Friday, July 27, 2012

Thomas Palley — MMT/ELR: A Mix of Old and Unsubstantiated New Ideas

Randy Wray and Mat Forstater, two leading contributors to the MMT School, have replied to my recent blog on the MMT controversy. Their replies warrant a brief response.
Read it at Thomas Palley
MMT/ELR: A Mix of Old and Unsubstantiated New Ideas
Thomas I. Palley |
(h/t Clonal via email)


wh10 said...

On first glance, I think it is a fair response. He has changed from "wrong" to "unsubstantiated."

It seems that MMTers have addressed some of the unresolved issues he cites, but this may be a problem of there only being a handful of MMTers, as Scott says. Papers have been published, but for many of these issues, in relatively limited quantity, scope, and depth of analysis (modeling/quant incluced) vs. other formal economic schools.

I think a lot of the online MMT fan base/commenters have an oversimplified understanding of economics and a black and white view of the world. Academics is not like that and requires rigorous analysis and an appreciation for nuance. Palley is calling for that and tacitly admitting his accusations were not fair in the previous post.

Matt Franko said...

Is it oversimplification to think that the US is not 'borrowing from the Chinese ' ?


David said...

Exchange cannot take place when one side adopts an “if you’re not completely with us, you’re against us”

It's also not helpful when the other side indulges in criticism by academic social class. "Their stuff isn't published in top line journals nobody we know (other Ivy leaguers) takes them seriously." That was Krugman's attitude after he lost the argument with Keen and implicit in Palley's original post: "Most of it's old hat, and the rest of it's questionable."

wh10 said...


Economic theory goes broader.

David - I don't think Palley has been published in top journals. I don't know much about him but he is a heterodox Post-Keynesian economist himself.

Tom Hickey said...

Matt, in econospeak, it's OK to say that the govt "saves" and "borrows" as a shorthand. Many people hearing this incorrectly conclude that these terms have the same meaning for the currency issuer and currency users.

However, it is true in terms of the sectoral balances to say that all three sectors cannot save or borrow simultaneously, in the the sum must be zero by identity.

It's similar to Warren's saying that when the Tsy receives taxes the money is destroyed. People picture a shredding machine that, of course, is incorrect. It's shorthand for non-govt NFA being "destroyed" when withdrawn. The reality is that non-govt deposit accounts are reduced and the Tsy account increased wrt to rb. but most people don't have a clue about this. They can't get their minds around the fact that money not held in cash is just digital entries on spreadsheets. When a non-govt liability imposed by govt is extinguished by the govt liability provided by govt (reserves), the transaction simply cancels out on the books. Poof.

Senexx said...

Every argument against MMT I have seen has been weak, or incomprehensible (Rowe) or focuses excessively on what is currently politically possible.

In short, Palley says yes we should all go back and read Keynes and understand what he really meant not what people say he means today and his only substantive point in that post was "I stop short of advocating full fiscal union with transfers between countries because that is not politically feasible, and instead advocate an ECB-backed financing union"

Only a slight exaggeration on my behalf as he does mention the qualified potential for inflation in a multi-sector economy under a JG but so does MMT itself, so that's neither here nor there.

Anonymous said...

I liked this part:

"The profession’s refusal to talk in such terms reflects a deep intellectual bias against money financed fiscal policy. That bias stems from flawed beliefs in the neutrality of money; the inefficacy of fiscal policy; and a political economy hostile to government."

sparc5 said...

Palley seems to be only marginally familiar with the MMT literature, his new complaint is that MMT ignores the possibilities of inflation when some sectors are already at full employment. Here is what 10 seconds of googling came up with:

Bell quoting Keynes "When a further increase in the quantity of effective demand produces no further increase in output and entirely spends itself on an increase in the cost-unit fully proportionate to the increase in effective demand, we have reached a condition which might be appropriately designated as one of true inflation. Up to this point the effect of monetary expansion is entirely a question of degree, and there is no previous point at which we can draw a definite line and declare that conditions of inflation have set in.2 (GT, p. 303)

Thus, Keynes recognized that prices were likely to rise before labor became scarce or capacity limits began to bind. While [Abba] Lerner did not initially believe that inflation would emerge before full employment had been reached, he later recognized that prices might begin to rise before all resources were fully employed. He noted that: [A]s long as it is possible for the supply of goods to increase along with the increase in spending, there will be no (permanent) increase in prices. (Lerner, 1951, p. 8)
Although prices might begin to rise prior to the attainment of full employment, they would not remain high and, thus, should not induce an abdication of the government's responsibilities with respect to the first law of Functional Finance."



John Harvey was saying good things about this paper from Pavlina Tscherneva recently:

"Finally, Keynes firmly objected to using unemployment as an inflation-fighting measure.
If inflationary pressures developed near full employment, the public sector should retard new
projects where possible and redirect its job creation efforts to particularly distressed areas in the
periphery of economic activity. But by no means should it discontinue public works, because that
is precisely the time when “private enterprise is stopping from overcapacity and is therefore not
in a position to expand” (Keynes 1982: 150). Inflation, for Keynes, was to be addressed through
various programs that would either defer payments or encourage thrift, but would not slash jobs"

He knew that MMTers wrote this right?

sparc5 said...

Mathew Forstater wrote this about Tom's previous post:

One of Tom's claims is that MMT "ignores the effects of sectoral bottlenecks and imbalances". try searching the phrase "sectoral rigidities bottlenecks inflation" on Google scholar. The first two hits that come up on the first page are two papers I wrote that directly address these issues, "Flexible Full Employment" and "Public Employment and Economic Flexibility" from the late 1990s. I made similar arguments in a dozen other papers. Will all those objective truth-seekers who are reposting Tom's blog now post a retraction, as it is obviously the only ethical response? I am holding my breath in anticipation.

Leverage said...

"Papers have been published, but for many of these issues, in relatively limited quantity, scope, and depth of analysis (modeling/quant incluced) vs. other formal economic schools."

I've been a critic of some of the MMT positions (even if I'm sympathetic), but this is an authoritative argument usually status quo economists will use.

Given how useless and wrong their models are (based usually in stupid foundations and constructed in totally pseudo-scientific ways) orthodoxy (or even other heterodoxy) has yet to demonstrate their moral high based on 'mathematization' is sustainable.

I call this argument bullshit.

Here is the game: that who frames the debate wins the argument, off course other contending schools of thought will try to frame the debate in their own terms, and some will try to tell you how 'serious and unbiased we are' with their 'serious language, plapers and mathematical models'. Ignorants will buy the argument, as they always do, and that's the majority of the population.

Never underestimate the power of perception and a 'serious tie and suit' and 'good speaking individuals'. Too bad not everybody was born to be impressed by these tricks.

paul meli said...

"…a lot of the online MMT fan base/commenters have an oversimplified understanding of economics and a black and white view of the world…"

I think this is also an oversimplification.

In my view 95% of economics is based on simple stuff that we already (should) know. MMT focuses on this part of the economic puzzle.

The other 5% is largely an attempt to figure out where the frictions and inefficiencies are in the system and to minimize or eliminate them.

In essence what they are attempting is do design a perpetual-motion machine, and in this they will have marginal success at best.

MMT recognizes those frictions and advocates methods that over-power them.

In order to fly we don't make gravity go away, we overcome the force of it.

The main problem with economics discussions is we can't get past arguments like "we have to borrow from China" and "we have to manage our budgets likwe a household".

If mainstream economics ignores the simplicity and intractability of the 95% what good will focusing on the other 5% do?

y said...

This is an interesting development. He touches on some questions I've been wondering about regarding MMT. I hope we get a good response to his points.

Anonymous said...

"Academics is not like that and requires rigorous analysis and an appreciation for nuance."

are you an academic, wh10? the above need not be true...

geerussell said...

in a multi-sector economy job creation in one sector via ELR will have spillovers in other sectors, which could be inflationary if those other sectors are at full employment

On this point from Palley, hasn't there always been an acknowledgement in the ELR literature of a one-off repricing of labor at the bottom? Setting a new floor does this more or less by definition.

That's not quite the same thing as saying inflation. If the floor is fixed, as it is in the MMT ELR proposals then there's no source of continuing upward pressure on wages after that one-off adjustment at introduction. Without continuing upward pressure it seems difficult to legitimately describe it as inflationary.

Index the ELR wage and you could see ongoing inflationary pressure from it but I've never seen ELR literature suggesting that approach.

wh10 said...

I am not, and it need not be true, but it should be true.

Tom Hickey said...

I wish economists would stop using "inflation" and switch to continuous rise in the price level at full employment. Otherwise, price changes are simply due to shifting saving/consumption ratio and other factors influencing supply and demand like shortages and bottlenecks.

wh10 said...

I agree Tom.

sparc5 said...
This comment has been removed by the author.
sparc5 said...

@geerussell yes, they state depending on where the ELR wage is set there could be a one off change in prices. Thomas Palley didn't do his homework at all and it was telling just how badly the PK community wants to discredit MMT by publishing this garbage. Not only does MMT have to fight against the 1% and their army of bribed economists but from jealous academically dishonest big name economists from our own team.

Matt Franko said...

Great stuff Tschaff and Paul....

We have morons at the highest level of policymaking going around saying things like "we're out of money" and "we're borrowing from the Chinese" and "we're borrowing from our grandchildren" and Palley thinks it's a better use of his time and keystrokes to try to figure out if someone thought the Euro system would fail as far back as 1997 or 1995....

Palley: Get a life you nerd and get in the real game!

beowulf said...

"I wish economists would stop using "inflation" and switch to continuous rise in the price level at full employment."

That's demand pull inflation, the big problem that MMT leaves unaddressed is the one Abba Lerner and Bill Vickrey focus on-- cost-push inflation.

Short of direct wage and price controls (which inevitably turns into a political quagmire), the only way to tackle cost-push inflation is by taxing rent seeking-- ether directly (excess profits tax) or indirectly (cap and trade gross markups market).

Tom Hickey said...

beowulf, I don't consider cost-push inflation to be inflation in that it is not a monetary phenomenon resulting from creating more effective demand than the economy can expand to meet . Cost-inflation is from the side of the real where supply falls below effective demand is due to lack of availability of real resources that are economically vital, like petroleum under an embargo or food price rises due to prolonged drought.

Viewing cost-push with the same lens as demand-pull results in attempting to deal with both using the same method, usually raising interest rates. As you say, with cost-push the angle of attack must be through either increasing the availability of scarce vital resources through production, new sources, substitution, etc. or else some kind of rationing that is politically imposed.

It's key to keep these distinctions clear and speaking of "inflation" and measuring it with an index as if the cause were single, and using a single deflator to convert nominal to real, obscures this.

It also explains the "mystery" of stagflation. Cost-push can constrict vital resource availability even with high UE, resulting in a rising price level and cost increases get passed through.

beowulf said...

Vickrey’s examination of the cause of inflation... notes that:
"Increasingly prices are set by sellers, …(able)… to raise their prices without a loss of sales sufficient to wipe out the gain.”
For these and other reasons Vickrey concluded that: “Monetary policy is inherently incapable of curbing this process (of inflation) except insofar as it goes to the extreme of idling resources” and causing unemployment. Vickrey points out that this is rarely faced honestly: “While they generally avoid speaking or even thinking of the policy in terms of increasing unemployment, the main channel through which restrictive monetary policy will act to restrain the raising of prices by price setters is by cutting back on the demand for resources and adding to unemployment.”

Tom Hickey said...

Yes, MMT explains it in terms of monetarists presuming a natural rate of interest, NAIRU, Taylor rule, and buffer of unemployed to reduce effective demand by contracting the economy and controlling wage pressure through increasing UE — in violation of the Fed's congressional mandate.

MMT proposes a fiscal approach and a buffer of employed, while Vickrey and Colander-Lerner favor a market approach.