Warren posted a comment to an August 28, 2012 post that those not following the RSS feed will miss, so I am posting it separately.
It's a comment on Sergio Cesaratto — A reply to Wray - Part I & II
Warren comments:
in a monetary union like the US or EU, for purposes of this analysis the only kind of regional problem you can have is an unemployment problem. In other words, if there happens to be full employment in all regions there's no problem, regardless of what the inter regional trade numbers happen to be. If there is unemployment, it's a problem whether related to trade or not, and subject to the same adjustments regardless of source.
When some regions are at full employment it can be problematic to simply increase aggregate demand at the macro level to sustain full employment in all regions. Should that be the case the 'answer' becomes 'fiscal transfers' where the central govt. directs public spending to the areas of high unemployment. While this works well to sustain full employment throughout the region, it's unfortunately misunderstood as a transfer of wealth to the areas of high unemployment from the taxpayers of the low unemployment regions.
In fact, while it's an addition of nominal wealth to the high unemployment regions, the production and exportation of public goods and services to other members of the union is in fact a reduction of real terms of trade for the high unemployment regions doing the production relative to the low unemployment regions doing the consumption, as exports are real costs and imports real benefits.
So while fiscal transfers for the production of public goods and services that serve the entire union are commonly presumed to be benefits to the high unemployment regions and costs to the low unemployment regions, in real terms the reverse is almost always the case.
Sounds pretty simple.... rsp,
ReplyDeleteI'm not sold on MMT's position on trade.
ReplyDeleteAs a manufacturer, I make stuff, then exchange the stuff I make for little pieces of paper (actually, for electronic digits). I call this "making a living."
It doesn't matter to me whether I sell my widgets to someone in the US or to someone in another country. Either way, I receive electronic digits while my customers receive real goods and services.
According to MMT logic, I am experiencing all the costs while my customers experience all the real benefits. According to MMT logic, I am a fool to swap real goods and services for electronic digits.
Never mind that I can use my electronic digits to obtain real goods and services, or that I may choose to save my electronic digits for a rainy day.
If Warren really believes that exporting real goods and services in exchange for electronic digits is a foolish thing, then why does he make and sell automobiles ? Does he refuse to export them ? Does the cash register at Mosler Automotive know the difference between a foreign sale and a domestic sale ? When he rings up a sale on a Mosler automobile, does he ask "will you be paying in foreign electronic digits, or in domestic electronic digits ?"
If, for the sake of argument, I could pay for stuff made in China by "printing money," then I would be getting a great deal, and then I would agree with MMT's stance on trade.
But since I cannot "print money," MMT's stance on trade does not seem to apply to my world.
There's much more to the trade issue so maybe someday I'll write up my thoughts in a more formal and thorough form. I'm still thinking about the subject and trying to keep an open mind.
Dan right this area is not simple and there is evil afoot here...
ReplyDeleteLook at the China situation.... first of all to me it's all "China, Inc." so it's hard to make a case of a separate "private" and "public" sector but if you allow that:
A Chinese industrial exporter sends goods to the US and is paid in USDs, then the Chinese CB takes the USDs in exchange for providing Yuan balances in the China banking system to the exporter.
To work the equivalent, a US company would have to export stuff to China and get paid in Yuan, and then have The Fed take the Yuan off their hands for new USD balances that they would take from the Fed in exchange for the Yuan... do you EVER see the Fed doing that???? I say NO WAY... rsp,
But Dan I would add that in Warren's situation he talks about in Europe, all of those countries are supposed to "be on the same team" so to speak and it would only be conducted in the same currency anyway (Euros) so you would think they wouldn't have a problem with it... from a financial standpoint any way...
ReplyDeleteGets back to the fact that the dominant forces in Europe are caught up in falsehoods and seek "balanced budgets" so Warren's recommendations probably make their eyes glaze over... rsp,
Here is how I think about it Dan
ReplyDeleteWhat would I (or all of us really if we are honest) rather do? Go to work to do something for 8 hours that ends up going to someone else or take some pieces of paper and "pay" someone else to do something for us?
All of us would rather do the latter. Now there are provisos. Many of us dont want the other person being our personal slave, we do like doing stuff for the sake of it and stuff but most of us spend our life working so one day we dont have to work and can just spend our savings and consume. Work and production are real losses, they cost us something real.... effort, time etc etc. Consumption is a real gain. It only costs you redeeming the coupons you saved. So importing the real stuff that someone else produced is a benefit and exporting your work is a cost.
Warren doesnt think its foolish at all to exchange electronic digits for real goods and services. What he thinks is foolish (best I can tell in my years of reading him) is that we place way too much effort on measuring the value of and engaging in trading of these digits as if they are some sort of commodity. This leads to hoarding of these digits as if they themselves are wealth. As these digits get removed form circulation they need to be replaced but we believe we cant afford to replace them because they are sooooo valuable and that civilization would end if we did this.
Greg,
ReplyDeleteGood summary.
Agree that Warren's proposed income transfer to the importing countries would work economically, but I don't see it happening politically.
ReplyDeleteGreg, you can only consume if you have a good paying job. Free Trade has created a "race to the bottom" where even the American manufacturing jobs that are lucky enough to survive are under pressure to sacrifice wages and job security to remain competitive. Ditto for environmental regulations, labor laws, government oversight, etc.. In effect, free trade has forced laissez faire capitalism on the American working class. That's a feature, not a bug.
I would distinguish between trading raw materials vs. trading value added products. I'm fine with importing oil in exchange for pieces of paper. That doesn't threaten many American jobs and allows us to conserve our own resources.
I'm fine with exporting computer chips since the physical resources involved are minimal. What you are really exporting is SURPLUS KNOWLEDGE, not physical resources.
"but I don't see it happening politically. "
ReplyDeleteThen the outcome is etched in stone. TINA.
As the line in a old Fram commercial used to say: "you can pay me now or you can pay me later".
@Dan Lynch
ReplyDelete"I'm not sold on MMT's position on trade."
Dan, what you say holds if you focus entirely upon your hyper-local view, pretending the USA wasn't your safe haven. What Warren's pointing out can be summarized as "ignoring the higher return-on-coordination." It's not only about what you could do acting as though you were alone. It's about the net benefits WE can achieve if we better coordinate all our net actions.
In the aggregate, it's always better to coordinate optimal application of capabilities, in order to further compound productivity ... not divert some output to agents outside our country and/or the sphere where we can compound our tangible benefits through continuously increasing coordination.
That's also the entire theory of evolution, in a nutshell. It's always better to refine our capability to generate higher REAL margins. When push comes to shove, dynamic value always leaves static value in the dust. Army ants vs snails? USMC vs Iraq Army? Agility vs size? Coordination always beats static equipment or assets alone.
ps: How long could you sit on any amount of personally hoarded static assets, once your community buffer died (neighbors, police, DoD, etc, etc)? Don't kill the goose that enables you to lay golden eggs. It's a 2-stage optimization task, never local or group growth alone.
We survive only as long as group success involves protecting the member-components, and vice versa. If we do that right, we never need export markets. If we get too disorganized, and start to dissolve our own unity, then helping to build capabilities among foreigners may temporarily look more attractive than growing your own country. Yet exports are always a suboptimal use of our capabilities.
Exports may be a "suboptimal use of our capabilities" but laying off American knowledge workers because it is more profitable for corporations to import from China where wages are lower and regulations non-existent is also "suboptimal," IMHO.
ReplyDeleteMMT does not distinguish between trading physical resources vs. trading high value added products. It does not distinguish between trading scare goods vs. surplus goods. When it comes to free trade, MMT seems to share the Neoclassical assumption that resources are scarce, instead of Keynesian assumption that we usually have a surplus of resources and the real issues are employment, stability, and distribution. MMT does not account for the hidden costs of free trade-- the "race to the bottom," the breakdown of national regulations, the personal and social costs of plant closings, wage suppression, union busting, etc..
MMT recognizes the importance of "monetary sovereignty" yet fails to recognize the importance of "regulatory sovereignty" -- which countries are forced to give up in free trade's "race to the bottom."
MMT recognizes the necessity of the government being able to collect taxes, but doesn't have a plan to tax corporations and 1%'ers who are free to relocate to other countries. MMT seems to share the Austrian view that corporate taxes are passed on to consumers, as if there were perfect competition and no monopolistic price gouging (Michael Hudson seems to be an exception on this issue).
Since we pretend to be a democracy, I say all free trade agreements should be put to a popular vote -- which means they would all fail unless they ensured a "level playing field."
Trade agreements that require participants to have 1st world wages, 1st world labor laws, 1st world environmental laws, 1st world safety laws, 1st world health care, 1st world pensions, and 1st world unemployment benefits, etc.., would benefit everyone. However, there doesn't seem to be popular support for international regulations. Nor is it clear how such international regulations would be enforced ?
Free trade might work in a utopia where you had adequate regulations to "level the playing field" and/or transfer payments, and a governing body to enforce the rules and make adjustments, but in our real non-utopian world free trade is a form of economic warfare.
Re: Warren's proposal to use transfer payments to compensate for trade imbalances. As Minsky predicted, it is difficult to sustain political support for transfer payments because the public views redistribution as morally wrong The economics might work, but the politics are difficult.
Mind you, I identify as an MMT'er, and agree with most MMT theories and policies, but MMT's stance on free trade doesn't impress me as being well thought out.