I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.
I don't think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits then we would see if we also aggressively used channels two and three.... I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.Read it at CEPR
Modern Monetary Theory: What's Modern About It?
by Dean Baker
(h/t Keven Fathi via email)
7 comments:
Sorry where does he say he prefers Monetarism?
@ Ramanan
OK, I agree. I overreacted. Took that down even before I saw your comment.
I just posted the following on Baker's blog.
I'm a strong MMT sympathizer and fellow traveler, but not an economist. I believe the deficit-driven fiscal channel promoted by MMT is by far the best of the three alternatives. But I speak only for myself in defending this position.
First, the interest rate channel seems to be somewhat effective for modulating demand in normal times, but limited in times like the present. Who honestly thinks we can effectively boost demand and economic activity just by more interest rate tweaks? That channel is exhausted.
Also, the interest rate channel works by expanding credit. That's fine for business investment, but the foundation of production is consumption demand, and I don't see why we should be at all eager to expand consumer credit again, especially following the terrible catastrophe of the credit bubble that we have just recently lived through. Progressives should prefer to find ways to generate economic activity that do not depend on further indenturing consumers to society's feudal landlords, but that instead put secure income boots directly in consumers's bank accounts.
The devaluation channel works by reducing the real wages of working people, particularly those who have the least workplace bargaining power and can least afford to have their real wages reduced. Yes, this makes those poorer workers more "competitive" with the serfs who live abroad. Surely we should avoid this path if there are alternatives. In a society in which CEO to worker pay ratios are now measured in the hundreds, while incomes in the bottom deciles have stagnated and dropped for years, it is absurd to conclude that the problem with the American economy is overpaid workers buying too much stuff from Walmart.
My own view is that the excess of consumer credit and the general decline in economic health is a result of growing income imbalances and growing economic insecurity, and so we should prefer policies that boost demand and economic activity by promoting greater income equality, and especially by boosting incomes and security in the bottom portions of our population.
Government spending works by redistributing purchasing power. If it's spending of the classic, deficit-neutral tax-and-spend variety, then the redistribution is obvious. Purchasing power is directly removed from those who have it in abundance and bestowed on those who do not have as much of it. Because the shift can often go from those who have a higher propensity to hoard and toward those who have a higher propensity to consume and produce, the redistribution can be a large net plus for society.
If the additional government spending is instead accomplished by expanding the deficit in the manner proposed by MMT, the re-distributive effect is more subtle and less disruptive, both economically and politically. One adds to the purchasing power of some without taking money directly from others. This boosts the demand for goods and services, and eventually the economy reaches a higher equilibrium state where those at the bottom are enjoying a significantly better standard of living while the rest enjoy more or less the standard they had before. Relative purchasing power has been redistributed.
The other great thing about the fiscal channel is that we can decide how to to spend the money, and can use it for big projects of long-deferred public investment, instead of relying solely on the frequently wasteful whims of the private sector, and it's endless flim-flam rackets and artificially induced desires.
Economists seem to love to stick with aggregates, and avoid uncomfortable discussions of distribution. But apart from the important social questions of justice and power in a democratic society, the dynamics of the aggregates and dynamics of distribution are entangled. It is impossible to avoid the distribution question.
Dan, "That channel is exhausted.": Earth to Baker.... come in please... is anybody there???
Baker: "However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth."
How about that MMT provides a theoretical framework that actually DOES provide for full/max employment instead of just identifying conditions that are only INTENDED to foster a NAIRU-type level of UN-employment which falls way short and as we have seen in these times, can result in 10's of millions of unemployed at best.
Tom, these guys (Baker, Bernstein, thro Krugman in there too) are basically implying Galbraith is a moron for associating with the MMT academics and related professionals.
This has to be "go time" for Galbraith if there ever was one. JG needs to fully engage these moron so-called "progressives" head on.
resp,
Dan, I promoted your comment to a post.
Right, Matt. As Bill would say, these economists have "neoliberal tendencies" that they seem to be in denial about.
Post a Comment