Pretty good summary of the issue of full employment and price stability, contrasting the MMT fiscal position based on effective demand with the monetarist position based on NAIRU.
Read it at Mother Jones
Who's Afraid of a Little Inflation?
by Kevin Drum
(h/t Clonal in the comments)
Still no mention of sectoral balances and functional finance, the heart of MMT.
Drum does bring up and important point that is as under the radar as MMT. We need to be talking much more about the mainstream model's presumption of unlimited growth based on infinite resources in a world dominated by petroleum as the most important energy source.
POSTSCRIPT: Of course, you might also want to consider MPT, or Modern Petro-Monetary Theory. Rather than asking what level of economic growth kicks off unacceptable inflation, it asks what level of economic growth kicks off an oil price spike that produces a recession and higher unemployment. I have to admit that I increasingly think of the economy in those terms these days.The only operational constraint according to MMT is not inflation, as it often expressed. Rather, it is availability of real resources. Inflation results when effective demand outpaces supply due to lack of availability of real resources, either through the inability of the economy to expand quickly enough to meet the increased demand (demand-side inflation) or because of lack of real resources (supply-side inflation).
Recent inflations in the developed world have resulted from shortage of petroleum relative to demand. This first occurred due to a monopoly by an oil cartel. While the Saudis are still the swing producers, the world seems to be running up against a natural supply constraint due to dwindling resources.
So far the discussion of MMT has been superficial. But at least it is being discussed.
UPDATE: Galbraith responds to Drum in Drum's comment section.
Kevin - your instinct on the oil price is on target, in my view. The inflation threat that we face doesn't come from deficits or high employment -- it comes from the cost and price of energy. But managing this is not within the competence of the Federal Reserve.
I have been trying to call attention to this issue for years (it's in my 2008 book, The Predator State, and in articles written recently with Jing Chen, most recently in the Cambridge Journal of Economics, which contains the following paragraph:
"Our central argument is that stimulus fell short – and would havefallen short even if the amounts had been greater – becauseincreased demand under existing high-fixed cost structures drove, or would have driven, the price of resources too high, too quickly. The constraint on growth was not inflation generated by easy money, but the combination of the rising real marginal cost especially of energy, combined with monopoly control of and speculative instability in energy prices, which together act as a choke-chain on the return to full employment."
But the endless debate over deficits, debt and quantitative easing tends to obscure this issue -- and in public discourse one cannot easily answer questions that are not being asked. So thanks for making the point, and keep digging at it.
James Galbraith
There is no energy constraint (in terms of what we have experienced using oil) if LFTRs are used:
ReplyDeletehttp://energyfromthorium.com
(Mike, thanks for this link earlier in 2011.)
Tofu,
ReplyDelete2.5 1750MW reactors per state can generate/deliver the same amount of energy we now consume in oxidizing our 300M gallons of gasoline per day.
Resp,
I updated the Drum post with a comment by Galabraith at Drum's place.
ReplyDeleteJG: "the combination of the rising real marginal cost especially of energy, combined with monopoly control of and speculative instability in energy prices, which together act as a choke-chain on the return to full employment."
ReplyDeleteReturn? When did we previously reach it?
Resp,
Matt, the claim is that whatever else policy makers do now to reach FE will run into the barrier of rising energy costs that will constrict the economy. The MMT economists make a similar argument with the tax rate. It is too high and too much is extracted too fast.
ReplyDeleteMatt,
ReplyDeleteThat quote is from Billy. Full employment existed in Australia prior to the neoliberal regime. So, I think that's his contex.
Tom, I really like this short statement:
"The only operational constraint according to MMT is not inflation, as it often expressed. Rather, it is availability of real resources. Inflation results when effective demand outpaces supply due to lack of availability of real resources, either through the inability of the economy to expand quickly enough to meet the increased demand (demand-side inflation) or because of lack of real resources (supply-side inflation)."
And, I think it's dead-on! But in that supply-side category, there's cost-push inflation caused by speculators and cartels and real "lack of real resources."
Letsgetitdone: But in that supply-side category, there's cost-push inflation caused by speculators and cartels and real "lack of real resources."
ReplyDeleteRight, there is real scarcity and artificial scarcity. There is a lot of artificial scarcity created in various markets through a variety of ruses, which, of course, benefits those creating the scarcity artificially through monopolistic practices. That's a reason that monopoly rent needs to be taxed away to discourage this type of behavior.
Libertarians want to remove government monopolies, but they don't have much to say about private monopolistic practices, because in their theory, monopolies can't exist in a "free market" due to perfect competition. That's just myopic. It's being blinkered by ideology.