Sunday, June 26, 2011

The Tradeoff between MMT and Government

Robin Koerner, publisher of, addresses the balance budget amendment in light of MMT's warning about what it would entail economically.

It seems to me that Koerner presents the tradeoff pretty well. What he is saying is that most people calling for a balanced budget amendment don't realize that everything has consequences and they don't understand the political benefit that is supposed to result has an economic cost, even a serious one, in the tradeoff. He piece is about the political/economic tradeoff, and he things that the decision criteria should be normative. He sees it as a tradeoff between prosperity and tyranny and comes down against tyranny. That appeals to a lot of people both on the right and left in this culture of crony capitalism and corruption, in which the state is seen increasingly as predator.

He understands the basic points of MMT about the fiscal balance and then considers the tradeoff in terms of government power. This and his previous post show that he has at least taken the trouble to investigate MMT. That's a plus, since we are at least engaging on a playing field where our existence is being acknowledged. Moreover, he is objecting to MMT not on positive grounds, which he seems to have conceded, but on normative preference. That seems like an advance for MMT to me, rather than having to confront ill-informed blather.

The main objection of both left and right to MMT policy is that it gives politicians too much power in its attempt to offset saving desire with fiscal policy through the sectoral balance approach and functional finance. The right is concerned with politicians using fiscal power to bribe the rabble for votes, and the left is concerned with state capture as the wealthy and influential bribe politicians with contributions needed in increasingly expensive campaigns. Koerner makes clear that his concern is not economic as much as political. He cautions that there is a tradeoff between economic concerns and political concerns, and that a balanced budget amendment would have consequences that MMT warns about.

I don't that this can be shrugged off politically. This is why the work that Bill Black and Randy have been doing on the blogs is addressing corruption is so important, and why proposals for reform like Warren has put out are key to putting the MMT position across politically as well as economically. I have also brought up the input of Michael Hudson on economic rent, which MMT hasn't dealt with specifically as far as I can tell. But this is a good argument for progressive taxation that distinguishes productive and unproductive gains and taxes the unproductive. MMT does talk about targeted taxation, and this is what progressives are looking for to address inequality.

What do you think?


Mario said...

I agree on productive and unproductive taxation aka Hudson style and economic rent.

I also sympathize with the political concerns of MMT (aka our actual monetary system) by both the left and the right as you aptly illustrate.

A political discussion must then be handled politically, not economically. And I have given up in the business of changing people's politics. It's a no-win situation as far as I can tell.

I do think however that if politics is the real concern (and not economics) then we should consider OTHER TYPES of political reform rather than a balanced budget.

For example, how about abolishing parties and/or equalizing that playing field through regulated campaign contributions distributed EQUALLY among 4 different platforms (candidates). And run the primaries the same way.

How about compensating all politicians in more humble ways so that it really is about "civil service"?

How about limiting terms for all reps in the house just like it is for the president?

How about making it illegal for reps and government officials to move through the corporate/lobbyist revolving door after/during their time in office and "civil service"?

How about making the media more legally LIABLE for the information they put out over the air? Do you know that Fox News cannot be aired in Canada b/c it is illegal in Canada to lie over the air...that tells us all ALOT about Fox News and the USA Media.

If the concern is a political one, then address it politically...a balanced budget does nothing for any of those concerns about government fact you'll only see more of it b/c the corruption is already here with us all. A balanced budget only means that the every-day-man in the private sector is just about literally doomed with such a proposal...especially at this time in our economy. It addresses NOTHING in regards to the corruption we see in our politics. Absolutely nothing. Recovery will be literally impossible for the USA without severe changes in our economy/society if that amendment goes through. Corruption is already here with or without MMT...politically we need to deal with that regardless of ANY economic decision or belief or theory.

That's my thought about it all. It's time for serious revisions in our politics and that likely means alot of tough love for alot of people in DC that love to cry and moan and raise a stink about anything and everything that takes their power, control, and wealth away. People will be turned up and pushed out. Power will be renegotiated. There is no other way as far as I can tell...powerful people will not be happy but it will be good for us all. I support this being done only through civil, legal, and non-violent means myself. Otherwise, I don't support it.

That's my thoughts on the issue!

Kevin Fathi said...

I think the best that MMT advocates could hope for at this point would be for a Job Guarantee program to be enacted as a nondiscretionary automatic stabilizer. Given the current political climate, it would require divine intervention.

Chewitup said...

I agree with Mario. Term limits and lobbying restrictions would go a long way. I ran across this quote today reading Erik Larson's new book, "In the Garden of Beasts" about Wililam E. Dodd becoming the US Ambassador to Germany in 1933. He was speaking to a group in Berlin and trying to be indirectly critical of the rising power of the National Socialists.

"One may safely say that it would be no sin if statesmen learned enough of history to realize that no system which implies control of society by privilege seekers has ever ended in any other way than collapse."

Mario said...

it's not much but you can sign and share this petition I created for term limits.


Daniel said...

I concur. Cronyism, corruption, and graft have always existed and will always exist regardless of whether or not a government's budget is forced to be in balance. If you want to minimize its pervasiveness, the only way I see it is that there has to be unyielding public pressure and widespread civic participation in the political system. The People reaaallllly have to want it.

In the end, its all about effectiveness and results. I don't think the average American is going to be fine and dandy with the severe economic repercussions of a balanced Federal budget. I think the support for the balanced budget amendment exists because people erroneously believe it will bring about economic prosperity, not for some idealistic "anti-government, pro-private sector just on principle, everything else be damned" sentiment.

NeilW said...

The key is that the design of government fiscal policies has to be in the form of automatic stabilisers, not discretionary policy.

That means less tax cuts and more stabilisation spending.

And the 'anti-government' politicians need to be given the hard word - what are you proposing as the solution to those who will have insufficient resources to live free from poverty as a direct result of their political choices.

Which is it to be? Compensation or Extermination?

Ralph Musgrave said...

The big weakness in the current system is that politicians can promise voters the Moon, and as to paying for the Moon, well we’ll just borrow: that way it’s not clear who pays. That system has “moral hazard” written all over it.

A better system would be one under which politicians have to fund all public spending out of taxes. As to deficits, THAT decision should be taken by central banks (or any committee of independent economists). Deficits are only justified to the extent that inflation permits, and gauging the threat is posed by inflation is way beyond the competence of politicians. As Koerner rightly says, most politicians “have never picked up an economics book”.

Thus the choice is not, as Koerner seems to suggest, between a permanently balanced budget and a system under which politicians can spend like there’s no tomorrow. There is a third choice: let central banks do the technical stuff, and let politicians do the political stuff, like determining the proportion of GDP devoted to public spending and how that money is allocated.

Crake said...

Would the stock of money equal the stock of federal debt, cent for cent?

Tom Hickey said...

@ Crake

Total non-government net financial assets is the total of tsys, reserves, and currency held. That is to say, everything the government has issued less what the government has withdrawn and debt retired. Here is now it works:

When government disburses funds through expenditure and transfers, it increases non-government net financial assets, there being no corresponding liability in nongovernment. All the issuance is done through crediting bank accounts, either directly (electronically) or indirectly (checks). Some of these reserves are converted to cash to meet demand at bank windows. Some is used to pay taxes, fees and fines to government and is withdrawn. Some of the reserves are converted to tsys issued to offset the deficit, in order to obtain the interest payment, which is also credited to bank accounts as reserves. So everything comes back to reserves. That's how nongovernment net financial assets are created.

Bank or credit money has a corresponding liability in nongovernment so it nets to zero. In addition, final settlement of transactions involving credit money take place in reserves, or currency obtained in exchange for reserves, unless the exchange is intrabank or some other kind of direct swap.

So you have to understand reserves to get how money creation works in the present system. Only the Fed can create reserves, and only Treasury can access reserves from the Fed directly through tsy issuance. Otherwise, the Fed lends reserves to nongovernment. Only the Treasury issues directly into the economy by its disbursements. Deficits comprise the issuance left over after taxation as the net, and this is offset by tsys that drain excess reserves that would otherwise result, making it more difficult for the Fed to hit its target rate without paying a support rate. With a support rate, tsy issuance is not needed operationally. It is a political imposition.

Tom Hickey said...

@ Crake "Would the stock of money equal the stock of federal debt, cent for cent?"

No. Money stock includes all the "money things" in the economy at any point in time. This is more than the net financial assets that government inject. It includes bank credit and other "money things." There are different measures of this based on types of "money things."

See Money stock for a brief def.

Calgacus said...

Crake: "Would the stock of money equal the stock of federal debt, cent for cent?"

Of course what Tom said is right. But you are sorta, kinda right, have seen Warren say about the same, don't remember his precise words. The federal debt is the base money ("NFA") of the economy, that all the other kinds of money leverage off of. It's what's left when you net out the non-government's obligations to itself. The currency issuers obligations are the basic money that makes the system go round; whether they are bonds, bills, currency or reserves is secondary.