ron Paul is saying is actually highly inflationary. LOL
ReplyDeleteNo, they are not meant as an insult. The mall owner in your example would indeed prefer a world where he received more money and got to keep his mall. But that does not make him different from any other actor in the economy, right? We would all like to acquire more goods and services. I'm asking why you care whether the current owner or the creditors get control of the mall. I'm not being dense here. I'm asking you to articulate why you prefer about the former world to the latter world. For example, you may think that the creditors will close the mall permanently and fire all the people. If so, then THAT is the characteristic you really care about. Not whether the owner keeps it. Or you may care about the fact that money returns flow to the creditor rather than the owner. I'm just saying that you should articulate this preference.
ReplyDeleteIf you only care about the nature of the distribution, then we could express the question in MMT terms just as easily, right? Why do you want money (or goods) to be allocated to one bucket rather than another? What characteristics do you want the bucket stocks/flows to have? Your answer can use as many concepts as you need.
Any preferences you have about people working are a bit more complicated to express. If you want person A to have access to more goods or services, then yes, you could just give him money to make the purchase. In making his purchase, he would either be bidding a good/service away from another buyer OR pulling some "idle" thing from its current owner to himself. I think you're really just saying that you prefer a world where more things are brought from the "idle" state into the hands of these JG guys, right? The money is just the counterweight that will force the idle resource owner to produce/move the good/service.
Is this not what you're saying? This is not a criticism of your preferences. I'm just seeing whether this analysis expresses them.
@marris
ReplyDeleteno worries all good I hear you.
So let's take a step back first. #1. I like industry and productivity in any economy. People doing things in a (relatively) free market environment. Cool.
It's the owner of the mall that I care about per say...it's about the aggregate demand that I care about. Malls and businesses shut down every day of every year in good and bad economies...you won't see me shedding a tear for any of them. ;)
However, it's when there is a distinct shift in the economy that is disturbing to me. We can see that shift happening today in many ways. The poor are becoming poorer, the rich, richer (and more powerful too). It's not good.
These shopping malls are not being replaced by other businesses...they are just sitting there vacant. No demand. It's not good. If the creditors got the mall, that means they too are taking a loss (here's comes the deflationary spiral)...many banks went out of business for these reasons. They can't turn the property b/c no one wants it, b/c no one is spending, and no one else can buy it b/c no one has any money left...they're all in debt. Yes leverage was high and many shouldn't have made or taken those loans in the first place...however workers and ordinary folks are left holding the pile of shit in many cases and have no money or means to make money. On top of this we have a raging debate in DC about slashing spending to tighten its belt.
How do you stop a deflationary spiral? What force can counter-act such a movement? Private sector? Where? No one's investing capital. No one's consuming. Why do you think blood can come from this stone? Something outside of the private sector needs to step in. That leaves either the external sector or the government. We have a trade deficit (another deflationary aspect of our economy), so we're left with the government...and ONLY the government to counter-act this force. This is not about the government buying shopping malls or about government spending to "re-distribute" property and market participants and supply/demand. Let the market do that on its own by itself. But it IS about recognizes what is going on in our economy and that we NEED to lower taxes at least. Why? To help people save. We need to get real financial reform and corporate reform. Why? So that we can all get out from under their economic hypnotism. The JG guys wouldn't be getting all the idle-ness at all either by the way. The JG guys are at the bottom of the barrel my friend. They don't have jobs, have no savings, and are making $9-10 bucks an hour...they aren't going to be buying up idle shopping malls and retrofitting them and all that for the 21st century. The idleness will be picked up by investors and businessmen in the market that see supply/demand and consumption patterns and want to turn profits. Consumers will be able to meet them at their doors and pay for those products b/c they will have money and savings. Financial reform and huge corporate regulation (and taxation) is crucial to keep the richest from being richer and to allow a more stable market.
What do Austrians suggest should be done in the current economic situation? Indeed what do they see is the main problem(s)?
oops sorry I meant to say this:
ReplyDeleteIt's NOT the owner of the mall that I care about per say...it's about the aggregate demand that I care about.
"Or they may spend it all on liquor, dope and whores."
ReplyDeleteAnd maybe pigs wil fly.
Bob "Yes, smart guy. Our entire economy and everything in it is one giant distortion. Money is created ex nihilo through fractional reserve banking. If anything other than 100% gold and silver reserve requirement banking is considered fraud, that problem disappears. Ron Paul explained in Chapter 2 of “End the Fed”"
ReplyDeleteAll economics involves trade-offs. The basic trade-off at the macro level is between price stability and employment. It is generally thought that these cannot be achieved together. MMT is the only theory that offers a practical solution to this apparent dilemma.
Adoption of a convertible fixed rate regime with no fractional reserve banking means lending financial capital directly, at a one to one ratio. The effect would immediately contract the money supply by a huge amount, destroying effective demand. This would have a deflationary consequence and unemployment would go through the roof.
marris "What is it about the "idleness" of the resources that bums you out?"
ReplyDeleteIf you don't get this, I don't think we have much to debate. We are down to the normative core of ideology.
The basic trade-off at the macro level is between price stability and employment.
ReplyDelete1. There is no "macro level".
2. Fiat money dilution is the cause of unemployment so there is no "trade off". With diluted fiat money you get unemployment plus generally higher prices and thus no "stable prices".
3. Prices will be what they will be. Market prices are not a problem and really do not require government intervention.
well...I guess that ends this discussion.
ReplyDeleteCheers all!!!
@marris...I'd be happy hear any thoughts you may have as always.
Cheers.
@Bob
ReplyDeletein your economy, do taxes effect prices and the private sector at all?
well...I guess that ends this discussion
ReplyDeleteThe big brained intellect speaks. You could easily get rid of Ron Paul and myself by proving the existence of "the macro level" and it's alleged alternate reality. You can't so you pull this "let's end the debate" stunt.
Why do you think Keynes ignored the pre-existing Austrian School in his analysis? Just like you, he knew he'd lose the argument so he purposefully refused to engage the Austrians like the coward he was.
are you saying that I need to prove the existence of the "macro economy"??!?!?!
ReplyDeleteyeah I'll pass on that one. thanks
(note: if I am misunderstanding what you mean by a "macro level"...let me know)
@libertarian89
ReplyDeleteagain your post doesn't show up here but I got it via email.
Thank you for response I appreciate it as well.
Good to know what is most important in your line of thinking.
Note...I am very skeptical that giving a man a bottom-of-the-barrel job that pays $9-$10 an hour is going to prevent him from finding new and better work somewhere else. As if he's going to be satisfied with such a situation. Give me a freakin' break.
Also if you would prefer that no unemployment exists at all for anyone then again this conversation is over, b/c I do think that such a proposal you are suggesting is socially reckless and completely unnecessary and frightening even for our economy and the PEOPLE that live in it.
But that's just me. I'm all for tough love...as you can tell from having a discussion with me...but I'm not all about senseless and unnecessary punishment and suffering. Sorry it's just not my style...especially when the government can't go bankrupt in the first place...you have no legitimate reason not to help people that are in need. If that distorts your perfectly spherical view of the private market and economic calculation then yes, put me on record as being all for that! I find it disgusting when people put a perfect ideal of any kind before suffering & innocent people that want to do something in this world but don't have the means or ways. It's not that unemployed people don't want to work or are lazy. If you want the government to crack down on anyone why not direct it towards banks, lobbyists, and huge multi-national corporations? The tough love thing is all good in my book, it just needs to be re-wired a dash.
I am starting to see why some other MMT-ers here respond the way they do towards Austrian economics...although let me also say that I am still open to finding something of value here with the Austrians...I am sure there is something in their ideas...there has to be...I just need to find it.
This whole thread is quite a waste of time.
ReplyDeleteThe only issue worth discussing is the difference between a deflationary or an inflationary solution to a recession, the former being the preferred option of austrians and austerians, the latter by those whose advocate sustaining aggregate demand through deficit spending.
agreed Mammoth...however like many that do not know what they actually believe and how it actually applies the real world they live in...the discussion wanders off far and away, never to be addressed head on, never with conviction, clarity, and integrity...but instead always with terse, splintering comments, senseless ideas, and a general lack of consistency or continuity in their reasoning.
ReplyDeleteI have attempted to be more than accommodating for every one of the many people that seem to pop up like clowns out of a car to address my posts...and the large majority of their comments are either completely useless or just pandering their own ideas around with no real interest in discussing, listening, considering, or answering to another's ideas...not only that but they don't even have the decency or respect to flesh out their own ideas fully when asked about them.
Libertarian89 and marris seem to be the only exceptions, but even with them, they ask more questions than actually answer ones directed to them.
the end is drawing nigh it would appear and my hope in Austrians is fading fast. I thought there might be something in it for all of us, but I am growing more doubtful with every post I read.
I am still interested in hearing from marris and I'd love to hear how bob views the effect of taxes on his private market economy that he's constructed.
@mario, thanks, your one of the most reasonable MMT'ers i have met. At least you will listen. Thanks. Here's my response
ReplyDeleteGiving him that job will slow down the reallocation process necessary for recovery. It basically slow down the recovery by in some cases preventing people from finding more profitable and productive lines of work, or making it harder for them to find more productive jobs.
What is socially reckless and unnecessary is for the central bank to inflate artificial asset bubbles with cheap credit and artificially low interest rates which draw capital and labor into unsustainable lines of production that only seem profitable during the boom phase.
So when the bubble bursts, millions of people find themselves unemployed because they were previously drawn into areas of the economy that were only seen as profitable because of the bubble. When the bubble burts and reality sets back in, they need to find new areas of work that are profitable, and sustainable, and employing them for the sake of employing them slows down or even prevents capital and labor from shifting into more economically desirable sectors.
The moral to the story is to avoid diverting labor and capital into areas of the economy that are not consistent with real consumer demand, and not justified by real market fundamentals. In which case the takeaway is this: Don’t inflate artificial asset bubbles, which ultimately means no central bank intervention and n monetary meddling, and no artificially low interest rates.
People are suffering because of central bank meddling and artificially low interest rates. The suffering will come to an end as soon as the government and the fed stop intervening.
The market can help those in need if the government and the Federal Reserve stop intervening and meddling. All this does is prevent the economy from reconfiguring in a sustainable way and prevents people from finding work in sustainable lines of production that produce real wealth.
All government spending, credit expansion, and intervention do is prevent the economy from restructuring in the way I just mentioned.
are you saying that I need to prove the existence of the "macro economy"??!?!?!
ReplyDeleteYes, that's exactly what I mean. You can't and you won't. The "macro economy" is just a list of individual sales and trades added up. It has no independent significance other than that. The same with "aggregate demand". These are garbage terms intended to fool the weak-minded.
Roddis is right. There is no astrophysics either, only particle physics. And as long as string theory cannot explain gravity, there is no gravity either.
ReplyDeleteokay I see where you're coming from Lib89.
ReplyDeleteI agree the Fed helps to contribute to asset bubbles as do the regulators (or lack thereof). I don't know if you know this but many MMT-ers actually agree with you and don't like the Fed as it is run by unelected technocrats with no real social accountability. There is a stream of MMT-ers that have constructed an actual way of destroying the Fed in a way that actually works. I am not an expert in that area but the basic premise is to bring rates to zero % indefinitely, merge the books of the Fed and the Treasury, and the Fed will simply balance the accounts by providing the reserve deposits for bank loans and transactions. No more open market, no more auctions, no more paying the treasury back, no more Fed dividends, etc. Rates would always be low essentially, and I guess that would hurt savers. Others know more about it than I do, and I'd like to hear more about it too myself. I like the idea of 0% rates, b/c monetary policy isn't an effective way to manage inflation/deflation anyway...but I'm not tied to that point either...if you want to keep it fine with me. Many MMT-ers do not subscribe to the idea that QE2 created a bubble in any market, rather it just swapped out bonds for cash, only to go right back into bonds again. LOL However the housing market bubble was created by more than just the Fed rates...lack of regulation, oversight, glass-stegall, etc. were more the cause it seems to me...low rates during Greenspan definitely helped for sure...the man was and is a total buffoon in my eyes.
None-the-less, I do personally believe the boom/bust cycle of asset bubbles and "waves" of enthusiasm and quick cash are not a "Fed phenomena" but rather a human one...they will still be here for anyone that's interested in them if/when the Fed leaves. I would think it very naive of Austrians to think once the Fed is gone that asset bubbles will also be gone.
The issue is the economy at large (aka the MACRO economy)...and when the largest companies went so leveraged, failed, got the bailouts, while everyone else crashed and burned...well we have a problem on our hands now. The JG is not a big element in such a scenario. Big things would be regulation oversight, restructuring of Congress and lobbying, and holding companies to the fire of their dumbass mistakes, as well as proper tax cuts, infrastructure rebuilding, and proper social investments like health care and pension programs. I am not an expert in health care but my wife is Australian and has had serious health challenges in the past and I know first hand that universal health care does work...as much as anyone wants to debate me on it, they are just wrong. Any inefficiencies can be tweaked and worked with and there are options and many possibilities beyond the crude form of health "care" that we have in the states today. The JG would just give people a job in this environment and create a backstop for the bottom of the barrel to be able to at least provide for themselves. They will be doing menial work no doubt. It's a cheap, easy job. What do you expect? But there's plenty to do which is not "meaningless" or useless in our economy...in fact the jobs could be done in private sector companies that sign up for the program to take on workers for added help. The companies don't even have to pay the workers...the government will compensate them while the companies get the extra help in the mail room, on the job, etc. It can work gentlemen...it really can. No economic calculation problem there. Trust me on this one. ;)
Austrians don't seem to want to admit to the fact that the government is a consumer in our economy. They just do NOT want to hear that for some reason. Therefore whenever you state that the government distorts the market b/c it buys pencils and computers and helicopters and decals and food, etc. for its offices and events and services you are creating a fallacy of composition since the government IS a part of the market, and therefore cannot distort it in that sense. The government is an equal consumer in many, many ways in our economy...you must recognize that fact. Is it flawed?
ReplyDeleteWe may not ever agree but at least we can communicate effectively with each other and understand each other. I do think it's vitally crucial for people to realize, as Mammoth points out, how to effectively respond to inflationary and deflationary trends in the MACRO economy properly (that one's for you Bob). This is why I want to KNOW what the Austrian view is on taxation in today's economy....should we raise, lower, or maintain taxes today? We don't need to get into the big, bad, and ugly government spending aspect of things...but we can surely discuss taxes right? I really don't want to presume what Austrians say about taxes. But I'd be happy to hear from you.
Cheers and thanks.
@Mammoth
ReplyDeleteLOL
and accounting cannot be used in economics for the same reasons that math cannot be used in chemistry...I mean seriously what ARE you thinking??!?!
Government is only a consumer because it has the ability to raise taxes on its citizens to pay for its consumption which prevents them from consuming more, or the ability to issue currency to pay for its consumption, which citizens pay for through inflation and a lower standard of living.
ReplyDeletethat's not true. taxes have nothing to do with government consumption (taxes don't "fund" anything the government does). Inflation is irrelevant here as well since it is measured against the aggregate...you can have high or low government consumption and still have high or low inflation...it depends on the private sector at the time. Our standard of living will only drop the longer the public sector "tightens" its belt against the private sector.
If they did, people can resolve the problems voluntarily in the free market without some MMT central planner using force to dupe people into doing things they otherwise wouldn’t do in a free market.
first off that is completely inaccurate about MMT as "central planners" using "force to dupe people." WTF man?!!? Automatic stabilizers are the main mode of attack...why do you think I am talking about taxes so much?!?! Secondly, if "people" in the "free market" can handle problems why can't the "people" in the government do that along with them just as equally? That question makes it sound like there is some wide separation between public and private but there really isn't. Government employees and public servants are also part of the free market you know. They don't all live on some government island in some government economy separate from the "free market." The only difference is they get paid by the government instead of a corporation (which likely has the government as its client in one way or another--most of the largest companies do you know)....they still buy the same groceries, TV's, houses as everyone else in the economy or "free market" as you say.
No one has a right to someone else’s money, property or income.
this is opinion and has nothing to do with economics.
abolish taxes for moral reasons
that'll get you hyper-inflation faster than the Fed ever will.
Our problems are attributed to too much government, too much spending, too much regulation, not a lack thereof.
opinion again...no evidence, stats, or figures to back this up. It flies in the face of all that has happened since the GFC.
They insist that they possess the requisite knowledge and information to plan our way back to prosperity through government deficit spending and job programs.
yeah basically that's true at this time. If we were overheating then we'd be saying something else...to match with those times...just like how the Fed changes rates to match the times...they only use a less effective tool. Government spending is what the US has to boost the private sector since we run a capital account deficit.
It sounds like you believe what you believe no matter what is presented to you. I am open to changing my thoughts based on the evidence presented, which is very little at this time. Are you willing and if so why not?
@marris So the feature you care about is some sharp increase in the number of bankruptcies? In the bucket model, each "event" is a flow of money and/or goods from one bucket to another, right? A sale is a flow of goods from bucket A to bucket B with a mirror money flow from B to A. Isn't this correct? It is useful for me to figure out bankruptcy gets mapped onto this. I think it means that the bankrupt mall asset would move from the owner's bucket to the creditor's bucket. There is no money flow. Now I *tnink* by "deflationary spiral" in this model, you may mean any of these things [I describe the characteristics for one creditor bucket, but you could say that the spiral only occurs when some minimum number of buckets go through this. Or through some other process]
ReplyDelete(1) It may mean changing expectations. To take an extreme example, the creditors wake up on Monday and estimate that the mall can be exchanged for 100 money units (this is the largest counterweight they can get). They wake up Tuesday and revise this estimate to 90. On Wednesday, they revise it to 80. The series of estimated values falls with time.
(2) It may mean a fixed set of expecations about various future prices of the mall. That is, the creditors wake up on Monday and estimate that if they can sell the mall Monday, they can do so for 100. If they can't find a buyer on Monday, but can find one on Tuesday, then then they will be able to sell for 90 on Tuesday. If they can't find a buyer on Tuesday, but find one on Wednesday, then...
(3) A combination of (1) and (2). Changing future expectations.
Do any of these repesent "deflationary spiral" in the bucket model?
You may have any preference over the state/sequence of states that "should" occur to a creditor's bucket. Or to some non-creditor's bucket. But what is the preference?
BTW, it could be the case that your preferences have some piecewise behavior. That is, as long as the number of creditor buckets going through (1), (2), or (3) stays under some threshold, then you stick to policy X. If it exceeds the threshold, you switch to policy Y. If you want some kind of piecewise policy, then you may also have some non-rule criteria for switching. For example, your preference may be that Mario decides when the switch. Or Tom Hickey. Or some group of people.
Are your preferences expressible in these terms?
Austrian economics per se does not have any "recommendation" for what "should be done" any more than MMT does. The recommendation is a display of preference, right? I *think* you could express ANY expectation or preference that an actor has about the state of stocks/flows (for goods and money) in "Austrian terms" just as easily as you could express it in plain English: "I expect to sell this mall for 100 units" or "I think you should give this guy $1000 a week," etc.
okay fine you want to call printing money inflation go ahead...but you're not recognizing that the economy is also un-printing money too...we have a trade deficit at the least that you're not considering that effects us. This is why you need to look at the AGGREGATE. ugh
ReplyDeleteI think I'm done here guys...let's take it at that...I'm done with ya'll...I'm sick of talking buckets and apples and moral dilemmas and free market and central planning...while all day long the reality stares us in the face.
@marris your logic and rigor of thinking is sparse and inconsistent but I appreciate your civility and interest in discussing things with me. It is much appreciated. Thank you.
@libertarian your thoughts are clear but not backed up with reality and they are contradictory. Regardless I appreciate speaking with you as well and have gotten much clearer as to the type of economic view you have. Thank you.
Call me what you will that's is going to have to be fine with me at this point. But I have accomplished my task here gentlemen...to understand you and your ideas and maybe for you to understand mine, but clearly your filters are so strong that you cannot view anything except through such filters. Thank you all and to all a good night.
Bob, denying the "macro level" ends the debate because MMT is a macro theory.
ReplyDeleteYou have ended the debate by denying the existence of the macro level, presumably because you assume that marco is based on ontological collectivism. That presumption is gratuitous.
MMT is not even methodological collectivism aka methodological holism. You assume an extreme version of ontological individualism and build your economic explanation on that form of methodological individualism.
As soon as the debate arrives at the ontological level, we leave the domain of economics and enter the domain of philosophy. Then the question becomes one of criteria. To the best of my knowledge, Austrian economists claim that their fundamentals are intuitively self-evident.
The way I do philosophy, and I am a professional philosopher, claims of intuitive self-evidence are recognized as disguised norms. So we end at the normative level, where all debates with Austrian economists eventually end. We simply disagree over basic norms.
So be it.
@tom
ReplyDelete> If you don't get this, I don't think we have much to debate. We are down to the normative core of ideology.
I did not write this to say that you should or should not be bummed out (about idleness or any other feature). I'm trying to see what your normative preferences are. I don't think they are an aversion to "idle resources" per se. They *may* be, but I want to make sure that you haven't left out anything from the description.
Suppose we implement the JG policy and everyone receives a stream of income which they use to bid on goods and services. [You may have some minimum criteria on what the minimum number of goods are, etc]. In this model, idleness has not disappeared, right? There are probably plenty of resources sitting in the ground which could be put into use. I could also create idle capital goods. I could use my means to build a mall and say, "Look, an idle mall! It would be great if DC could allocate some workers to run it. Then it would no longer be idle. Furthermore, I don't see why I need to pay these new mall workers. Why not just continue to give them the JG wages? In fact, you government guys are using MY mall. Why don't you send me a rent stream as well?"
I'm not actually sure what you think should be done in this scenario. Should the government rent the mall? Should it not? It may be the case that you really do care about idle capital goods, in which case the mall should be rented. [This is what I'm trying to figure out]. If you do not recommend renting it, then there must be something that you care about besides "idleness" per se. Or maybe your preferences are different in a world with/without a JG stream? I *think* you want the JG stream for its own sake. But I'm not sure.
About the deflationary vs inflationary way out of a recession, I like to think of simple economy of the Capitol Hill Babysitting Co-op that Krugman mentions in some of his books. The wikipedia article provides a good summary of different schools analysis of it, including Bill Mitchell's in the MMT camp.
ReplyDeletehttp://en.wikipedia.org/wiki/Capitol_Hill_Babysitting_Co-op
I have to say that in this simple economy, the free market explanation seems superior to me, and I would love to see it addressed by MMTers more thoroughly.
The "by marri" post should say by marris. Also, I was addressing my comment to mario (not myself ;-).
ReplyDelete@marrio I'm not sure what you're saying here. What do you mean the logic is sparse? You said that MMT could be expressed with flows and stocks, right? I'm asking you to express your policy recommendation in terms of flow and stock characteristics. How else could you express an "MMT policy"?
I don't think I've done anything in "Austrian" terms. Do you? I talked in terms of buckets since you said that MMT statements can be expressed in this way.
@marris
ReplyDeleteI'm not actually sure what you think should be done in this scenario.
I didn't see you guys had all these posts as of late. LOL
basically marris we got side-tracked onto a micro level example so the analogy doesn't exactly hold...none the less basically what MMT is saying to do is to first recognize that in this scenario what is going on is massive de-leveraging (saving and not spending) throughout the private sector. Therefore MMT suggests that policy should help to speed that process along. Help people get out of debt and get back to spending, hiring, working, building, consuming again. How do we do that? MMT suggests to cut taxes first and foremost so that people are saving more and can pay off their debt faster and easier and everyone is happier. The government doesn't need that money anyway! Honestly I feel like I'm seriously repeating myself here. The other thing we can do is provide more infrastructure rebuilding to catch ourselves up a good 50 years with bridges, roads, electrical, etc. Also at the very least to NOT cut spending as they are doing of course! But also to possibly do universal health care, universal pensions, R&D, education, etc., etc., etc. It can be progressive but the point I am trying to make to you guys is NOT to subscribe to the policies...but rather to the reality of the way things work in our economy...I am trying to teach you guys how to fish. You can then create your own policy proposals then that fit your own politics and views but they will be based in reality now instead of a pipe-dream fantasy land...and then if you really do want poverty and wide-spread unemployment you can go for it balls to the wall knowing full well wtf you are doing. Everyone has a right to believe what they want...but in my world no one has a right to deny facts and reality without getting at least challenged by someone about it..especially when so many and so much is at stake.
does that answer your question about what MMT suggests? #1. cut taxes, JG program for the bottom of the barrel, infrastructure, no more cutting spending, etc., etc.
Cheers mate.
@marris
ReplyDeletethe buckets you are talking about are all just one...the private sector. The shopping mall, the creditor, the demand, the jobs, etc. It's all just one bucket man. The whole point was to attempt to get you to understand what happened 3 years ago so that you could see that "lower prices" aren't exactly a good thing and how the output gap actually functions in our economy to show you WHY we need to help move the economy along or at the very, very, very least why slashing government spending is equivalent to kicking a man's teeth in when he's already down and out. You're getting way hung up with this hypothetical analogy and lost the forest for the trees I hate to say. Sectoral Balances are not an MMT thing...it is an economic thing. MMT just understands it better than most. The only other "bucket" available in such a situation as we find ourselves in today in the USA is the government sector...our external sector is in deficit b/c we import more than we export. I've been trying to explain to you the situation our economy is in and what options we legitimately have to work with today. Going to the gold standard is walking into a death trap and letting the free market "work this out" is completely non-descript, unevidenced, and "sparse."
"you have to know that reducing government spending is nothing at all like taking money out of the economy. Right?"
ReplyDeleteThat is a presumption that requires a macro justification. MMT says why it is wrong in terms of debt-deflation. See for example Irving Fisher's classic article The Debt-Deflation Theory of Depression, and Hyman Minsky's macro theory of financial cycles based on his financial instability hypothesis.
Autrian's presume that the economic will automatically reset by deflation, in which prices and wages will come into equilibrium at a lower level and this is happen with some minor dislocation due to liquidation of malinvestment.
MMT disagrees with the view on several levels, the most important of which is that debts are denominated nominally and the amount to be repaid remains the same in a devaluation. This results in massive cash flow problems as many loans, such as mortgages, cannot be serviced.
This has a cascading effect as asset values tumble, foreclosures mount, homelessness and unemployment rise, effective demand dries up, and the economy spirals into a deflationary depression. Not exactly a minor dislocation.
I realize that Austrian economists deny this, and this is where we differ.
Bob: "The "macro economy" is just a list of individual sales and trades added up. It has no independent significance other than that. The same with "aggregate demand". These are garbage terms intended to fool the weak-minded."
ReplyDelete"Aggregate" means "individual terms added up." That is what macro is. It adds up the sectors that contribute to the economy, households, firms, government, and the rest of the world wrt the currency of issue. What don't you get about this? You are the one coming across as weak-minded.
"Austrians don't seem to want to admit to the fact that the government is a consumer in our economy."
ReplyDeleteThey also do not seem to appreciate that all money ultimately comes from the government, banks being chartered institutions that are public-private partnerships, not exclusively private even thought they are privately owned.
Final settlement of all monetary transactions is through the exchange of bank reserve or currency in circulation (cash) and both come exclusively from the government, which has a monopoly on currency creation. This is also true under a gold standard. The difference is that currency is tied to gold in the government's vault, and money creation is limited by the fixed exchange rate.
Some people seem to think that money grows on trees like coconuts.
@tom Just saw your post about philosophy. Your statement that "claims of intuitive self-evidence are ... disguised norms" is interesting (albeit confusing ;-). Are you using the word "norm" here to mean "convention"? Or "preference"? Or do you think of these as the same thing? I've always thought that the teleological model requires both perceived properties and preferences about those properties. But that they are different things. For example, you and I may share some convention about whether a car qualifies as a "red car" or not. However, you may prefer a red car to a blue car and I may prefer the blue to the red.
ReplyDeleteI'm curious about what you think of this paper by Rod Long [https://mises.org/journals/scholar/long.pdf]. I think the Wittgenstein grammar model distinguishes between these two concepts. What do you think about it?
marris, your argument is at the micro level. MMT is concerned with the macro level from which national policy options are formulated. Since you do not seem to think that government should have a budget, or it it does it should only be minimal, funding basic operations and security, you have no understanding of sectoral balances or the role of aggregate demand in achieving systemic efficiency at the national and international levels, which is what macro is about. Idle resources don't bother you. Deflation doesn't either. If that is the kind of economy and state you want to live in, good luck with that. See you at the polls.
ReplyDeletemarris: "I did not write this to say that you should or should not be bummed out (about idleness or any other feature). I'm trying to see what your normative preferences are. I don't think they are an aversion to "idle resources" per se. They *may* be, but I want to make sure that you haven't left out anything from the description."
ReplyDeleteI have already said that MMT is a macro theory whose chief policy goal is achieving and maintaing full employment (everyone willing and able to work has a job offer) and price stability (the Fed targets a constant 2% CPI). Other macro theories hold that employment and price stability involve an inevitable trade-off. MMT denies that and shows why.
While full employment and price stability is a norm admittedly, it is one of the chief focuses of every approach to macro economics because it happens to be what citizens (who vote) are most concerned over. Thus, it is not only a economic norm but a political issue determined by the electorate. If unemployment or inflation get too high, the party in power is blamed — rightly so although the public doesn't understand why. If this persists, then the party in power gets booted out.
As as a policy option, full employment and price stability is a political winner if it is viable economically. MMT shows how to achieve this through appropriate fiscal policy.
It is also economically efficient at the national level, since the economy is always operating a full potential with minimum waste. The most severe kind of waste of unemployment and the MMT approach minimizes it without affecting price stability.
What not to like about that?
@tom I'm not sure what macro properties cannot be expressed in the bucket model. When you say that you want the JG program and price stability, you're really saying that you want money (new money?) to appear in the buckets of the JG employees, right? Any real-world JG policy ("macro" or otherwise) is just going to result in people getting checks in the mail, or seeing bank account balances increase, etc. There is nothing explicitly "macro" or "micro" about the JG streams themselves. Do you think that the bucket model cannot express some mechanical characteristic of JG?
ReplyDeleteI think the same is true for the CPI characteristic, right? CPI is just an arithmetic function on the sizes of flows. When you say you want CPI below 2%, you are saying that you want the flows to be such that some numerical "average" does not exceed 2%. Does this not express what you want?
Also, I'm not sure why we're talking about voting or national policy. Isn't you're overall point that you prefer a world with JG and stable price characteristics? Would your preferences change if the majority did not have these SAME preferences? Or if some particular vote expressed that the majority did not want them? Any voter who goes to the polls to express an opinion on this (or any other property) is expressing an opinion about properties. He is doing the same kind of thing that you are doing here, right?
It's possible that macro and micro mean something different in economic system than they do in physical systems, but I don't think so. I did not have any actual recommendation on whether government actors should or should not provide some goods and services, whether they should allocate goods in such and such way, whether they should or should not create money, etc. I certainly did not recommend that CPI should be higher or lower. I'm trying to see whether "MMT policies" are expressible in terms of identities, whether the bucket model (which I think map directly to the variables in these accounting identities) can express these policies, and whether MMT "macro policies" are just preferences about some aggregate measure (which leave the individual actor's bucket properties unspecified), etc.
The phrase "more efficient" does not add anything to this, right?
@mario I originally chose buckets because they just provide a way to visualize stocks and flows. Accounting expressions can be mapped to bucket model. Just assign a bucket to each stock variable and picture any flow as a flow of contents from one bucket to another.
ReplyDeleteIf you want to say that the government sector does not NEED a bucket to represent money (that money flows to it can just evaporate and money flows from it can just appear), then that is fine. I think you still need a bucket there to indicate the set of real resources controlled by government actors. When the government buys a paper clip for example, the money for that paper clip can just appear in a private actor's bucket. But the paper clip needs to move in the opposite direction, right? If you want to treat government money flows separately, then fine.
I'm not sure whether the deflationary spiral you mentioned (private actors selling at lower and lower prices) is just a "private sector phenomena" or whether it requires the government to be involved or what. If it is a private economy thing, then it can be expressed in terms of mirrored flows of money and goods from one individual's private bucket to another individual's private bucket, right?
If the government did not intervene and some "bad thing" happened, then this bad thing should be completely expressible in private bucket terms, right? All private transactions can be expressed that way.
Interesting article. Thanks for sending. My view is that Mises and Hayek were both excellent thinkers and being Austrians, especially, would have been aware of fellow countryman Wittgenstein's writing. They would also have been quite familiar with the controversies of the time that underlie the larger debate. These were highly educated men with first-class intellects.
ReplyDeleteThe problem with trying to state what a philosopher like Wittgenstein meant involves interpretation and there are many interpretations of Wittgenstein (LW). I only had a chance to peruse Long's paper and he makes some good points. But a first blush, I am not sure he has LW's concept of logic quite right. I'll have to read it more closely.
For LW, logic is shown through language-use, and virtually all of LW's post-Tractatus work is by way of illustration rather than statement of principles or conclusions. Therefore, it is impossible to say what he is pointing at, or he would have said it clearly himself.
Instead of exposition, LW employed "language-games" as elucidations, games being constructed logically out of rules. LW is primarily concerned with rules and how they are actually used in context.
Seeing this is to see the logic of the language-use involved. But once one has seen it, one cannot explain it without involving oneself in nonsense. Wittgenstein claims that most of philosophy involves this sort of nonsense — trying to say the unsayable, when one needs to be getting the other to see what one sees in order to communicate what one wishes to communicate.
Wittgenstein's posthumous notes collected and published as On Certainty are focused on the logic of justification, i.e., criteria. Certainty for LW is reducible to rules. Mathematics is made up of tautologous that are true apriori due to construction of the rules of mathematics.
continued below
Ordinary language (OL) is similar but not formalized or entirely formalizable, in that there are aspects of the logic that escape notice. For LW, philosophy is bring these aspects to notice.
ReplyDeleteThe ultimate criteria in OL are rules that functions as norms. The norms that are generally accepted in a culture are non-reflective for the most part. Many are framed as descriptive statements that people take to be self-evident because they are generally agreed upon. LW point is that this agreement based on neither psychologism, nor realism. They are definitional of a "form of life" in which the context for language-use emerges, which shows the relationship of language ("thought") and context ("reality") though the logic that they ("subjective" and "objective") share.
Can the rules of a worldview (way of seeing) be "wrong"? It makes so sense to ask this question from within that context because the rules define the boundaries of the context ("reality") and language-use ("thought"). As the rules shift, and they do over time, the context is different. This is what "primitive thinking" means. for example. Were primitive people "wrong" about what they thought. Yes, of course, but in must be added, from our point of view, which is defined by the boundary conditions in which we operate and which are unstated. Some of these boundary-conditions can be shown by "logical analysis" in LW's sense, but we could never be sure that we had identified all of them.
When a sub-group of in a group of language-users makes claims of self-evidence that others in the larger group do not agree are self-evident, then a norm defining a particular way of seeing and acting is involved. This norm is shown as a rule that this group follows, even though others do not, since there is no general agreement on it. Then we have two ways of seeing and acting conflicting, which is revealed by context — disagreement.
Both groups may appeal to "facts." But facts are not real "things" existing independently of their logical construction as descriptions. The world as the "totality of facts" is bound up in the logical constructs that LW calls worldviews. Worldviews are also norm-laden. Different worldviews are not only possible but actual as we see displayed in the conflict over the norms that define them. This especially obvious in anthropology, and LW uses many such examples.
@ marris,
ReplyDeleteThe macro buckets are aggregates, specifically the aggregated economics behavior of the sectors, households, firms, government (federal, state and local in the US) and foreign. These are broken out in the large models that the Fed, Treasury, financial institutions, etc. use to map the economy. The data are reported by the various reporting agencies and plugged into the models of national accounts.
"There is nothing explicitly "macro" or "micro" about the JG streams themselves."
The streams to individuals are micro, and the aggregates are macro. Macro is micro-data that is aggregated. The JG operates on both the micro level, actual employment, and at the macro level — unemployment rate, government expenditure, etc. as aggregates.
IN the MMT view, economic policy has both micro (individuals) and macro (aggregates) aspects. MMT regards full employment as a macro goal, which obviously means that at the micro level every individual that is willing and able to work has a job offer. The macro aspect is the add to effective demand that the injection of nongovernment NFA amounts to as a portion of "G" in national accounts. Another macro effect is the change in unemployment rate resulting from the JG.
In the MMT view, the government's fiscal balance has to adjust to the domestic private sector and the external sector's saving desire. That's the macro reasoning.
continued
"When you say you want CPI below 2%, you are saying that you want the flows to be such that some numerical "average" does not exceed 2%. Does this not express what you want?"
ReplyDeleteYes, and at the macro level, it is not important what the individual price levels are. Volatility is taken for granted at the micro level. Macro policy doesn't aim at shaping this directly. but rather that effective demand is neither excess wrt to the ability of the economy to accomodate it, nor deficient. The former will result in inflation, and the later in economic contraction and unemployment.
"Also, I'm not sure why we're talking about voting or national policy. Isn't you're overall point that you prefer a world with JG and stable price characteristics? Would your preferences change if the majority did not have these SAME preferences?"
National policy is supposed to more or less resemble the preferences of the majority, although there is no guarantee of that in a representative republic with only two parties. Unfortunately, very often national policy reflects the preferences of the elite. That's the way this system is set up.
My preferences would not change, but the democratic process would have spoken differently. That happens all the time in a democracy. One votes one's preferences and values. There are winners and losers in each election, as national preferences shift. Often there is no candidates that represents one's preferences and value. Generally one either votes by not voting or makes some compromise.
" I'm trying to see whether "MMT policies" are expressible in terms of identities, whether the bucket model (which I think map directly to the variables in these accounting identities) can express these policies, and whether MMT "macro policies" are just preferences about some aggregate measure (which leave the individual actor's bucket properties unspecified), etc."
The sectoral balances at the aggregate level make up national accounting and are the basis for macro. MMT uses these macro tools in the same way that others do to a great extent, but the focus is different. I don't know of any macro economists that are not concerned with employment and price stability. It is fundamental to macro. The prevailing approach is through monetary policy (interest rates). The unique approach of MMT is its emphasis on fiscal, in addition to its focus on actual operations as fundmental.
All policy options are essentially normative, i.e., choose among goals, and fit the means to achieving the goal. National policy options have to be justified as practical based on macroeconomic analysis, i.e., analysis at the national level, which involves sectors and aggregates.
"The phrase "more efficient" does not add anything to this, right?"
Only if you don't think that underperformance doesn't involve wasted resources.
marris " I originally chose buckets because they just provide a way to visualize stocks and flows. Accounting expressions can be mapped to bucket model. Just assign a bucket to each stock variable and picture any flow as a flow of contents from one bucket to another."
ReplyDeleteAs you know the aggregates in the basic macro equation,
Y = C + I + G + (X-M)
are flows over a period, so the bucket (stock) model doesn't quite work here.
@tom This (flow) identity just says something about the sizes of the flows without saying anything about the stocks, right? Why do you think this is not expressible in bucket terms? We can make isomorphic statements about bucket flows.
ReplyDeleteGetting stock information from the "real economy" to parameterize the stock levels of our bucket requires that we look at real world stock balances. Until we know them, then we could only use the bucket model to make statements about the changes in stock since some epoch moment (the starting moment of the first flow statement).
If flow statements are the only ones that MMT theory requires, then any MMT policy should be equally expressible in the bucket flows. If some MMT theorist makes a statements about stocks, then he will still not be able to say anything that a bucket model cannot say, right? In fact, if his statement gives the size of a stock at some moment in time, then we would simply reason about an instance of our bucket model which has that fixed parameter filled in. We would be able to express the same statement that he expressed.
> The macro buckets are aggregates, specifically the aggregated economics behavior of the sectors, households, firms, government (federal, state and local in the US) and foreign. These are broken out in the large models that the Fed, Treasury, financial institutions, etc. use to map the economy. The data are reported by the various reporting agencies and plugged into the models of national accounts.
ReplyDeleteOK. I will try to express my statements with the terms "individual" and "aggregate." This will help me avoid equivocation. I don't want to use any phrase like "macro preference" or "macro policy" and be unclear about whether I mean (1) an individual actor's preferences about aggregate measures (such as your preference about bounded CPI) and (2) the preferences of an actor who has control over government resources (whether buildings or the money creation engine or whatever). There is nothing necessarily "aggregate" about the preferences of the latter, right? He could allocate those resources to bring about states of affairs which have either individual features or aggregate features that he cares about. So far, so good?
> MMT regards full employment as a macro goal, which obviously means that at the micro level every individual that is willing and able to work has a job offer. The macro aspect is the add to effective demand that the injection of nongovernment NFA amounts to as a portion of "G" in national accounts. Another macro effect is the change in unemployment rate resulting from the JG.
I'm confused by this policy statement. What do you mean he should be "given a job offer"? I think part of the answer is that you want to offer him a stream of income. Is this correct? I think you also imply that you want him to "work" for the stream. What do you want him to do? Does MMT require that he do some specific activity in exchange for this money? How underspecified is the MMT work concept?
I'm sure many of the people who are able and willing to work are just as able and willing to sit at home or whatever. From what you've written, I'm not exactly sure why this would be a bad thing. He can contribute his (individual) demand to the aggregate demand by just bidding on the market. He can also do that from home. Does MMT require specific actions from him besides demanding stuff with the new money? Does "MMT-approved work" require that his labor (energy) be used to move idle resources into production? If so, is there some criteria for choosing which of the many possible idle resources he should move into production? If none of these things matter, then why don't we let him sit at home, collect his income stream, and move on?
> In the MMT view, the government's fiscal balance has to adjust to the domestic private sector and the external sector's saving desire. That's the macro reasoning.
When most people save, they do so because they want higher cash balances, right? If that is a "problem" and we have MMT, then why doesn't the MMT planner just increase people's cash balances? Does MMT theory offer any reason why a flow should come from G (which require goods to flow in a mirrored way) vs. money creation (which require no such counterweight flow)? This is also why I'm confused about the excitement over government as a "customer." If I run a business, the best customer is one who stops by, pays me, and asks for nothing in return. Wouldn't cash receivers always prefer money creation?
Just clarifying that MMT emphasizes stock-flow consistency, and GDP equation represents a flow over time (quarter, year). For example, if the government runs a deficit over a period the stock of outstanding Treasury securities (tsys) increases by that amount (issued in offset), less tsys redeemed over the same period. The fiscal deficit is a flow into the bucket (stock) of outstanding tsys.
ReplyDeleteThe sectoral balances that MMT uses in stock-flow consistent (SFC) maxro modeling are flows. What is bought over a period (aggregate demand) has to equal what is sold over the same period (aggregate supply). Of course, the flow is multifarious given the number of actual transactions in the economy over a period. But the details are not of concern in macro, only the aggregates.
Of course, stocks will change depending on whether flow is positive or negative. But I think it is fair to say that MMT is more concerned with flow, specifically changes in aggregate demand owing to demand leakage to saving.
This is what MMT considers of primary importance in adjusting fiscal policy. That is to say, the appropriate fiscal balance is determined by nongovernment saving desire and adjusts to changes in that desire.
Macro generally looks to the accounting data expressed in nominal terms as a record of actual transactions during a period. Exchanges of actual "stuff" are expressed in nominal terms in national accounts as aggregates (or else as % of GDP). Nominal valuation is adjusted for inflation to arrive at real valuation.
On one level, MMT is chiefly interested in aggregates expressed in nominal terms in order to determine the appropriate size of the deficit. That is the chief macro policy recommendation in the view of MMT to hit the sweet spot between inflation and an output gap opening up.
Then specific fiscal policy proposals must be developed allocating those funds in a targeted way. A reason that MMT prefers fiscal policy solutions over monetary is that fiscal can be tightly targeted, while using interest rates changes is a blunt instrument.
This is where the political process comes it. There is both a "liberal" approach, e.g., emphasizing expenditure if a deficit is called for, and a "conservative" approach emphasizing tax cuts.
For example, in the MMT world Warren Mosler comes down the conservative side of tax cuts while Bill Mitchell comes down on the liberal side of expenditure. But whichever the approach, the totals have to result in the appropriate deficit figure to be MMT consistent.
marris "Does MMT theory offer any reason why a flow should come from G (which require goods to flow in a mirrored way) vs. money creation (which require no such counterweight flow)?"
ReplyDeleteG is the only offset of nongovernment saving desire, which constitutes demand leakage. Demand leakage reduces total spending (aggregate demand) which means that not all that the economy is capable of producing get sold, which results in economic contraction and rising unemployment.
All government expenditure — spending and transfer payments — involves the government issuing currency, over which has a monopoly. The government funds itself independently of taxation or borrowing.
Government spending transfers real resources to public use. Transfer payments do not do so directly, but provide recipients like those on SS with funds to use as they please. The government does this simply by crediting bank accounts electronically, or issuing checks.
There is no operational limit on government expenditure or the size of the deficit in a fiat system. Of course, government expenditure is limited politically by the appropriation process (budget). Same with tax policy, which is independent of appropriations. "Tax and spend" is a misnomer in a fiat system. The executive branch cannot authorize fiscal expenditure independently of congressional appropriation, nor has it any control over taxation independently of Congress either.
marris "I think part of the answer is that you want to offer him a stream of income. Is this correct?
ReplyDeleteYes. The basic idea is that in a modern monetary economy money is required for sustenance, and if the economy cannot rise to to the task by providing work, then government should undertake this as a matter of public purpose (promoting the general welfare).
"I think you also imply that you want him to "work" for the stream.
There are different views on this among MMT professionals writing about this. Some would eliminate the dole for those capable of working (Mitchell) while others would make it optional to work or take the dole as along their unemployment benefits lasted (Fullwiler).
What do you want him to do? Does MMT require that he do some specific activity in exchange for this money? How underspecified is the MMT work concept?"
There are different proposals on the table, from a national program like WPA, a government run program farmed down to state and local government but funded by the national government, to a government funded program that would be contracted out.
A principal specification is that the work would not compete directly with the private sector (take away private sector jobs), but would focus on public projects that the private sector is not interested in undertaking.
See "Job Guarantee" at Wikipedia and www.mmtwiki.org for references.
> Yes, and at the macro level, it is not important what the individual price levels are. Volatility is taken for granted at the micro level. Macro policy doesn't aim at shaping this directly. but rather that effective demand is neither excess wrt to the ability of the economy to accomodate it, nor deficient. The former will result in inflation, and the later in economic contraction and unemployment.
ReplyDeleteThe idea of this real-world inverse relationship between CPI and employment requires some justification. [We're talking the Philip's Curve or something like it here, right?] It does not follow from any of the accounting identities discussed. When you drop new money into a private individual's bucket, I think you know very little about how it will be spent (that it cannot be tightly targeted). Maybe CPI is such a coarse measure that it all washes out. But I think this must be shown mathematically or empirically.
I would think that the planner's ability to compute/describe an economy's sweet spot (where "effective demand is neither excessive nor deficient...") in terms of aggregates requires that this relationship be simple. Further, if the relationship exists, then why do we care about measuring CPI at all? Can't the MMT planner just drop money into the system until measured unemployment falls below some theshold? You will be on the sweet spot (or in the sweet range) anyway, right? Why do you care about verifying it with CPI? Or are the CPI measurements used to calibrate next year's model?
I think if you actually took some private economy with one million unemployed people and put 100K of them on JG streams, there are very few non-trivial things you can say about the results. The recipients are going to bid on goods and services so it's *possible* that your price statistic will be exceeded before you put the next 100K people on. Furthermore, [I haven't thought about this too much], certain patterns of money drops could cause private bucket stock (which previously would have been saved) to start flowing. Maybe you think this is good (because the stock was idle before). I'm just bringing it up because such a "dislodge" would also show up in your price measurement, even though it may just flow around the individual buckets of previously employed people. For example, I may buy up oil now in anticipation of a future incase in JG demand. You're going to see the price effect in the current period.
> National policy is supposed to ...
Maybe, but this seems to be outside the scope of MMT. From what I can tell, a dictator and his friends can implement MMT policy (create money, buy resources, etc) just as easily as a president and his friends. If the dictator knew the preferences of his people (from referendum statistics or historical measures), then he could wring idleness out just as easily as a Treasury official, right?
> Only if you don't think that underperformance doesn't involve wasted resources.
Do "inefficient" and "underperformance" mean anything besides idleness in your view? Are they synonyms? Is it possible to have a configuration X which is both less idle AND more efficient than configuration Y?
> Government spending transfers real resources to public use. Transfer payments do not do so directly, but provide recipients like those on SS with funds to use as they please. The government does this simply by crediting bank accounts electronically, or issuing checks.
OK, this is how I was thinking about them. Now I *think* that there will be a great deal of discretion on the part of government actors as to precisely what goods they can buy up, how they can allocate non-specific goods to production. Any constraints on their behavior is supposed to come from the political process, etc. MMT proper does not say anything about how these choices should be made (although as you mention, various MMT supporters have proposed different plans).
> marris "Does MMT theory offer any reason why a flow should come from G (which require goods to flow in a mirrored way) vs. money creation (which require no such counterweight flow)?"
ReplyDelete> G is the only offset of nongovernment saving desire, which constitutes demand leakage. Demand leakage reduces total spending (aggregate demand) which means that not all that the economy is capable of producing get sold, which results in economic contraction and rising unemployment.
Ugh. I really wished you had not introduced the term "demand leakage" here. The whole answer is a complicated way of saying "No, MMT does not," right?
"Demand leakage" is confusing because it implies that something is "leaking" out of the economy while the government does not act. If you want to CALL deleveraging "leaking," then fine whatever. But it is worth pointing out that the accounting identities already introduced (and the corresponding bucket flow models) don't say anything about leverage. If you want to introduce ADDITIONAL identities to capture deleveraging, then sure.
It is useful for me to trace through the MMT concepts already presented (no leverage) to see what government flows are trying to accomplish. I claim that in the model presented so far, government flows are attempts to create new circular flows, not to make up for some "leak." In fact, "leak" in a no-leverage model may refer to one of two different things (maybe these are related, but you must show this either mathematically or empirically):
(1) If "leak" means that money which flows into some individual bucket does not flow out, then I would claim that G does not fix this any more than money creation fixes it. The person who receives G money could save it just as easily as he saves newly created money. The money added to the individual cash balance may never be spent again in either scenario.
(2) If "leak" means that some good falls idle, then I claim that either G or money creation could bring it into use. A G flow just pops the good from a private bucket into the government bucket. [I guess this transfer qualifies as one unit of non-idleness for this period?] Once that transfer is done, ADDITIONAL non-idleness requires more G flows to pay government workers to keep the good moving. That is, we'll need to pay these workers next year to keep the good non-idle.
[continued]
ReplyDeleteI claim that you face the same "problems" with G that you face with money creation. If you want them to move stuff around next year, it may require additional payments. Reducing idleness (motion) during this period is just as "difficult" whether you move goods into the government bucket or use subsidies to move it around various private buckets.
If the goal of a G flow is to create some resource non-idleness through multiple periods, then you are really saying you want this G flow to drive/inspire activity through time (either within the private buckets or between the private sector and government). Maybe there is some empirical reason why one form of funding is more likely to achieve this than another. But it must be shown. Many patterns of flows are possible in the model presented so far. To the extent that MMT is a bunch of stock/flow identities, it cannot say anything about flows through time. Whether or not a particular G flow will have such lasting effects is outside the scope of identities.
Anyone who does not take the MMT (or Keynesian) worldview too seriously would probably enjoy reading Henry Hazlitt's Failure of the New Economics. It blows away a lot of the confusion that arises from using terms like "leaks" in a non-conventional way.
http://blog.mises.org/16505/epub-failure-of-the-new-economics/
http://mises.org/pdf/failure_of_new_economics_study_guide.pdf
> "There is no operational limit on government expenditure..."
This is just a complicated way of saying that government actors can create money flows, right?
That is, if you pay people to do stuff, they will do it.
If you can pay them with money that you print, even better.
> A principal specification is that the work would not compete directly with the private sector (take away private sector jobs), but would focus on public projects that the private sector is not interested in undertaking.
ReplyDeleteBased on what? What mechanism are the MMT planners using to make sure that every flow into the system pulls idle resources (rather than bidding away goods in current markets). Are you going to tally the set of idle resources and then decide what to build with them? [This tally process is possible. I'm just wondering whether anyone plans to do it]. Otherwise, this "principal specification" cannot be met.
It's quite useful for me to visualize this specification by partitioning the set of resources into "in use" and "not in use" aggregate buckets. I think that the specification above is saying that MMT plans are designed to (1) move resources around the "not in use" bucket without having any effect on the "in use" items, or (2) that any effects will be treated as "acceptable" by the MMT implemeentors.
If I thought (1) was possible, then I would be on board. It would basically be like bootstrapping a new economy next to the old one. If you think you can do that, then more power to you. I don't think you can. I think these plans are going to create (2). And that means that a production process which would have previously taken place is going to not happen. The complementary factors of that process may get absorbed by some other process. Or it may not. If not, then you've just created some new idle resources.
[You've also stopped another agent from carrying out something he wanted to do. Whether or not you should do this is a normative question which cannot be answered here. I guess it depends on the action. However, I think it's misleading to dismiss this as "satisying a demand for savings."]
Overall, I don't think MMT tells us anything that we did not already know. The basic idea seems to be if you create a flow, stuff may move. So I'm not sure what the theory "contributes" to the body of economic knowledge already out there. It is possible that some guy has a plan that he thinks is "good" and that he describes it in MMT terms. But he could just as easily explain the operations in English: "I think we should..."
BTW, I think the easiest way to show that you have good planning strategies is to demonstrate them. I'm curious whether any group of MMT supporters has tried to create an MMT-managed micro economy and show that it "works." [You guys could issue your own currency internally and use a political process you want to manage exports and imports, manage government production, etc.] I would be really surprised if it works out (whether it produces a high standard of living for members), but I will be pleasantly surprised. If it destabilizes, then at least the damage is contained. My main concern with MMT advocates is that they focus on the "ease of implementation" that MMT offers. Most people are interested in the plans themselves and the expected effects. I don't think MMT itself makes it easier to formulate or reason about such plans.
Err... the question in the first post should ask whether it is possible to have a configuration X which is both less idle and LESS efficient than configuration Y?
ReplyDeletemarris: "Can't the MMT planner just drop money into the system until measured unemployment falls below some theshold? You will be on the sweet spot (or in the sweet range) anyway, right? Why do you care about verifying it with CPI? Or are the CPI measurements used to calibrate next year's model?"
ReplyDeleteYes, MMT uses employment as the measure. For MMT, inflation as general continuous price rise is not problematic under full employment, since inflation as a general price rise includes wages.
The reason that employment v. inflation is important policy-wise is due to the present policy based on NAIRU and Taylor rules, which looks at measure of inflation rathe than unemployment and uses unemployment as a tool to control inflation.
Generally speaking, recent inflation has resulted from supply shortages, especially petroleum, rather than excessive demand resulting from money creation outpacing the ability of the economy to expand. MMT recognizes that supply-driven inflation is a different issue that demand-driven and requires a different approach to addressing it.
"From what I can tell, a dictator and his friends can implement MMT policy (create money, buy resources, etc) just as easily as a president and his friends."
Operational reality doesn't distinguish who is in charge. Anyone can use operational knowledge in policy formulation. This is important politically because either party can use MMT principles in formulating its policy.
For example, Warren Mosler developed the basis for MMT while working at Art Laffer's shop and says that Art understands soft currency economics. Wondering where Cheney's "deficits don't matter comes from?"
"Do "inefficient" and "underperformance" mean anything besides idleness in your view? Are they synonyms? Is it possible to have a configuration X which is both less idle AND more efficient than configuration Y?"
ReplyDeleteFor MMT "idle resources" refers to less than full employment in particular.
"OK, this is how I was thinking about them. Now I *think* that there will be a great deal of discretion on the part of government actors as to precisely what goods they can buy up, how they can allocate non-specific goods to production. Any constraints on their behavior is supposed to come from the political process, etc. MMT proper does not say anything about how these choices should be made (although as you mention, various MMT supporters have proposed different plans)."
ReplyDeleteAn MMT economist that is a conservative will come up with different fiscal policy proposals than a liberal MMT economist. As I said, there isn't homogeneity on policy among MMT economist even though they all agree on the same macro based on operational descriptions. there has been some interesting interaction on the MMT blogs about particular policy options and some participants are very conservative while others quite radical. Nevertheless, we agree about the basics of policy formulation.
"I claim that you face the same "problems" with G that you face with money creation. If you want them to move stuff around next year, it may require additional payments...."
ReplyDeleteThis whole comment ignores the basic macro principle of MMT, namely, that it is changes in nongovernment saving desire to which government fiscal policy must adapt to to maintain output and full employment by accommodating the demand leakage to saving. ON the other hand in an export driven economy, the government have to run a surplus to withdraw NFA to control inflation.
Fiscal policy is policy is determined politically, and there are various policy options that satisfy the macro requirement for the government fiscal balance. The political debate is then properly about how to balance injection (expenditure) and withdrawal (taxes) of nongovernment NFA to hit this amount, and it will depend on political preferences in the trade-off between expenditure and taxation, and how specifically to target these, pretty much the same now but not stabbing in the dark anymore.
marris "but you must show this either mathematically or empirically)?
ReplyDeleteRegarding your extended and detailed comment, I would recommend that if you are interested in MMT answers to consult the professional literature. For example, Mitchell and Muysken, Full Employment Abandoned (2008) is the definitive work on the subject of employment from the MMT vantage. The sectoral balance approach was developed by Wynne Godley and the definite work on the SFC approach to macro using national accounts and sectoral balances is Godley & Lavoie, Monetary Economics (2007). Many of the common objections have been addressed mathematically or empirically in various articles. There's plenty of data and empirics, as well as math and accounting there.
For an understanding of MMT I would recommend beginning with the mandatory reading Mosler's place then go over there and tell Warren that you don't like the leakage concept, which is hardly unique to MMT. Leakage from circular flow is a standard concept among macroeconomists.
In fact, there is very little in MMT that is new other than how it is all put together into a macro theory that differs from others in that it claims to be able to reconcile employment and price stability instead of accepting a trade-off.
I am not an MMT economist so if you want to debate specifics, I suggest engaging with one of the professionals. I would be going out on a limb and am not sure my representation of their position would be correct. I and others here who are not MMT economists have attempted to give a broad outline of MMT from our incomplete understanding, but we are limited when it comes to details. There is a body of MMT professional literature considering it has only been around for a relatively short time and there are as yet few people working in the field.
Warren Mosler participated in the debate at Mises initiated by Prof. Murphy (who studied up on MMT before criticizing it), so Warren is no stranger to professional Austrian critiques of MMT. Warren always responds cordially to questions and objections at his blog, provided people have done their homework first. The article that launched MMT is "Soft Currency Economics." Seven Deadly Innocent Frauds is Warren' popular work and could be regarded as an MMT response to Henry Hazlitt.
You might also wish to check out Austrian economist Edward Harrison of Credit Writedowns, who has incorporated MMT principles. Start with MMT for Austrians.
marris "(1) If "leak" means that money which flows into some individual bucket does not flow out, then I would claim that G does not fix this any more than money creation fixes it. The person who receives G money could save it just as easily as he saves newly created money. The money added to the individual cash balance may never be spent again in either scenario.
ReplyDelete"(2) If "leak" means that some good falls idle, then I claim that either G or money creation could bring it into use. A G flow just pops the good from a private bucket into the government bucket. [I guess this transfer qualifies as one unit of non-idleness for this period?] Once that transfer is done, ADDITIONAL non-idleness requires more G flows to pay government workers to keep the good moving. That is, we'll need to pay these workers next year to keep the good non-idle."
Idle resources are determined in MMT primarily by unemployment, which is the most costly source of waste. The flow of injections aimed at unemployment, e.g., the JG, are aimed where they will be spent, i.e., at the bottom. Similarly, proposed tax cuts now are aimed at the payroll tax, which affects the middle. The bottom doesn't save, so they will spend what they get. Food stamps and unemployment benefits are another example of injections that get spent owing to necessity.
The middle both spends and saves. Right now, the middle class is under financial pressure and saving/deleveraging at an above average rate, as well as cutting back on borrowing to spend. Minsksyian analysis would say that the middle will not resume spending or borrowing while rebuilding savings and paying down debt. So a good portion of this tax cut is expected to be saved to hasten the rebuilding process and get the circular flow moving again.
Funds that are spent by the government are purchases so they are income to someone. At the macro level this will increase consumption as well as accommodating saving.
So, in principle, I don't see a problem. I don't know that MMT economists have published empirical studies, but a good number of studies have been done on the effect of government stimulus, and there are arguments on both sides. I am certainly not in a position to be a referee. MMT economists warned from the outset it was too small to accomplish the desired effect. Moreover, the rise in petroleum prices sucked most of it up, just as the recent rise in gas prices sucked up most of the payroll tax break.
I don't know how MMT would want to respond to dealing with the specific here, so I will leave it up in the air. I assume that the answer would involve adjusting fiscal policy to address developments.
great Q&A here guys.
ReplyDelete@marris I would only add that you consider checking out the Modern Money Primer (MMP) which is held over at www.NewEconomicPerspectives.com and is hosted by MMT professionals (fathers of MMT). They just started so you'd be able to get in at the beginning where every Monday they put a post up explaining MMT for the lay audience from start to finish and in full. Plus every Thursday they answer all questions in the comments section, which is extraordinarily generous of them I'd say.
In terms of real life examples of MMT applications I believe, if I am not mistaken, that Warren Mosler advised the government of Argentina on their situation and was able to help them turn things around there (not sure on that so don't quote me). I do know for a fact that Bill Mitchell over at http://bilbo.economicoutlook.net/blog/ has advised and aided the government of Tasmania in Australia on budgeting and fiscal policy for their situation as a currency USER (not issuer) through MMT applications. I believe he has also assisted the country of South Africa among others all through his economic research and development team called "COFFEE." It's real, rigorous, and applicable.
great chatting and I hope to see you around more often marris. Cheers
sorry here's the proper link for the Modern Money Primer over at New Economic Perspectives.
ReplyDeletehttp://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html
Yes, this was fun. Thanks for taking the time to answer my questions. I think I understand what is being described. I will poke around those recommended sources to make sure.
ReplyDeleteI keep coming back to the fact that the theory itself has no built-in safety mechanisms [they are all exogenous, either in the political process, or dependent on the current planning policy in use]. This may be a good thing because it gives both political parties a way to formulate policy. However, I think it also creates considerable dangers. I will try to summarize what I think are the mostly likely bad outcomes here, just so people who want to evaluate policies can guard for them.
(1) I think any MMT-managed economy is going to face the risk of very high inflation (both quantity of money and price level). It may either happen slowly and speed up or start with some supply shock. Along the way, we may see fuller employment [because workers are on a JG stream, etc]. However, it will not matter because price increases on the market will exceed JG stream size increases. I *think* when policy makers recognize this, the first (and most politically feasible?) option will be to increase the sizes of JG streams even further (or index them to CPI, etc). I don't think they will try to mop up money with higher taxes.
That is, when the price of eggs and sugar starts to go up, JG [and low income] people will be outraged if you try to reduce/tax THEIR money. They barely have enough as it is. Taxing wealthier people will not fix the problem because they are not the marginal buyers in these markets.
Indexing is more likely, and that will push more money into the system. Egg sellers [who are already freaked out by the higher prices in sugar] will raise their prices IN ANTICIPATION of the increased stream sizes, because they know the new money will raise the price of sugar further. Sugar sellers will also act this way [because they expect the new money to push up the prices of eggs]. Either way, the sellers will try to outpace each other because they all want to stay ahead of the rising index.
(2) I don't think there will necessarily be any decrease in the number of lobbyists. It's possible that you will see the number of lobbyists for one sector shrink while another one grows, but I don't think it will be that different. The MMT policy makers will have no objection to them, because people "on the ground" are going to become increasingly more important than the aggregate statistics. [I don't think you can get "targeted drops" without this]. The lobbyist recommendations will look less like "well, I think you should increase G by X% next year" and more like "you need to bail out this factory NOW or they will fire N employees!"
The Treasury officials will realize how bad those layoffs will look [if it doesn't bother them, it will certainly bother their bosses!]. Those fired employees are voters! The officials will give in and send more money. Or they will be "transferred" to other responsibilities. Or, everyone will agree to turn to the MMT policy book/model to see whether the money drop is OK. Either the book/model will say DROP and they will move on. Or it will say HOLD. If it says HOLD, then there will be pressure to change the book/model [after all, who wants one that recommends that workers get fired, even if JG streams ARE in place?]
[continued]
ReplyDelete(3) Some political entrepreneur is going to see the increasing influence that these lobbyists have over the money flows. He is also going to notice that it takes a lot of money to pay each individual lobbyist and only the biggest companies (either in dollar terms or the ones who employ the most potential voters?) can afford them. He's going to get the bright idea that he can help more businesses [and take a healthy cut] by scaling up the process. That is, he's going to become the industry leader of lobbying. Rather than charge a high price for a few clients (as most lobbyists do), he's going to charge a low price for many clients. His "conduit institution" (and his competitors) will become increasingly common means to siphon new money to struggling businesses. At this point, these conduit things are not exactly banks, but they play a similar role.
(4) The Treasury officials, who find themselves increasing unable to keep up with the stream of conduit requests [or qualified to judge the merits of the requests], may delegate the power of new money creation to the "best" (or more popular) conduit institutions. At that point, those things are going to look a LOT like banks. Maybe, sensing the danger of unrestricted expansion, the Treasury guys will impose some max quantity which can then be allocated each period. Or, if they find it difficult to estimate the expected quantity demanded, they may give the conduits more discretion. For example, they may allocate some fixed quantity and let the conduit lend out MORE than this (e.g. the allocated quantity scaled up by some maximum factor).
Anyway, this is all bad (worst-case?) scenario stuff, and there are certainly other considerations which could intervene. I think it's good to have it written down so people can use it to evaluate policies and their effects through time.
I have a specific question on “economic calculation” unrelated to MMT.
ReplyDeleteDoes it have a way to account for negative externalities such as pollution? I assume Austrians argue that the free market should set prices, how does it capture those costs in prices?
Crake, the purpose of the "free market" is to privatize gains and socialized losses. Regulation is required for a fair market system. An absolutely free market enables cheaters and the Gresham dynamic drives out the honest. See Bill Black on this, for example.
ReplyDeleteI don't think that anyone (libertarian, minarchist, anarchist) thinks that the "free market" will do anything unless norms are in place to prevent/resolve conflicts over scarce things. The umbrella term "property rights" is used to refer to these norms.
ReplyDeleteThe specific answer depends on the type of pollution. It basically comes down to making pollution a violation of someone's property right.
Land pollution is easiest to address, because land property norms already exist in most societies. For example, there are usually institutions in place to prevent you from "polluting" on my yard. I could take you to court for trespassing, dumping, etc. I think these days, (most?) land pollution is basically stuff dumped on public land. If you want to stop that, you have a few options. (1) You could sell the land to some private owner. (2) You can watch for litterbugs and pounce on them. That could either be some voluntary (private) project or some political project where you ask the state to allocate more resources to the problem. (3) You could rent some rights to the land in exchange for cleanup service. For example, I see an increasing number of privately sponsored sections of highway, where some business or local group pays for cleanup and gets the rights to put ads up on that section of road.
Water pollution is more difficult. If the body of water is small and closed (e.g a pond or small lake), then the options are the same as those for land. You can sell the whole lake to private owners, get some voluntary lake-watch project going, allocate public funds to increase the number of park rangers, sell some rights (such as fishing rights) to local fishers, etc. If you use the last approach, then it becomes the fishermen's job to monitor for all the stuff that could hurt the fish population.
If the body of water is open, it gets more complicated. If we're talking about something like a river, you can treat it like the lake (treat it as one thing). Or you can give people rights over sections of the river. For example, if your factory upstream dumps crap into the water and that stuff flows into my section, then I bring a dumping case against you. This is a bit like some guy piling up garbage on his land and letting pieces of it blow off his land and onto yours.
If we're talking about the ocean, you're basically stuck with the sectional method described for rivers. If bad stuff enters my section, I need to find the person responsible and take him to court.
One way to make it easier to think about pollution is to think of a pollution increase as a decrease in some scarce thing (clean water, clean land, etc). If norms can be structured so that some private person/group cares about that thing, then they are asked to protect it. I think Tom Palmer mentions some ocean fishing rights recently implemented by either Iceland and/or New Zealand. They started with some "permits to X tons of fish"-style thing which could be traded on the market. The total supply of these rights were specified by some ministry (the Ministry of Fish?). Later, some quorum thing was set up so that rights owners could vote on the scale of the permits [what X is]. I haven't studied this in too much detail, but Tom Palmer says that X was scaled down [http://www.fisheries.is/management/fisheries-management/individual-transferable-quotas/].
Palmer covers many of the ideas in this talk [http://www.fee.org/media/theory-of-rights-and-property/]. He seems like a cool guy. He does not think much of Rothbard (unfortunate in my opinion since I've learned a lot from both these guys). But I think he's done good work.
marris: "I keep coming back to the fact that the theory itself has no built-in safety mechanisms [they are all exogenous, either in the political process, or dependent on the current planning policy in use]. This may be a good thing because it gives both political parties a way to formulate policy. However, I think it also creates considerable dangers."
ReplyDeleteThe MMT vision is to make most of the fiscal adjustment automatic, similar to the presently existing automatic stabilizers, e.g., when the economy economy contracts tax revenue fall as and transfer payments increase, and when the economy begins to recover the opposite effect kicks in. BTW, MMT economists hold that under the present arrangement, tax revenue increases too much and that extracts more NFA than appropriate for conditions.
This also needs to be considered along with other MMT policy proposals, such as Warren Mosler's here.
> The MMT vision is to make most of the fiscal adjustment automatic, similar to the presently existing automatic stabilizers, e.g., when the economy economy contracts tax revenue fall as and transfer payments increase, and when the economy begins to recover the opposite effect kicks in.
ReplyDeleteFrom what I've read so far, that certainly seems like a key part of the vision, but I haven't found much justification (empirical or mathematical) for why it will be possible. I think heavy automation is not possible because the more "automated" the model, the easier it becomes for non-planner actors to run/estimate it. This puts everyone (I mentioned sellers above, but I guess also JG voters) on the anticipation-driven inflationary path very quickly. It's also difficult to add randomness to the computation because it introduces the possibility of both "good" and "bad" outcomes.
So I don't see a way to make it work without putting a lot of control into the hands of the planner actors. That makes it more difficult for non-planners to guess the outcome (it will be a strategic thing rather than an automated model thing). And that means that the planners will need to "figure out" where to drop money. I think that in that environment, macro-management could take a backseat, and avoiding really bad/surprising inflation-driven bankruptcy becomes very important. [This is not necessarily true in a heavy automation scenario because you can't yell at a model. You can yell at planners and planners who pick models.] I *think* that in that scenario, the planners will welcome the help of lobbyists (the people on the ground) to provide early hints that some bad thing will happen.
@marris
ReplyDeleteput flesh and blood on your ideas marris. Like today's current events for instance. Does what you are saying have any resemblance to the issues we face today or any issues we've ever faced in relation to government spending? Look at the Reagan years...where is the insane out of control economy?
Who do you think has been purchasing things for the government for the last 100 years--communist central planners in the US government? Why is it so difficult to accept that we know how to spend as a government...we've been doing it for as long as we've been around as a nation and we seem to be able to do it just fine thank you very much. From my perspective, your valid political disposition about the government is highly distorting your economic analysis, history, and reasoning.
How much inflation are we experiencing right now b/c of all this government spending (and why would that be a bad thing again right now?)? Where is the "inflationary bankruptcy" risk today (or ever)...and what is "inflationary bankruptcy" in the first place? Where has there ever been an inflationary bankruptcy in the USA? I can honestly say I've never heard of such a thing...but that may be my own ignorance being revealed, please let me know if I am missing something.
Listen, you're very concerned about the idea that the government spends...I get that...however you fail to realize that the government has been spending far longer than you or I have been alive and I'd say based upon the 20th century that we have a pretty darn good track record...wouldn't you agree based upon the results?!?!! Your concerns are not reasonable nor are they based in evidential fact or history.
This is not a difficult or strange concept that the government spends. It happens all the time no problem. What's the hang up my man? ;)
Cheers
@marris
ReplyDeletenote also that government spending as a process is NOT a politically controversial issue AT ALL...both sides of the aisle know that we can effectively spend as a government...it's not that which is the issue...the issue has always been on WHAT do we spend...and lately it seems that even that is not an issue anymore...they all just spend on the rich, for the rich, and by the rich. That is a critique of the programs implemented...not of the PROCESS of implementing plans...big difference my friend. Frankly, the argument that the government distorts markets and is inefficient and ineffective, etc., etc. is really a very fringe-type of ideology with very little (possibly no) data to back it up...however it does appear, like it or not, that such fringe causes are moving more and more into the mainframe of society.
> Does what you are saying have any resemblance to the issues we face today or any issues we've ever faced in relation to government spending?
ReplyDeleteI don't think so. Banks are not lending. Much of the earlier fiscal stimulus has been eaten up by stuff that Tom mentioned (high oil prices, etc). I don't think the bad scenario I described could happen in this environment unless everyone decides to start spending like crazy [for whatever reason]. Then you would see some rising prices. But in that world, you wouldn't use MMT, right?
> Who do you think has been purchasing things for the government for the last 100 years--communist central planners in the US government?
I pick option B, the US government. :-)
> Why is it so difficult to accept that we know how to spend as a government...we've been doing it for as long as we've been around as a nation and we seem to be able to do it just fine thank you very much. From my perspective, your valid political disposition about the government is highly distorting your economic analysis, history, and reasoning.
First, I'm not saying that the government can't bring idle resources into production. Some could raise moral objections to the Cantillon effects [the government actors bid resources away from private actors, etc]. However, if you did not care about that [and you believed that the government knows how to spend well, etc] then the policy would look like some super-savvy, super-resourceful entrepreneur showing up and deciding to start new businesses, right?
My "problem" is that all the policies I've seen assume that market actors can't react to the MMT policy makers (I called them planners, but we can use whatever term you want). That is, why won't people anticipate the new money and raise the prices of goods close to the new drops?
I'm not saying that this objection should stop any particular dam or road project. If you want to employee workers, then you will see the project as "good." The strategic pricing I described will be limited to cement and bulldozer owners raising their prices to capture more of the building funds, or store owners raising prices on JG worker customers. The price effect will be quite small. The resource effect, too.
However, I think that if you adopt this as a widespread policy to get large flows moving, then you leave the field open to EVERYONE anticipating the new money. It actually becomes a race [if I don't stay ahead of the price level, then everyone else will]. The JG workers will do this to the best of their ability by voting in the most generous politicians, etc. But so will everyone else. I don't see why any voter-driven improvements will be easier in that environment (with the rising price level) than it is in the current one (with the fixed or falling price level).
> Where is the "inflationary bankruptcy" risk today (or ever)...and what is "inflationary bankruptcy" in the first place?
ReplyDeleteIt's when a business's costs rise faster than it's revenue. I don't think this is predominant today. Some people are cutting prices. Others are not. I think most businesses are closing for lack of customers. Many people are saving because they don't know what bad thing is around the next corner. Things are bad.
However, those are not the ONLY ways things could go bad. Any MMT planner will need to deal with scenarios in which JG worker wages are outpaced by market prices, or where businesses go under because of rising costs. From what I've read, I *think* an MMT-managed world will drift to this state, possibly hitting some good states along the way. If we get there, then I don't think taxes are going to help, because production in that world need not be higher than production in the current one. [A tax increase will stop marginal production]
I *think* it's a bit difficult to see this problem in the current MMT work because the authors imply (assume?) that high prices are functionally/statistically tied to high employment. But you can't capture anticipation that way. Everyone tries to anticipate [stay ahead of] whatever price the model spits out. The final observed prices will be higher. Furthermore, the people's whose streams rise the slowest lose the most.
> or any issues we've ever faced in relation to government spending?
ReplyDeleteSorry, did not see this. I'm not sure. Inflationary recessions are quite new [last 100 years?]. Maybe you could interpret the 70s/80s recessions this way? I think lots of bankruptcies happened due to the inflation.
@marris
ReplyDeleteokay interesting points. I see more of what you are saying.
I don't think government will be starting up new business ventures though under an MMT world...I have never heard MMT state, "have government get into new industries and start being a producer." I think that is a misunderstanding of MMT to think that. Rather it is that the government sets up and provides for healthy and proper public purpose. Things like retirement, health care, safety, pollution, etc. The government sets floors and ceilings for the public to live within...they are not in it for "profit" or for competition against the private market...they are in it to protect the public's right to "life, liberty, and the pursuit of happiness." This is done by stabilizing certain industries that should not be based on profit/loss checks and the boom/bust nature (greed/fear) of humans...things like retirement, health care, education, infrastructure, certain types of R&D, etc. We really CAN pay for the BEST public schools and technology and experiences and aides for all of our children!!! Think about that one for a while!!!
Yes it is possible for there to be an inflation push and prices are grabbing new prices to sell to the government at the highest level...however the government consumes now and has for years...so has this happened at all? It doesn't seem to me that it has. Austrians like to say that it happens...but whenever I have asked for the data no one answers except with trite anecdotes and emotional statement implicating that this is an obvious fact and I am ridiculous to question it. LOL My point is that the government has been a spender since it existed and our inflation has been tame and in check as far as I can tell. This is definitely true at the micro level of businesses...what businesses do you know of that are out-bidding each other against the government? I don't know of any. Remember COMPETITION still exists...and since the government is just another customer, businesses would be inclined to keep their prices competitive to maintain that reliable customer. I think for that reason alone your concern is put into check. Wouldn't you agree?
@marris
ReplyDeleteIt's when a business's costs rise faster than it's revenue.
if costs are rising why aren't the revenues? Your inflationary bankruptcy sounds more like a micro economic issue rather than a macro one. That company just might be in the wrong business. LOL The inflation of the 70's had nothing to do with government spending...that was supply-side inflation. Different issue...I am talking about inflation bankruptcy occurring in our country due to demand...yeah...I think what you're saying is just another way to get into the whole hyper-inflation argument which is frankly also very, very bogus and unrealistic in the USA today. Sorry man. Actually, now that I think about it...it doesn't even sound like hyper-inflation, b/c revenues aren't rising along with it. I don't see how this could be happening on the marco level...but that doesn't mean it can't...I am just not seeing it myself. Possibly if we were an exporting nation and couldn't raise our prices but for some unknown reason due to a technology slump and incredible cost increases at the macro level...but I just can't conceive of such a thing happening or how it relates to government spending. LOL Either way, I think we both already agree that it is very unlikely and hence no longer a concern of ours in this regard?
Any MMT planner will need to deal with scenarios in which JG worker wages are outpaced by market prices, or where businesses go under because of rising costs.
okay, but why are there rising costs? And what do the rising costs have to do with government spending? I don't see the connection. You could also peg the wage for the JG to inflationary tendencies to make sure it is relatively normal throughout time. But again if revenues aren't rising then prices aren't price and so what you're suggesting is not even inflationary...it's deflationary it seems! Your concern before was that prices would rise without the costs rising...in other words, producers simply increasing their profit margins as far as they could against the eternal government customer...this means that costs are stable not rising...it's the price that is rising. Now your concern is that the costs will rise without the prices rising!?!?! But why have these concerns? And what does government spending have to do with this?
marris: "Then [rising prices] you would see some rising prices. But in that world, you wouldn't use MMT, right?"
ReplyDeleteI would not put it quite that way. MMT says don't address supply shortages with excess demand solutions.
MMT economists recognize that most recent inflations have been driven by supply shortages, especially petroleum, since its quantity is controlled by a cartel and gasoline is pretty much an oligopoly in the US. Warren Mosler observes that since the Saudis are the swing producers, they are effective monopolists. In addition, as more consumers come online as developing nations' economies expand, materials will become scarcer. Moreover, climate change portends to affect food availability. All this will affect prices from the supply side and the response has to be in those terms, not as "inflation," which is generally understood as demand side.
marris, I am not sure what you mean by "MMT planners." There cannot be a centrally planned economy in the US other than through the Fed. For example, the Fed now sets the fundamental price in the economy, the interest rate (price of money). That is central planning and at least some MMT economists would like to see the overnight rate set to zero permanently.
ReplyDeleteMMT recommends that fiscal policy be the primary means of using government to affect the economy, by recognizing that the very existence of state money results in some unemployment. So government at least has to address that issue resulting from the demand leakage to taxation.
Secondly, MMT recommends that an understanding of sectoral balances and functional finance reveals that the government fiscal balance must adjust to changes in non-government saving propensity in order to maintain a full employment budget with price stability. Presently, there is no understand of how the size of the deficit relates to the macro economy.
Government fiscal policy is decided politically through the appropriations/taxation process. How government expenditure is allocated and how taxes are distributed is a political issue in a liberal democracy such as outs. While Congress is quite unlikely to delegate this authority, it could do so to some extent through the Fed, as Beowulf has pointed out.
As soon as government with fiscal authority is introduced, some "central planning" in involved. The notion that a modern economy can operate free of central planning means that government can neither provision itself nor tax.
The political issue is how far government should go. MMT is agnostic on that, other than in advising that since government creates unemployment it needs to address it. And since government issues the currency, it has to deal with price stability. MMT shows a what to reconcile this in a way suggesting that employment and price stability necessarily involve a trade-off that precludes optimizing one of them. That involves setting a floor price through the job guarantee.
MMT claims to provide knowledge of how to maintain full employment and price stability based on macroeconomic principles and fiscal policy. That is what policy makers are already trying to do and failing at. So I don't see the problem with "central planning" here. That is to say, MMT doesn't create any more central planning that already exists, recommends reducing the Fed's role in central planning, and shows elected representatives how to carry out their fiscal responsibilities to greater advantage to the country as a whole.
Sorry for the delay. I got sidetracked with some other stuff.
ReplyDeleteI think I see why this is confusing. I will try to construct a really simple example of how the high inflation scenario could arise.
Let's start with something very simple: consumer goods. Under a JG plan, workers who are currently unemployed would get minimum income streams. Let's say they take some of that money and use it to buy blueberries. What happens on the blueberry market? They bid blueberries away from other consumers who would have purchased them, right? [That's just how an economist would describe it. In practice, these guys walk into the store and buy blueberries at the posted price. The store owner is happy that he's selling more. He may even try to increase his stock for next week. He may ALSO raise his blueberry prices. Not by a lot. Just enough to make sure he doesn't run out at the end of the week.]
Now it's *possible* that there are a bunch of blueberry production resources sitting idle and that this will bring them into production. That is, there's some guy out there with a blueberry farm who's not growing blueberries who will now start to do so. He may expand production. However, while the total money bids coming in from supermarkets exceeds [number of blueberries in this week's stock x price per berry], he TOO will raise prices. Only the stores which offer him the highest prices (and charge the consumers higher prices) will get blueberries.
Furthermore, let's not forget the non-JG blueberry buyers [the ones who have low incomes and don't receive JG streams]. They will notice that blueberry prices are rising. It's possible that they will simply write this off ["well, I guess I'll need to eat oranges instead"]. However, to the extent that they realize that the higher prices are caused by the new money in the system [JG money], they'll be a little pissed. Why can't the government give them some money, too? They should be able to buy the blueberries at the higher prices. After all, they have "real jobs." To the extent that they can, they may even try to vote in people who promise to boost their incomes and/or reduce blueberry prices. If they get income streams too, then the JG workers are back where they started, unable to keep up with rising prices.
What are the MMT planners going to do in this situation? I think the most likely scenario will be to give more money to the people who want it.
[By planner, I mean anyone who decides the pattern of money drops. This can include members of the Fed, Treasury, the G7, the National Association of Blueberry Farmers, etc. Basically, they have the ability to do the targeted drops and/or pick models which decide the targeted drops]
This particular example did not depend on any savings desire. Savings desire can be incorporated, but it requires knowing a bit more about WHY that savings desire exists. Is it just because people are scared? The scenario is caused by new spent income streams, so if that's the problem, then I guess this scenario will be delayed to the extent that JG workers are scared to spend new income.
ReplyDeleteOr it because everyone (workers and non-workers) have a lot of outstanding debt and they feel they must forego purchases until they pay off more of it? In that example, it's possible that a new JG worker will pay off some debt and then start buying blueberries. It's also possible that he pays of some of the debt, starts buying berries, and rolls the remainder. There may be some people who do neither. They go into deeper debt because their JG streams now make them more eligible borrowers. It would depend on the person.
I think that to the extent that debt is paid off, it may delay the scenario I descibed. Maybe. It depends on the bank. If the bank takes the money and issues no new loans, then the scenario will be delayed. If the bank issues more debt [they don't like the drop in their balance sheets, etc], then it depends on where the new money goes. If it causes money to flow into the blueberry market, then I guess the same problem will arise.
BTW, this is a "simple example" of the type of difficulty the planner will face, and it will arise even if the JG workers receive income and are NOT asked to do anything. It gets even weirder when we consider the effects of JG projects. To the extent that they use only previously idle resources, we may not see really weird effects. But I don't think that will be easy.
marris "[By planner, I mean anyone who decides the pattern of money drops. This can include members of the Fed, Treasury, the G7, the National Association of Blueberry Farmers, etc. Basically, they have the ability to do the targeted drops and/or pick models which decide the targeted drops]"
ReplyDeleteOnly Congress through the appropriations process can authorize fiscal expenditure. The executive executes the budget that Congress approves. The Fed is not permitted to conduct fiscal operations, only monetary operations, and monetary operations don't include "money drops" in the economy that change the amount of nongovernment net financial assets, other than through influencing interest payments.
Government disbursement through the appropriations process includes expenditure in which government acts directly to provision itself and transfer payments in which government funding is indirect, i.e., through the choice of those receiving the transfer payment, such as SS.
The purpose of the JG is to employ people that would otherwise not be employed, since they are able and willing to work but cannot find a job in the private sector. These people now receive transfer payments in the forms of unemployment insurance, food stamps, etc., so the JG add would not be all that much different. Do food stamps lead to inflation?
The point is that transfer payment smooth out the economy over economic cycles and prevent deflation in crises. I recently read that the GFC was less severe in Germany than the US because of the more robust safety net there.
Moreover, a rise in some prices doesn't result in "inflation" unless the terms is used imprecisely. IN the economic sense it means a general continuous price rise, including the price of labor. The JG could have a one-off effect when introduced, but that doesn't constitute inflation if it is not continuous.
Moreover, there is always a tradeoff in economic policy. While it is possible, although I think pretty unlikely that a JG would be inflationary in the strict sense. What would happen first is that increasing effective demand would be stimulative and serve to bring idle resources on line. if it added a bit to nominal GDP in a downturn, that would be OK. That is what the Fed is not desperately trying to do with monetary policy, unsuccessfully. The tradeoff here is between a bit of inflation and the enormous foregone opportunity that idle labor involves. See Bill Mitchell's research on this, for example.
The purpose of the JG is to provide a buffer of employed rather than the existing buffer of unemployed. As a buffer of employed the JG expands in downturns and decreases in recoveries, like the other automatic stabilizers. The MMT idea is that pay for work is more effective and efficient than the existing system of transfer payments. It would also pick up some people that would not otherwise be covered, e.g., recent grads that had not been employed long enough to qualify for unemployment insurance, a significant group in this downturn.
marris: "This particular example did not depend on any savings desire. Savings desire can be incorporated, but it requires knowing a bit more about WHY that savings desire exists."
ReplyDeleteIN a downturn in a financial cycle like this one, a great deal of the saving comes from deleveraging. There is also increased desire to rebuild depleted savings in the face of uncertainty. In a boom, irrational exuberance takes over and people run down their savings because their assets increase in value. But asset values are not locked in until realized, and when asset values fall during the downturn, people find that their balance sheets have deteriorated. Since they don't expect asset values to shoot up right away, they increase their savings rate.
This makes perfect sense on the individual level, but when a significant portion of the population increases saving, this reduces effective demand, sending a signal for business to cut back on inventory. The result is economic contraction, more financial pressure on households, more uncertainty for firms, and therefore less spending and more saving by both. The result is that both consumption and investment fall, opening an output gap and increasing unemployment, feeding into the downward spiraling loop.
@marris
ReplyDeleteI get what you're saying marris but it is rather humorous to think such a thing would occur. You do realize we are talking about $9-10 bucks an hour or something like that. That means that even if "blueberries" rose in price due to such huge demand (assuming that locally such demand would even occur in the first place since the JG is nation-wide and spread out over many, many areas making it very unlikely that it's all concentrated at "one store" raising their prices, and even if it a significant portion of JG workers were in one area, it would obviously be in a rather poor area and so raising prices much further would likely out-bid all the customers!)...but regardless, assuming this "inflation" were to happen and prices were to rise...it wouldn't take very much for the price to rise so far that all of that "new demand" from the JG workers was effectively out-bid on the price (in other word they could no longer afford the new, higher price themselves!) and therefore supply and demand would move back into balance again since no more demand would be there to raise prices further. And since the original price already marked the equilibrium "sweet spot" for all the non JG workers who demanded blueberries, prices would likely fall back down to their original level anyway! In other words the "threshold" to out-bid JG workers on the price of "blueberries" is so close to the current price that it makes hardly a dent at all and would quickly come back into alignment at the current price or only a slightly higher price equivalent to the 9-10 bucks the JG workers are earning. Not only this but many of the JG workers are likely already earning 9-10 bucks somehow through unemployment or food stamps or under-the-table jobs here and there, so again the majority of JG workers are already accounted for in prices. More than likely producers and businesses would just see added volume of sales only slightly and consider it good enough profits on that basis alone b/c the volume would not be substantial enough to consider raising prices b/c demand would not be "through the roof" with just a JG influx.
Also on a larger scale with your argument, you are essentially saying that there is a "reasonable" level of unemployment simply b/c prices will rise for everyone else with full employment. This is a theory and social approach that most if not all MMT-ers seriously object to (myself included). Serious and/or unnecessary unemployment is a drag on our economy and inexcusable in our modern monetary system. We pay far more in the drop in our safety, stability, wealth, and lack of achieving our full potential both in production and in intelligence by having constant, unnecessary unemployment. The possible threat of an inflationary trend on the micro level (probably not the macro level since we are talking low income levels) is really quite an egregious counter-point to achieving full employment in my estimation. True it is possible, indeed likely, that a floor would be set in prices and incomes on the macro/national level and therefore a floor with macro-inflation...however, frankly, that is the point of this whole idea in the first place...to create a floor for a standard of living for the lowest of the low in the society, from which our economy/society can always bounce back from (instead of street and slum poverty even for willing and able individuals!). Who care honestly and sincerely take a position against such a proposition? I don't understand.
> Only Congress through the appropriations process can authorize fiscal expenditure. The executive executes the budget that Congress approves. The Fed is not permitted to conduct fiscal operations, only monetary operations, and monetary operations don't include "money drops" in the economy that change the amount of nongovernment net financial assets, other than through influencing interest payments.
ReplyDeleteI think what you wrote about the executive and legislative branches is correct. The Fed stuff is a bit terse, but as long as "influencing interest payments" includes open market operations, currency swap lines, and the creation of limited liability companies with independent balance sheets, then sure, that's what they do.
> The purpose of the JG is to employ people that would otherwise not be employed, since they are able and willing to work but cannot find a job in the private sector. These people now receive transfer payments in the forms of unemployment insurance, food stamps, etc., so the JG add would not be all that much different. Do food stamps lead to inflation?
The folks who run the grocery store certainly include ALL customers (including food stamp customers) when they plan inventory and pick selling prices. And there are definitely customers who walk into grocery stores and decide that the "price of X is too high, so I will defer/avoid this purchase." It's not just cash customers, right? Food stamp customers must also budget their income.
> The point is that transfer payment smooth out the economy over economic cycles and prevent deflation in crises.
To the extent that the program remains "small," it will have a small inflationary impact. Small programs will also kick up a smaller circular flows. To the extent that these policies (streams or large projects) are designed to create "larger" flows, they will have "larger" price effects. There's also the expectation-based pricing issues I raised. Why should we believe that the economy will be "smoothed" rather than on an expectation fueled ramp-up, followed by another crash (as everyone realizes that adding money to the system will not fix things).
> I recently read that the GFC was less severe in Germany than the US because of the more robust safety net there.
What does "less severe" mean here? Fewer people unemployed?
marris: "as everyone realizes that adding money to the system will not fix things"
ReplyDeleteEveryone doesn't realize this since increasing non-government net financial assets by crediting bank deposits is a tool that MMt proposes in addressing demand deficiency when there is an output gap and high unemployment. Increasing incomes increases both consumption (effective demand) and saving, since people consume some of their income and save some. Increasing consumption sends a signal to firms to increase investment, which also augments effective demand for and production of both consumer and capital goods.
Increased demand is not inflationary when it elicits greater supply. This is how contraction turns into expansion in a recession and recovery.
"What does "less severe" mean here? Fewer people unemployed?"
Lower unemployment, narrower output gap, shallower economic contraction and quicker recovery.
> Moreover, a rise in some prices doesn't result in "inflation" unless the terms is used imprecisely. IN the economic sense it means a general continuous price rise, including the price of labor. The JG could have a one-off effect when introduced, but that doesn't constitute inflation if it is not continuous.
ReplyDeleteThe example certainly describes one (simple) market. The aggregate effect will depend on the number of markets affected, the sizes of the streams, etc. I also haven't found any MMT literature to address expectation-fueled price increases. I think it's certainly possible that the price level and indexed income streams could start chasing each other.
> The tradeoff here is between a bit of inflation and the enormous foregone opportunity that idle labor involves. See Bill Mitchell's research on this, for example... The MMT idea is that pay for work is more effective and efficient than the existing system of transfer payments.
What do foregone opportunity, effective, and efficient mean here except employment? Are you talking about the quantity of goods and services produced?
"Pay for work" would certainly introduce some issues which don't arise with a transfer payment system. For example, does Mitchell discuss production structures or factor specificity? Or does he use a "capital fund" model? The fund view certainly simplifies the analysis, but it makes it difficult to express some of the problems that real-world planners will need to face.
> This makes perfect sense on the individual level, but when a significant portion of the population increases saving, this reduces effective demand, sending a signal for business to cut back on inventory. The result is economic contraction, more financial pressure on households, more uncertainty for firms, and therefore less spending and more saving by both. The result is that both consumption and investment fall, opening an output gap and increasing unemployment, feeding into the downward spiraling loop.
Well, the spiral idea is definitely interesting. But I'm not sure how much we can say about their development/duration. For example, all the cash that exists in the system exists in the cash balances of individuals, right? To the extent that prices fall, that cash becomes more valuable (can purchase more stuff). That may slow down (stop?) the spiral ("I can afford to spend a bit now because I can buy ten pies for the previous price of one").
> Increasing incomes increases both consumption (effective demand) and saving, since people consume some of their income and save some. Increasing consumption sends a signal to firms to increase investment, which also augments effective demand for and production of both consumer and capital goods. Increased demand is not inflationary when it elicits greater supply. This is how contraction turns into expansion in a recession and recovery.
In the example, the increase in demand certainly brought another blueberry field into use. I'm not sure that "increased consumption" per se is the best way to interpret the signal. In reality, it was unprofitable to run the field at the pre-JG market price. As prices increase on the market, more factors are drawn to production. For example, if it costs me $5 to produce an ounce of blueberries from some field, then the field owner will leave the field idle until the market price exceeds $5. [Technically, the field will be used as soon as the price of SOME good X exceeds the cost of producing X. It does not need to be blueberries.]
@mario
ReplyDelete> the "threshold" to out-bid JG workers on the price of "blueberries" is so close to the current price that it makes hardly a dent at all and would quickly come back into alignment at the current price or only a slightly higher price equivalent to the 9-10 bucks the JG workers are earning.
If the JG workers are going to be outbid on the markets, then what's the point of the streams? The workers could not buy stuff before and they can't buy stuff now. No standard of living floor has been established. I think you (Mario) want the JG streams in place so that people CAN buy stuff with it, right? The point of the example was simply to show that (1) the streams will affect prices and (2) the larger the streams, the larger the effect.
> Not only this but many of the JG workers are likely already earning 9-10 bucks somehow through unemployment or food stamps or under-the-table jobs here and there, so again the majority of JG workers are already accounted for in prices.
If they already have this income, then why put them on JG streams?
> Also on a larger scale with your argument, you are essentially saying that there is a "reasonable" level of unemployment simply b/c prices will rise for everyone else with full employment. This is a theory and social approach that most if not all MMT-ers seriously object to (myself included).
No, I'm not saying that high unemployment is "reasonable" or that you shouldn't try to fix it. I just don't think that *this* will fix it. Things get even weirder when the JG projects get more complex (dams, roads, etc).
If the JG workers are going to be outbid on the markets, then what's the point of the streams?
ReplyDeleteI am saying that JG workers will not be outbid...I am saying that prices will not rise substantially enough for them to be outbid. And I am saying that even if prices did rise to outbid them, price would quickly stabilize itself and likely return lower b/c the threshold for out-bidding a JG wage is very low and therefore price will either move back to the original location before the JG workers entered the market (which is really where price is set for the market) OR it will stay just above the JG workers' threshold (which be a very small increase) and JG workers will have to substitute that item. They're JG workers though...they already know all about substitution. What's the big deal?
Remember a concentration of JG workers needs to exist in order for any real inflation to occur at the "store level" and if that's the case, then that area is likely already quite poor, so based on the market conditions there prices will not be able to rise very much farther anyway. Also the threshold to outbid the JG workers needs to be able grow in order for that inflation to MAINTAIN itself ceterus perebus. The likelihood of both of those things occurring simply b/c of a JG program is highly unlikely.
If they already have this income, then why put them on JG streams?
b/c they are STUCK in their current situation. Long periods of unemployment are known to destroy a person's attractiveness as an employee and their abilities, knowledge base, and skills can atrophy. Plus UE benefits RUN OUT eventually!!! Under the table work is not sustainable. Many people can't get a job, b/c they don't have a job in the first place (which many times is a requirement or a big help in the work force). The JG program handles all of those issues. As for dams or public projects...yes that's good. We are using our idle resources of labor and human ingenuity to get something accomplished that is a benefit to some, if not a large part, of our society. That could be a small company that signs up to participate in the JG program to "vet" for future employees in the long-term for themselves or it could be public purpose projects from highway clean-up, to answering phones, to cleaning out old files or offices, to building dams or preparing the materials for others to build dams, etc. It also educates people on the job to allow them to get out in the work force on their own or possible start their own businesses and trades.
Note that with the increase of more workers in the private sector, you may in fact find wages going down a bit since there is more supply of labor to choose from. This would counter-act any "blueberry" inflation as well, beyond which I've already addressed in particular to the "blueberry" situation. By adding in universal healthcare and a universal pension, the slight decrease in wages would be a welcomed occurrence in conjunction with accessible health care and a stable retirement future for people ages 60-70, etc., etc.
I'm not saying that high unemployment is "reasonable" or that you shouldn't try to fix it.
okay then why is a JG program that puts people to work a bad idea? I am must be missing something here, b/c I keep hearing you say that a JG program will create inflation which is implying that the rest of the society will be "paying" for the employment of these disadvantaged individuals...and this "paying" is a good reason to reconsider a JG program all together. Am I misunderstanding you here? If I am, then why are we talking about "blueberry" inflation as a concern or disadvantage to a JG program?
marris "I also haven't found any MMT literature to address expectation-fueled price increases."
ReplyDeleteMMT doesn't believe in the expectations fairy.
"What do foregone opportunity, effective, and efficient mean here except employment? Are you talking about the quantity of goods and services produced?"
The greatest cost arises from unemployment. I have already cited Bill Mitchell's work on this. There is also the lost income and profit resulting from an output gap, including waste of productive resources while lying idle. There is also a gap in investment in new plant and equipment. For example, a long recession in one country puts that country behind others in competitiveness.
"For example, all the cash that exists in the system exists in the cash balances of individuals, right? To the extent that prices fall, that cash becomes more valuable (can purchase more stuff)."
Recoveries are led by increasing private lending. Cash balances are generally held by the well-off that buy stuff toward the bottom and break the fall. For example, about half of home sales now are cash sales to investors for rentals and flippers.
"I'm not sure that "increased consumption" per se is the best way to interpret the signal. In reality, it was unprofitable to run the field at the pre-JG market price. As prices increase on the market, more factors are drawn to production."
Simply put, producers are not going to bring idle resources on line until there is effective demand for their products. This is what is wrong with the idea that as consumption falls, and interest rates go down, investment gores up. Investment is not as sensitive to interest rates (cost of capital) as to being able to sell the product. Sure, some firms with deep pockets may take advantage of low capital cost, but that is not happening now. Large firms are buying back equity instead, and corporate saving is mounting with rising corporate profit, rather than corporate investment.