Tom Hickey on a comment by JWM at billy blog

JWM posted a good comment at Bill’s that I would like to comment on in some detail. (I had initially guessed that the author was JW Mason have since been informed that this is not the case.)

The comment is about a video of an MMT presentation. The comment is constructive criticism, and my comment in response is an attempt to move the conversation forward. I'll take it step by step.

I watched the above video, Steve’s presentation was excellent (particularly his comments on superannuation!) — but I’m not surprised there is a sense that the audience did not “get it”.It is all very well starting out big and bold with the statement that the central government is not constrained in its spending. MMTers do this all the time. In many cases you never properly get to the “…but”. The “but” is the important bit: that it is prudentially constrained elsewhere, by the unused productive capacity of the economy. So being freed of worries about tax as revenue and debt accumulation, we are now apparently confronted with the far trickier business of calculating (or agreeing on) output potential.…

First, I think we have to look at what is going on from (at least) two directions. Both are important.

The two directions are substance and procedure. The comment is about the substance of the argument. However, given the venue of the presentation, it must also be about procedure. The presenter is trying to persuade as will as inform. The information is being used as a tool of persuasion.

So the first question is about strategy. As Scott Fullwiler has emphasized, in such cases strategy has to be distinguished from the substance of the argument. Strategy depends on the audience and the objectives. Here the audience consists of political activists and probably few of them are well acquainted with economics and finance, let alone being professionals. So the presentation must be tailored to that audience, that is, “dumbed down” without losing the substance. This is tricky as anyone who presents sophisticated knowledge professionally well knows.

For example, a philosophy professor has to introduce the substance of intellectual history and critical thinking to eighteen years olds who will probably never take another course in it. That is a huge challenge. The substance of intellectual history and reasoning as the basis for critical thinking lie at the foundation of all life because “all life is problem solving” (Karl Popper), and reasoning is a primary tool humans use to solve problems if not the primary one.

Reason gives humans a tremendous advantage evolutionarily, and demonstration of reasoning ability very often separates the winners from the losers in life. All other disciplines can be viewed as subsets of philosophy in this sense of rigorous problem solving using reason and reason also requires appeal to evidence were relevant. Science is largely quantitative problem solving using the language of math rather that logic, of which math is a subset. But the use of reason extends beyond science, the limit of which is generally agreed to be determined by availability of quantifiable evidence that is amenable to testing through formulation of hypotheses.

You will find at the end why I am taking this broad tack now.

Anyway, a presenter has to develop a strategy suited for the purpose; The strategy in arguments involving critical thinking involves bringing in substance as needed to substantiate points. The use of substance must be judicious. The target audience may not be well acquainted with the field. In fact, the audience may also be ill-informed or even misinformed. This is often the case in arguments about policy, owing to ideological influences as well as special interest pleading.

In the case of many presentations involving MMT, the audience is not only ill-informed about economics, economic policy, money and banking, and finance, but also misinformed. An audience is likely influenced by myths that appear as “common sense.” When the president of the United States says, “Well, we are out of money now,” ordinary people connect that with their own situation of money scarcity and believe it. They accept as matter of common sense that either taxes need to be raised or funds borrowed from people’s existing savings if "we are to live within our means."

Thus, the primary strategic objective must be to disabuse the audience of this myth about government finance and lack of affordability. Since this is an audience of progressives, it is necessary to persuade them that not only is lack of affordability not the case, but also that progressive programs will not be adopted when they are most needed, in contractions, when it appears, that “there is no money” available. Even if they are adopted in good times, voice will be raised to cut them bank in bad times, when they are especially needed. So the alternative is either to forgo reforms or else cut elsewhere to be able to “afford” them, both of which are anti-progressive. Progressives need to be convinced that the lack of affordability argument is false and is being used against them.

Having established that a chief issue is affordability, it is necessary to use substance as a tool in persuasion to show how a government can always afford to use its own currency to move private real resources to public use and that government not only should do this when the private sector is either unwilling or unable to employ available resources but must do this to avoid the economic inefficiency of waste. It is not reasonable economically to do otherwise, unless there are other reasons not to do so. That is a matter for debate since all action involves trade offs.

The primary message of MMT politically is that so-called affordability is never the constraint on governments that are sovereign in the currency they alone issue as monopoly providers, that is, float their currency and and forgo borrowing in currencies that the government does not issue. The financial capacity of such a government is unlimited operationally. 

Run the video of Alan Greenspan schooling Paul Ryan on this a in congressional hearing. 

This is a trivial point, but the public by and large doesn’t realize it. They need to be told because they are under the illusion that the government is like a firm or person like themselves who are income-constrained and have to "live within their means" or go bankrupt. 

This is not all they need to be told, so the story doesn’t end there. That a sovereign currency issuer is not limited operationally by the amount of currency it can issue doesn't not imply that it can do so   without trade offs or consequences. 

But debunking the myth of lack of affordability is a sine qua non in persuading progressives that a progressive government can accomplish what progressives want to do. Presently many if not most progressives are being taken in by the myth of lack of affordability as the chief reason given they can’t do what they propose without raising taxes or robbing the grandchildren.

Debunking this myth, which seems to be a matter of common sense, must be the focal point because this is the major objection that the public is being inundated with by well-financed PR campaigns pick up and repeated ad nausea in the media echo chamber. 

Since it seems to be a matter of common sense, all alternatives seem to be counter intuitive. This presents a hurdle to persuasion. This is why debunking the government-as-big-firm-or-household analogy is crucial.

It is the lede. Never blow the lede.

Secondly is the “but.” JWM writes:

you never properly get to the “…but”. The “but” is the important bit: that it is prudentially constrained elsewhere, by the unused productive capacity of the economy. So being freed of worries about tax as revenue and debt accumulation, we are now apparently confronted with the far trickier business of calculating (or agreeing on) output potential….

It is of course true that there are other issues than “affordability.” Randy Wray sums them up in a nutshell. There is the real constraint of available resources and there are also the financial considerations of price stability (inflation rate) and currency stability (fx rate). There are also voluntarily imposed political restraints that can be changed or removed through political action. Availability of real resources is a hard constraint unless it can be removed by taking action. Price and currency stability are not and differ based on regions and conditions anyway.

Government can only use fiscal policy up to the limit where lack of available real resources, including human resources, begins to spur inflation or (inclusive) the fx rate begins to adjust to increased currency issuance. But exactly where such limits lie is controversial. Many of the present limits are arbitrary or arrived at based on questionable assumptions and theory that doesn't fit reality very closely. They also apply differently under different conditions.

This may be all an audience needs to know in a brief introductory MMT presentation to non-experts. However, if there are economically or financially astute people in the audience that will modify the situation. The presenter will need to know the MMT literature well enough to present the argument in greater detail and cite documentation.

For example, the affordability argument doesn’t hang on the capacity of the currency issuer to issue currency at will (by fiat), but rather the intertemporal government budget constraint. The simple answer is that the cb sets the interest rate and as long as r<g, no problem (where r is the interest rate and g is the growth rate). Questioners can be directed to Scott Fullwiler’s paper, Interest Rates and Fiscal Sustainability, for a detailed answer.

Similarly, the short answer to availability of real resources is to look at the employment figures. If workers are available, then real resources are being idled, which is wasteful when they could be put to use with a job guarantee. The depth answer here will require reference to MMT literature.

One problem is therefore that there are essentially two cohorts — expert and non-expert — and they must be addressed separately, even though both may be present in the same audience on any particular occasion. Then the challenge becomes addressing both as adequately as possible without losing either. This may be difficult only to scope limit and time constraint. It is a challenge in the scope of 500 word op-ed, for example.

JWM continues:

Life used to be so easy: tax revenue as a constraint needs nothing more than an adding machine. Politicians, policy makers, and citizens will still have to thrash out allocation of scarce resources. So “money” is not a scarce resource (of the state), but everything else is…which is measured in money also? Are we getting anywhere here, practically speaking?

The issue here is chiefly twofold in my view.

First, the prevailing view in economics and finance is that monetary policy is always or generally sufficient and fiscal policy is not only unimportant but must be disciplined or politicians will create instability that the cb will have to counteract through monetary policy. This view assumes that the fiscal authority and the monetary authority act inversely rather than in tandem.

Secondly, the prevailing view is that sound management is necessarily hierarchical and cannot responsibly be left to the consensus of democratic governance. Some measure of technocracy is required for sound economic policy and finance, and for responsibility in government.

Either a technocratic approach is adopted that is hierarchical and less than democratic, or else “politicians, policy makers, and citizens will still have to thrash out allocation of scarce resources.” Those are the choices. Technocrats will choose the former, democrats will choose the latter and trust the process.

Voters in a democracy need to be informed. The first step in this process is being disabused of myths like lack of affordability (Barack Obama, Paul Ryan in the US) and “there is no other way” than privatization and deregulation (Margaret Thatcher and Ronald Reagan).

Voters also need to realize that the type of monetary system establishes the available fiscal space and that economic policy is about using that space efficiently and effectively to meet common objectives.

There is a lot more to know, but if politicians, policy makers and citizens all realized this much, the debate would not only be different from what it is now, mired in myths, but it would also be based on potentially sound reasoning.

JWM continues:

I know MMTers believe that bad policy is coming off the back of bad (economic) theory. What I see as an alternative at this point is bad policy coming from good theory (see Paul Samuelson quote at 58:15).

This is a debate that economists will need to resolve and non-economists probably don’t have much to contribute to it, unless they have extensive background. I would simply say though that presently there seems to be somewhat of a dichotomy between economic and finance that needs to be overcome for an economic theory to be taken seriously. I will leave that argument to experts in both.

JWM continues:

So how do things look when we all talk MMT? Are we talking about a complete revolution in the way politics, allocation of resources, taxation policy, etc. are determined? Which probably sounds like hard work to that audience. Or is it simply adopting a different viewpoint as to where the constraints really lie? WHich at the moment, for practical minded people (that audience), would be no significant difference at all.

 If "we all talk MMT," then we all talk in terms of actual monetary operations and national accounting, and observe stock flow consistency. If all parties are doing this already, nothing would need to change n this regard. In addition, MMT follows Minsky in holding that finance and economics are closely connected, e.g., through the financial instability hypothesis. Are we all talking this way?

Again, back to strategy and the audience, in this case a progressive political party. MMT does imply “a revolution in the way that politics, allocation of resources, tax policy, etc. are determined.” This is pretty central to progressivism, or at least it appears that way to me. Bernie Sanders is now calling for just such a "revolution."

An introductory presentation doesn’t have to spell that out anymore than is necessary. For example, the audience in the video is the Australian Green Party. The purpose of the presentation would be to show how shifting viewpoint to MMT would affect the ability of the Green Party to accomplish its objectives and meet the objection of the opposition, e..g, affordability.

But let's be clear. Economic policy is about trade offs. There is no policy that is going to please all people or satisfy all interests. The end in view of policy in a liberal democracy is the goal of liberalism from the time of the ancient Greeks — living a good life as an individual in a good society. (See I told you that this would converge toward philosophy.)

Liberalism is a philosophical position that stems from ancient Greece. The thinkers of the time explored political philosophy in great detail and with extreme seriousness. This was not just an intellectual exercise for them. The Athenian forum (Gk: agora) what perhaps the scene of the only true democracy to be achieved on the level of an entire state (Gk: polis). It survives in the New England town meeting.

In ancient Greece, the great thinkers that launched the Western intellectual tradition focused on the question of what it means to live a good life in good society. This question was answered dogmatically in the years of Christendom, but it arose again that the time of the Reformation and Renaissance, when the imposition of dogma began to be overcome and freedom of thought and expression was reintroduced. This impetus was aided by the rise of science and the success of technology.

Cutting to the chase, the classic work of modern liberalism is J. S. Mill’s On Liberty. John Stuart Mill was the eldest son of James Mill, who was an economist. J. S. Mill is known now mostly as a philosopher and political theorist but he also wrote on political economy. Suffice it to say here that Mill’s major contribution was linking freedom with self-improvement. Freedom from constraint and freedom to choose provide freedom for self-actualization based on self-unfolding. Freedom from, freedom to, and freedom for are the foundation of liberalism.

Humans are social animals. Hence, a free society is required for the individual freedom necessary to develop and express full potential. For Mill a liberal society should be organized toward achieving the utilitarian ideals of the greatest good for the greatest number.

Based on liberal principle the goal of government is to maximize individual freedom and opportunity for self-determination to the highest degree consistent with security, order, welfare and prosperity necessary for the common good, recognizing the changing conditions will affect this distribution, as will interest groups if permitted to accumulate power.

With respect to relating living a good life in a good society as it relates to political economy, I have been recommending revisiting John Kenneth Galbraith’s The Good Society: the Humane Agenda, as well as Economics and the Public Purpose. JKG sets forth issues and ideas that need to be upgraded in terms of changed conditions but also in terms if greater understanding in economics and finance. But his work is a good template from which to start. There are many other notable works as well, many accessible to non-experts and some written for popular consumption. 

There are many counter-examples on the right, too. Hayek's The Road to Serfdom, Milton and Rose Friedman's Freedom to Choose, Murray Rothbard's For a New Liberty: The Libertarian Manifesto, and Henry Hazlitt's Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics have been enormously influential in shaping opinion.

JWM writes:

The tax revenue constraint may be a fallacy but it is easy to understand. Are you to deny the average citizen one of the great democratic cudgels: “You are spending MY tax dollars!” “Not with MY tax dollars you don’t!” etc. Ok so it’s “wrong”. What is the alternative that keeps us disciplined? An MMT lecture won’t do it, I think most people get theory by looking at the practice of it.

What is the alternative to inculcating a false belief that taxation is necessary to pay for present expenditure and pay down public debt as a means for stoking fear of the consequences of lack of fiscal discipline.

The alternative is being properly informed about the scope and use and of fiscal space as set forth above and as explained in detail in the MMT literature, including how to use the fiscal potential of government to achieve truly full employment as a job offer for all willing and able to work, thereby ending waste of human resources.

Ignorance is no replacement for knowledge. Perpetrating myths is paternalism. Randy Wray cites Paul Samuelson advising against telling the public the truth to protect them from themselves.

Well then, why are we going through the expensive farce that masquerades as democracy? Just to make people believe falsely that they are in charge of their own lives and enjoy political self-determination. Or for entertainment. A reality show?

Actually, most people are probably more afraid of inflation (Weimar, Zimbabwe) as a consequence of "printing money" than of rising taxes because of fiscal imprudence, with just as little reason if the reality be known. Of course, that did not affect monetary policy because the central bank is a technocracy and as such is politically independent.

JWM ends with:

I’d like to see MMT collaborate with other disciplines: political science, sociology, microeconomics. Out of that, develop a modern monetary practice. Something practical minded people can engage with.

Hear, hear.

That would require people in different disciplines agreeing to talk to each other and then reaching out to do so. This would need some unifying purpose. 

I doubt that developing a modern monetary practice would provide it other than in a limited way. Is Bill Black making a big difference in law, for instance. 

Btw, Mat Fortater has written on Adolph Lowe, for instance, and Randy Wray on Kenneth Boulding.

Another example is economist Kenneth Boulding's contribution to systems theory and psychologist Abraham Maslow's contribution to management through his study of motivation. Economist E. F. Schumacher wrote directly on on philosophy in A Guide for the Perplexed, and the semi-philosophical Small Is Beautiful: Economics as if People Mattered.

I would suggest that this unifying purpose be developing a practical philosophy of living a good life in a good societies a basis for liberal policy. Philosophy is about using reason in the most generally way and so it underlies all intellectual fields and disciplines. 

This reason-based approach is traditionally not one the instruments but also the purpose of liberalism socially, political and economically. Liberalism is reason-based. It is basically secular and humanistic, although it is tolerant of other approaches, too, to the degree that they do not assert themselves over reason.

This means integration of social, political, and economic liberalism, addressing the paradoxes of liberalism, and unmaking the faux liberalism of elites that fear actual liberalism as an integrated social, political and economic paradigm.

Without beginning with philosophy the project is likely doomed owing to unexamined assumptions that will lead to incompatibilities down the road. As Aquinas stated at the outset of De ente et essentia, paraphrasing Aristotle, “A small mistake at the beginning becomes a great one by the end.