I have an article in the new issue of Dissent, arguing that “As long as democratic politics operates through nation-states, any left program will require some degree of delinking from the global economy.”…
One thing that’s probably not as clear as it should be in the Dissent piece, is that the case for delinking is much stronger for most other countries than for the United States. For most countries, free trade and, even more, free capital mobility, drastically reduce the choices available to national governments. (This “disciplining” of the state by foreign investment is sometimes acknowledged as its real function.) For the US, I don’t think this is true – I don’t think the threat of capital flight meaningfully constrains policy here. And in particular I don’t think it makes sense to see a more positive trade balance as necessary or even particularly desirable to boost demand, for reasons laid out here and here.The US is a special case in many respects and American leaders, media and much of the public project the American case on the world either as the general case or the general case to be achieved, and often this is not even the actual case but the dominant narrative.
J. W. Mason's Blog
At Dissent: A Cautious Case for Economic Nationalism
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York
For most countries, free trade and, even more, free capital mobility, drastically reduce the choices available to national governments.
ReplyDeleteNo, they don't. Not for a country with its own currency, with no foreign denominated debt. The universal, fanatical adherence to this belief, even in this case, is matched by the universal absence of any argument for this mere assertion - for there is none possible in this case
People who believe this and think they understand functional finance very obviously have some Lerner to learn, not to speak of modernizing their mind with MMT. Which basically amount to removing the nonsense which people have fuddled their minds with for years and years, and stating & thinking the obvious things that everyone already knows. Floating your currency etc is all the "delinking" necessary.
Speaking of "delinking" here is as bass-ackwards as considering this performance art as the state of nature, and considering people who don't have their hair tied together as oddball "delinkers".
MMT or FF don't posit that "deficits are self-corecting". They observe that deficits don't need correcting - "Imbalance, what imbalance?" "Correcting" a deficit the usual way is like setting yourself on fire because your hair got wet. But so coincidentally, the "so called international bankers" always do well with this pyromania.
Good comment, Calgacus.
ReplyDeleteThere is no such things as capital flight in a floating rate currency. There is just a portfolio adjustment.
ReplyDeleteThis idea that you need 'foreigners' to trigger activity in your economy leads right back to the political underlying narrative of a higher power driving things - the vengeful Old Testament God of the markets.
Calgacus-
ReplyDeleteThis is an interesting question, which I've been wanting to write something about.
It may be true that international constraints aren't important for a country "with its own currency," but I think we have to think carefully about what the quoted phrase means. I think the US is, again, a rather extreme outlier in that the vast majority of transactions an American household, government or firm engages in are dollar-denominated. This isn't true in most of the world.
- Most trade flows are denominated in dollars; much of the remainder are denominated in euros (or historically, other world currencies). Not the currencies of the countries invovled. And trade makes up a larger proportion of GDP for most countries than it does in the US.
- A large fraction of financial transactions are also denominated in dollars. By "no foreign denominated debt" I assume you mean public debt; but if we include private debt, then this condition applies nowhere, and applies even approximately only in the US and Japan and maybe one or two other places.
- Wealthy individuals and institutions in much of the world hold much of their assets either offshore or in domestic foreign-currency-denominated forms.
What this means is that the public sectors' task of stabilizing the economy can face an obstacle in the form of "not enough money," since much of the relevant money is foreign. This is true even if the central government itself has little or no foreign debt. My plea to folks in the MMT world would be to see currency sovereignty not as either-or, but as a notional endpoint on any continuum that various countries approach to different degrees and none achieves completely.
"Speaking of "delinking" here is as bass-ackwards as considering this performance art as the state of nature"
I wouldn't call it a state of nature. But I would call it a pretty good metaphor for the current state of most economies, especially smaller and poorer ones. If you actually are linked up like that, it would seem worth thinking about how to get delinked.
Neil-
In the world of the textbooks, maybe. In the world we live in, it's quite evident that exchange rate adjustments do not smoothly or reliably solve balance of payments problems.
Now I'm curious:
ReplyDeleteIs it the general MMT position that a country with its own floating currency, in which any public liabilities are denominated, does not face any external constraint in trying to achieve full employment or other domestic macroeconomic goals? Or do people think that even if a currency-soveriegn country follows appropriate fiscal policy, it may be unable to reach full employment without additional measures to deal with the balance of payments?
I would say that "the general [case] MMT position [is] that a country with its own floating currency, in which any public liabilities are denominated, does not face any external constraint in trying to achieve full employment or other domestic macroeconomic goals" based on anything other than availability of real resources.
ReplyDeleteBeing general, the general case is always an abstraction from the logical point of view. Probably no special case conforms entirely to the general case over all time periods owing to various factors some of which are social and political rather than specifically economic.
For example, in case of a BoP issue, a nation might have to break with custom or law to support domestic firms or national policy by stiffing foreign creditors who demanded payment in a currency the nation does not issue. That's not an economic issue but a legal and political one. Conversely, even through a currency sovereign cannot be forced into default on obligations denominated in the currency of issue, voluntary default is possible politically, and this can be a real issue.
The MMT general case assumes that all actors understand MMT's description of the monetary system and its implications, as well as the MMT framework for doing macroeconomics wrt public policy, e.g, SFG modeling and functional finance.
If this were the case, it is assumed that many special cases could fit the general case quite closely.
In the MMT framework, the absolute boundary condition is availability of real resources.
Funds can bring unused resources into use, either immediately or over time, but no amount of funding can create real resources from nothing.
However, even with a perfect understanding of MMT and the will to act on it, smaller and less developed countries would still be constrained by limited availability of real resources. This can be addressed through "concerted action." (ht Ramanan).
Treating the global economy as a closed system economically, knowledge and application of MMT analysis can optimize use of real resources for production, but only in terms of economics.
There are also other factors that not only influence policy but also may supervene. Non-economic factors may be political, e.g, distribution of power, legal institutions, etc., or social, e.g., general level of education, cultural biases, etc.
From the POV of social and political thought, I like to view this in terms of achieving ideal society in a way that avoid utopianism. This requires a plan for getting from here to there iteratively and incrementally by taking a systems approach in reducing negative factors and increasing positive ones in a practical way.
The basic message of MMT for this project is that the constraint is availability of real resources in the present and future, and that affordability is not a constraint on the employment of real resources.
The sweet spot is enough financial resources to utilize available real resources optimally. Too few financial resources result in under-employment of available real resources, which is inefficient and therefore not economical. To great an amount of financial resources relative to availability of real resources can result in inflation.
"Most trade flows are denominated in dollars"
ReplyDeleteWhy do you think that matters? It's irrelevant to a business what an invoice is denominated in. You do a rough calculation into what denomination you hold and get out your visa card. It's all sorted in an instant.
The functional entity is the one that does the currency conversion into the local currency. I'm not at all sure it matters where that is physically located, and I'm not at all sure it is always the traditional importer or exporter. As In my visa card case, it may be the finance house.
"but if we include private debt"
Private entities can go bust. That's the key point. If you go bust in dollar denominated liabilities then the dollar denominated asset holders makes a loss - and that loss can be legally enforced.
Private debt in foreign currencies is of no concern to the state of a local currency area. You just run the entity via administration/Chapter 11 and refinance in the normal manner. You definitely don't prop up their bad financial planning by 'bailing them out' with your currency reserves. Let the foreign lender take the cold bath.
The question is whether that part of the business operation - operating as it does in a different currency zone - should be analysed in as belonging to the local currency area or not.
I feel the mistake is using physical borders rather than denomination borders in analysis. You get a different view of the lay of the land when you avoid doing reporting currency conversions.
"What this means is that the public sectors' task of stabilizing the economy can face an obstacle in the form of "not enough money," since much of the relevant money is foreign."
The key to understanding things from an MMT viewpoint is to forget about money. It is totally irrelevant to the discussion.
Any state running any currency area can commandeer any resource available for sale in its currency. That means within its area of power and influence. In other words where it can impose a tax, a restriction or an order to move a resource into public use. If you ban private healthcare in your power area, then that frees up medical staff to work in public hospitals. You can then pay them in your local currency - which causes taxation and saving in that currency. No foreign currency, or even extra taxation, required.
"In the world of the textbooks, maybe. In the world we live in, it's quite evident that exchange rate adjustments do not smoothly or reliably solve balance of payments problems."
Not at all sure where you got that from based upon what I said - other than a knee-jerk response accusing people of 'textbook thinking'. Under MMT analysis there is no balance of payments problem. It's always balanced by definition. The transaction would never have happened otherwise in a floating rate currency because the finance arm would never have completed. The finance arm and the real arm have to be in place *at the same time* or there is no deal.
This is the mistake mainstreamers make all the time. The idea of imbalance - based upon the mistaken concept that savings isn't an export/import product.
The reason things don't move back to balance is because they are already balanced. You'd think that would be obvious by now given the quantity of evidence.