A commenter on my blog drew the article "Thin Air’s money isn’t created out of thin air," (by Michael Pettis) to my attention. It refers to output gaps, which appears related to my recent article on output gaps. In his article, he makes some statements about Modern Monetary Theory (MMT). Although I would put myself in the MMT camp, I would note that I cannot write on behalf of an official MMT line; I disagree on a few points, and it is unclear what the MMT position is on some topics.
Pettis' article is quite long and contains a great deal of content. Although I find myself in agreement with much of what he says, he packs in so many theoretical asides that I cannot hope to summarise them. As a result, I am not attempting to respond to his underlying thesis. Instead, I just want to highlight some hidden assumptions around output gaps.
What Does MMT Say?My reading is that "MMT says" that involuntary unemployment, that is, unemployment in excess of transitional, estimated to be about 2%, is evidence of an "output gap" defined as idle resources that could be put to use. The assumption is that there is enough potential work and enough other resources to perform the extra work in order to eliminate involuntary unemployment by creating a job offer for all those willing and able to work and supporting those unable to work with transfer payments. The constraint is demand side inflation, which can be addressed by functional finance and a price anchor, that is, the JG wage paid for an hour of unskilled labor.
No need for economic models to determine the output gap, which is an unobservable theoretical construct. Instead "look at the length of the unemployment line."
That leaves measuring inflation. One way to do that is to observe the size of the JP pool. If there is no one in it, then wage pressure has risen.
Admittedly, this is a simplified conceptual model. But it conveys the point that government as currency issuer can always "afford" to employ available resources by purchasing any resources in excess of what the private sector is willing to purchase and which would otherwise be idle. The government can also address the price level using its power as the currency monopolist as well.
Under the concept of popular sovereignty, state sovereignty rests with the people acting through the representatives they choose, who are commissioned to act for public purpose rather than for private gain by interests. Under this framework, the people can expect that the government will be guided by the welfare state as a model that emphasizes the general welfare and common good, rather by a market state model that privileges interests and private gain.
Under a welfare state model in which the government as currency issuer can put all available resources to use continuously, full employment (excluding transitional) becomes a civil right.
Hello Tom,
ReplyDeleteI was looking at a more narrow theoretical argument about output gaps and inflation, and not the larger question of what policy should be. (Although I have a small discussion of that.)
Given the current economic structure, there are some theoretical problems with the traditional approach to the output gap. Bill Mitchell has written about them, but I did not find the exact reference I was thinking of. The usual method of estimating the output gap has embedded assumptions that causes the methodology to be biased. (This was not unique to Mitchell, I recall an article by Solow (?) that criticized the bias in the traditional output gap estimation method.)
I paraphrased these objections using terminology that I found easier to understand, coming as an outsider to the literature.
Right. I didn't mean to imply that MMT economists don't consider the theoretical dimension of the debate.
ReplyDeleteBut the simplified version easily understandable by anyone boils it down to employment, taking available human resources as representative of available real resources. If human resources are available and demand is sufficient to employ people gainfully, then it's generally not lack of materials or machinery that is the issue.
Warren Mosler's heuristic measure of the output gap is the length of the lines at the unemployment benefits offices.
The mainstream actually acknowledges this implicitly by look at "wage pressure" to gauge inflation as much as indexes. Now the PPI and CPI are historically low but the cry is to raise rates to prevent inflation from taking hold owing to falling employment rate and rising wages — in the face of a lack-luster economy.
Tom
ReplyDelete"but the cry is to raise rates to prevent inflation from taking hold owing to falling employment rate and rising wages — in the face of a lack-luster economy."
If the people with higher wages bought stuff that otherwise wouldn't be made and this leads to no price inflation, how the hell is this classified as "inflation"?
Everyone is absolutely better off, including the rich. It is just status.
Or am I missing something. That is the crux of the issue?
No, that's just the excuse. They want higher interest to collect rent.
ReplyDeleteIt's normal for wages to rise in a recovery and that doesn't constitute actually wage pressure. In addition, the employment numbers need to be analyzed and that indicates a lot of potential still off line.
"Everyone is absolutely better off, including the rich. It is just status."
ReplyDeleteBingo...
Hi
ReplyDeleteHaving just read James Galbraith on Pickety, I'm thinking inequality too, since you also mention rents, Tom. So capacity and investment (rather than feeding the greed of rentiers & super-profiteers) seem to go together. Before we have a too quick win-win declared (Random) we need to build for equality even under the resource constraints that James G also discusses.
Jim