Thursday, December 29, 2011

Tom Hickey on the basic issue involved in the JG wrt macro

Repost of a comment of mine at Pragmatic Capitalism follows:

OK, let’s simplify this discussion of the JG. It’s essentially about targeting inflation using a buffer stock of unemployed as a tool (in violation of the Fed’s mandate) through monetary policy or aiming to achieve full employment (less frictional) using fiscal policy and a buffer stock of employed.

The former position is the current standard operating procedure of the Fed, based on the Phillips curve, NAIRU a Taylor rule and other aspects of mainstream monetarist economics. The MMT response is that full employment along with price stability can be achieved through fiscal policy and a buffer stock of employed (JG).

Present Fed monetarist policy reduces full employment by redefining it through positing a supposed natural rate of 4-6%. Now there is talk that the “new normal” may be more like 6-8%. Conversely, MMT claims that actual full employment (less frictional) can be achieved through fiscal policy and a JG, and that this this will actually promote price stability.

Those that reject the MMT solution are choosing the monetarist position over it, and the resultant chronic idle resources and economic underperformance — unless they offer a macro theory theory that resolves the issue differently. Takers?

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