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Monday, October 2, 2017
Simon Wren-Lewis — Why is MMT so popular?
Ha ha ha!
Mainly Macro Why is MMT so popular?
Simon Wren-Lewis | Professor of Economics, Oxford University
Another economist critiques MMT with academic broadsides launched at layman explainers. Must be Monday. Wren-Lewis says:
Whether you finance those deficits by creating money or selling bonds is also a secondary concern - it just influences what the interest rate is, which has an uncertain impact on activity.
You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.
It would save so much time and pointless back & forth if he'd read something like Fullwiler's Interest Rates and Fiscal Sustainability where those exact concerns are addressed.
Is it too much to ask that an academic economist begin their understanding of MMT with primary sources from MMT economists instead of trying to reverse engineer it from layman explainers?
Wren-Lewis gives, for the most part, a very fair account of what MMT believes; yes that one sentence about the "budget constraint" is nonsense, and accusing a guy like Bill Mitchell of not using equations is absurd, but don't denigrate this piece. It engages fairly with MMT. Just because we know his opposition to MMTers is a little wonky, it does not follow that this is in itself a bad article.
This is an olive branch from somebody suffering from severe cognitive dissonance. They are looking down the barrel of obsolescence and realising their life's work is probably completely wrong.
The request from MMTers is to go easy on Simon, ignore the barbs and explain patiently what has been asked.
Fullwiler's sentence in the Concluding Remarks of his paper "Interest Rates and Fiscal Sustainability" wraps it up:-
"The corollary here is the importance of recognizing that a nation similarly cannot “afford” high-interest-rate monetary policies if it also wants to pursue true, full employment policy while ensuring that whatever fiscal deficits incurred in the process are not inflationary."
The laugh was about SWL pretty much throwing in the towel.
I posted a reference to Scott's article over at his placer when I read the post. He moderates posts so there will be a delay in his putting it, which I assume he will do.
Not even close. His positions on the mechanics of interest rates, the budget constraint, and the usefulness of fiscal policy as a ZLB special case are all squarely in the mainstream and mutually exclusive with MMT.
Sure, it's nice to see him talking about MMT but let's have some perspective about whether it's some kind of watershed moment unless and until he actually comes around on those points. Just so there's no ambiguity that's not a personal attack on SWL nor is it a call to go be nasty in his (or anyone else's!) comments section.
I'm curbing my enthusiasm here because we've seen this play out more than once in the last several years. A few of the highlights:
Brad DeLong- reflective about the failures of mainstream econ, after a relative good faith engagement with Lerner, Mosler and MMT in general... left with the same deficit dove budget constraint priors he came into it with.
Lawrence Summers- Cited Minsky as one of the biggest influences on how he looked at the GFC, engaged with MMT economists, got sent and probably did read Interest Rates and Fiscal Sustainability. Today he's still co-signing deficit worries.
Krugman- Had a moment of clarity on the importance of fixed vs floating currency regimes... cited de Grauwe for it with no mention of MMT. Then went on to have a slap fight about banking and cite the manifesto of some rando anti-MMT finance guy as his source for MMT.
Maybe there was a discussion I missed somewhere in the last six or seven years but as far as I know the next mainstream economist to publicly flip from deficit dove to deficit owl will be the first.
While I think that SWL has thrown in the towel on the really important foundational issues, it's not yet a total win, since he points out that there is still be bi issue to be debated. But at least we are now debating it in terms of a framing that is at least open to MMT.
This is a debate that MMT proponents should welcome and are ready for.
The quote I intended to include got delete in the posting.
SWL concludes his post with, "Of course having a fiscal authority following MMT and a central bank following the Consensus Assignment once rates are above their lower bound could be a recipe for confusion, unless you believe what happens to interest rates is unimportant. I personally think we have strong econometric evidence that changes in interest rates do matter, so once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment? That is a question for another day"
Why is MMT so false? Comment on Simon Wren-Lewis on ‘Why is MMT so popular?’
Simon Wren-Lewis positions himself as follows: “Policymakers following austerity when they clearly should not annoys me a great deal, and I am very happy to join common cause with MMT on this. By comparison, the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay.”
When the all-pervasive cloud of blather is blown away the hard formal core of MMT emerges in the form of the familiar sectoral balances equations.#1 These equations can be traced back to Keynes’ General Theory and they are provably false since then. Here is the mother of all false macro relationships: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)
Being scientifically incompetent, After-Keynesians did not spot the lethal blunder in this two-liner. Fact is that Keynes got macroeconomic profit wrong. Because the formal core as given with the two-liner is false the whole analytical superstructure of Keynesianism, Post Keynesianism, New Keynesianism, and MMT is false. All share the same foundational defect. This means that MMT policy proposals are plucked out of the thin air of common sense and populism.
For the general public, the essential points are: • MMT has NO sound scientific foundations,#2 • MMT’s sectoral balances equations are mathematically false, • MMTer violate scientific standards on a daily basis, • MMTer camouflage the profit effects of their economic policy agenda,#3 • MMT policy advances the cause of the one-percenters, • MMT is political agenda pushing in a scientific bluff package.#4
Egmont Kakarot-Handtke
#1 Wikipedia, Modern Monetary Theory https://en.wikipedia.org/wiki/Modern_Monetary_Theory
#2 For the full-spectrum refutation see cross-references MMT http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
#3 MMT and the magical profit disappearance https://axecorg.blogspot.de/2017/08/mmt-and-magical-profit-disappearance.html
#4 MMT: Just political heat, no scientific light https://axecorg.blogspot.de/2017/10/mmt-just-political-heat-no-scientific.html
I left a comment after SW-L's article as follows - it normally takes him a day or two to publish comments.
Two weaknesses in the conventional assignment…
First, artificial adjustments to the rate of interest do not on the face of it maximise GDP because GDP is presumably maximised where interest rates are at their free market level.
Two, according to SW-L, the purpose of fiscal policy under the conventional assignment is “controlling the level of government debt”. But what’s the optimum level of that debt?
“Conventional assigners” presumably think the optimum is whatever level gives a rate of interest which leaves room for interest rate cuts come a recession. But that, to repeat, is an ARTIFICIAL level. It presumably does not maximise GDP.
Warren Mosler (founder of MMT) argued that the natural rate of interest (on government liabilities) is zero. That’s in his paper “The Natural Rate of Interest is Zero”. Milton Friedman thought likewise.
Yours, devoted MMTer - prepared to convert to another religion when presented with persuasive arguments….:-)
In their Working Paper No. 37 ‘The Natural Rate of Interest is Zero’ Warren Mosler and Mathew Forstater state:#1
“The government budget deficit is also ‘normal’ in the sense that it is the mirror image of the non-Government surplus in the basic macroeconomic accounting identity:
Government deficit = non-Government surplus
where non-Government surplus includes both the domestic (or resident) private sector and the foreign (non-resident) sector, which includes foreign firms, households, and governments. It is therefore equivalent to the well-known identity:
(G – T) = (S – I) + (M – X)
Government budget deficit = domestic private sector surplus + foreign sector surplus where the foreign sector surplus is another way of expressing the trade deficit. The government budget deficit permits both the domestic private sector and the foreign sector to ‘net save’ in the government’s unit of account. Only a domestic government budget deficit permits the domestic private sector and foreign sector to actualize their combined desired net saving.”
Let us ignore foreign trade here, i.e. M, X=0, then MMT asserts
Government deficit = non-Government surplus
This is false because non-Government consists of the household sector and the business sector. Therefore, for any given level of household sector saving/dissaving holds:#2
Government deficit = Business profit
Because the fundamental balances equation of Mosler/Forstater is false most of the paper’s content is worthless or misleading or mere historical storytelling.
MMT was always right: Gov-Deficits do NOT cause inflation Comment on Simon Wren-Lewis on ‘Why is MMT so popular?’
The quasi-automatic Pavlovian argument against MMT is that ‘sustained reliance on printing money to finance deficits can lead to escalating price inflation’.#1 This view is based on the commonplace Quantity Theory, which is provably false.#2
MMT has gone to great lengths to demonstrate that the inflation fear is unfounded. What the layperson cannot see, though, is that not only Orthodoxy but MMT, too, has NO sound scientific foundations. The MMT policy proposals are based on Keynesian macro which has been refuted long ago.#3, #4 Both Walrasian microfoundations and Keynesian macrofoundations are provably false and have to be fully replaced.
As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market clearing X=O and budget balancing C=Yw the price is given by P=C/X=W/R, i.e. the market clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#5
The market clearing price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the Profit Law. Under the condition of budget balancing, total monetary profit is zero.
Now, the sovereign government decides to run a budget deficit in the next period. Government spending is given with Cg and taxes T are initially zero. Total expenditures is now C=Ch+Cg and this yields a price hike: P1=C/X=(Ch+Cg)/X=P0+Cg/X with market clearing X=O. If deficit spending is exactly repeated period after period the price remains on the elevated level but there is NO inflation. No matter how long the government sector’s debt increases by Cg, there is NO further price increase.
Monetary profit for the economy as a whole is now given by Qm≡(Ch+Cg)−Yw. Because of the household sector’s budget balancing, i.e. Ch=Yw, profit is Qm=Cg. It always holds Public Deficit = Private Profit.
The amount Cg = government budget deficit comes from the central bank, i.e. is created out of nothing. The two sides of the central bank’s balance sheet, overdrafts and deposits, rise by the same amount. The combined transaction pattern of the household and government sector is shown in Figure 2.#6 Through deficit spending the business sector’s pile of cash rises continuously and is, at the end of the period, equal to profit which in turn is equal to the deficit Cg. The newly created money ends in the ‘cash box’ of the business sector, i.e. government sector’s overdrafts = business sector’s deposits.
This can go on for an indefinite time with the quantity of money = deposits at the central bank rising continuously ― but with no further price increase.
It is assumed now that the government consolidates its overdrafts by selling bonds to the business sector. The quantity of money in Figure 2 drops back to zero exactly at period end. Thus, the newly created money = deposits of the business sector is mopped up. The government sector’s debt rises period after period and the business sector’s stock of bonds, too, as an exact mirror image. This can go on for an indefinite time with no inflation.
The problem arises at another corner. The bonds bear interest and in order to pay the interest the government has to raise taxes. For simplicity, it is assumed that taxes T are exactly equal to total interest and interest payments start in period 3.
The net income of the wage income receivers in period 3 is Yw-T. Under the condition of budget balancing, consumption expenditure fall, i.e. Ch3=Yw-T. This causes the market clearing price to fall, i.e. P3=C3/X=(Ch3+Cg)/X=(Yw-T+Cg)/X. The tax T has a deflationary effect under the condition that employment is kept constant for a while.
The profit of the business sector was zero in the initial period, i.e. Qm=C−Yw=0 because of C=Yw, and is now Qm3=C3+T−Yw. The business sector now receives interest which is here equal to the household sector’s taxes T. Because of C3=(Yw-T)+Yg this yields again Qm=Yg. So, total profit remains unchanged but profit from selling the output goes down. This effect of the falling price is exactly compensated by interest income. This can go on for a while. Problems arise when the profit from normal business operations approaches zero and total profit consists alone of interest income.
This, in turn, depends on the development of the interest rate. If it is constant interest payments on bonds increase with the continuously growing public sector’s debt. The necessary increase of taxes eventually drives profit from normal production to zero. This, in conjunction with deflation, is the real hazard of a growing public debt and NOT inflation. It is no wild guess to assume that business will react to falling operating profit with curtailing employment. The problems can be pushed into the indefinite future with a parallel reduction of the interest rate on the public debt, preferably to zero. The central bank can support this process by buying back bonds and thus increasing the liquidity in the system. This has NO effect on the price P.
As long as the debt is revolved, all is fine. Interest for the public debt is taken from the household sector via taxes and transferred to the bond holding business/banking sector. The ensuing deflation and the decline of profit from consumption good production ― and NOT inflation ― is the real damage of MMT economic policy. The orthodox critique has always been way beside the point.
Egmont Kakarot-Handtke
#1 Cited from Scott T. Fullwiler, Interest Rates and Fiscal Sustainability, p. 3
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986 #2 Forget Friedman, forget the Quantity Theory https://axecorg.blogspot.de/2017/09/forget-friedman-forget-quantity-theory.html #3 How Keynes got macro wrong and Allais got it right https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html #4 For the full-spectrum refutation of MMT see cross-references http://axecorg.blogspot.de/2017/07/mmt-cross-references.html #5 Figure 1, Wikimedia, Pure production-consumption economy https://commons.wikimedia.org/wiki/File:AXEC31.png #6 Figure 2, Wikimedia, Transaction pattern https://commons.wikimedia.org/wiki/File:AXEC100.png
Egmont, I've commented elsewhere that your steady-state analysis has not utility for understanding inflation. I will not repeat that.
But it's hard to let this stand unchallenged -
"MMT has gone to great lengths to demonstrate that the inflation fear is unfounded."
Can you provide an actual quote from an actual well-known MMTer (or actually any MMTer) that inflation is NOT the penultimate constraint to their basic notion that there could be much more central government spending?
I have criticized MMTers lip service to the inflationary constraint from a policy or implementation standpoint, but I would never suggest that they believe the "fear is unfounded."
I said: "MMT has gone to great lengths to demonstrate that the inflation fear is unfounded."
You say: “Can you provide an actual quote from an actual well-known MMTer (or actually any MMTer) that inflation is NOT the penultimate constraint to their basic notion that there could be much more central government spending?”
In his multi-part series ‘Modern monetary theory and inflation’ Bill Mitchell concludes: “First, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.”*
By and large, MMT says, as long as there is unemployment inflation is not a problem. It may become eventually the penultimate constraint. But this is not the burning issue.
So, perhaps I should have been more explicit: “… that the inflation fear is unfounded under the prevailing conditions.”
We have enough going on with bigger fish that we don't need to engage with someone unknown who simply trolls us. If you want to engage and truly have something worthwhile to say, find a different approach and a different tone. Or continue to be ignored. Your choice.
STF, perhaps you have a reading comprehension problem. Let me see if I can help.
If you are following my posts that closely to conclude trolling, you should be able to pick-up the fact that I am an adherent of MMT's basic tenants which INCLUDES the penultimate limit to federal deficit spending being the inflation constraint. My critique is centered on the disconnect between (a) MMTers understanding that constraint but giving only lip service to how it would actually be operationized and (b)their constant whining about how their obviously superior view of the world is not taken seriously by the vast majority of the public let alone nearly all, by far, policy makers.
Some MMTers have provided some elements (e.g., Cullen's avoid unproductive spending on ponies, R. Mitchell's rely on monetary policy on steroids, B. Mitchell's don't worry inflation's never been a problem) but generally most MMTers' fallback is that they're just economists and that's not their job. I see your blowing off as trolling what I see as the fundamental issue holding MMT's actually operational acceptance as a form of the typical fallback... you're just a tad more cowardly about it.
Thank you for providing a priceless example of MTTers' blind spot in trying to grapple with why their view of the world is not being accepted. Mitchell is considered one of the top thinkers of the school, and yet his approach to trying to convince operational adoption of a new MMT-based policy approach is just to ignore its stated constraint because, well, its never been a problem before (at least under the current budgetary constraint). Pretty bizarre..to be kind about it.
On another note, I recognize that you have problems with MMT, but just looking at the relationship between spending (federal deficit or otherwise) and price levels, are you sure your equations truly capture that dynamic? Yes, this balanced equation -
2C7H5(NO2)3 (s) --> 7C (s) + 7CO (g) + 3N2 (g) + 5H2O
- provides a lot of information, but if that's all your considering, you might get your hands blown off.
I was not referring to you or anything you've said above whatsoever in my comment, so I have no idea where your response or insults of my character came from.
That said, yes, it's well known among us that we need to do a lot more research on the mechanics of inflation. This is not a blindspot at all--it's a core goal in our collective research agenda. There are several publications with more details by Bill, Randy, myself, but it is still very insufficient coverage for sure. There are fewer than 10 of us, and we've all had full research/teaching/speaking agendas, so we haven't gotten to everything we want to do (there's a lot more than just inflation to get to, IOW, but I'd still put the quantity and breadth of research output from our small group up against many others). Contrast this with several thousand neoclassicals building their own macro/money paradigm. If you'd like to do some research on this in the same vein as you've presented above, it would be very much welcome by us.
Another economist critiques MMT with academic broadsides launched at layman explainers. Must be Monday. Wren-Lewis says:
ReplyDeleteWhether you finance those deficits by creating money or selling bonds is also a secondary concern - it just influences what the interest rate is, which has an uncertain impact on activity.
You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.
It would save so much time and pointless back & forth if he'd read something like Fullwiler's Interest Rates and Fiscal Sustainability where those exact concerns are addressed.
Is it too much to ask that an academic economist begin their understanding of MMT with primary sources from MMT economists instead of trying to reverse engineer it from layman explainers?
Wren-Lewis gives, for the most part, a very fair account of what MMT believes; yes that one sentence about the "budget constraint" is nonsense, and accusing a guy like Bill Mitchell of not using equations is absurd, but don't denigrate this piece. It engages fairly with MMT. Just because we know his opposition to MMTers is a little wonky, it does not follow that this is in itself a bad article.
ReplyDeleteThis is an olive branch from somebody suffering from severe cognitive dissonance. They are looking down the barrel of obsolescence and realising their life's work is probably completely wrong.
ReplyDeleteThe request from MMTers is to go easy on Simon, ignore the barbs and explain patiently what has been asked.
Fullwiler's sentence in the Concluding Remarks of his paper "Interest Rates and Fiscal Sustainability" wraps it up:-
ReplyDelete"The corollary here is the importance of recognizing that a nation similarly cannot “afford” high-interest-rate monetary policies if it also wants to pursue true, full employment policy while ensuring that whatever fiscal deficits incurred
in the process are not inflationary."
The laugh was about SWL pretty much throwing in the towel.
ReplyDeleteI posted a reference to Scott's article over at his placer when I read the post. He moderates posts so there will be a delay in his putting it, which I assume he will do.
I put a post on there about the Budget 'constraint' linking to Bill's blog posts on the subject dismissing it as of 'no real economic importance'.
ReplyDeleteHopefully that'll show up as well. I just hope otters people have been equally polite in their comments.
I've heard that he's run into prickly MMTers in the past, so let's be civil to him.
ReplyDeleteHe's an MMTer now. He really is. He doesn't deny that monetarily sovereign countries need not stress about taxes to fund spending.
ReplyDeleteHe's way, way closer to us than Krugman. I say we thank him.
He's an MMTer now. He really is.
ReplyDeleteNot even close. His positions on the mechanics of interest rates, the budget constraint, and the usefulness of fiscal policy as a ZLB special case are all squarely in the mainstream and mutually exclusive with MMT.
Sure, it's nice to see him talking about MMT but let's have some perspective about whether it's some kind of watershed moment unless and until he actually comes around on those points. Just so there's no ambiguity that's not a personal attack on SWL nor is it a call to go be nasty in his (or anyone else's!) comments section.
I'm curbing my enthusiasm here because we've seen this play out more than once in the last several years. A few of the highlights:
Brad DeLong- reflective about the failures of mainstream econ, after a relative good faith engagement with Lerner, Mosler and MMT in general... left with the same deficit dove budget constraint priors he came into it with.
Lawrence Summers- Cited Minsky as one of the biggest influences on how he looked at the GFC, engaged with MMT economists, got sent and probably did read Interest Rates and Fiscal Sustainability. Today he's still co-signing deficit worries.
Krugman- Had a moment of clarity on the importance of fixed vs floating currency regimes... cited de Grauwe for it with no mention of MMT. Then went on to have a slap fight about banking and cite the manifesto of some rando anti-MMT finance guy as his source for MMT.
Maybe there was a discussion I missed somewhere in the last six or seven years but as far as I know the next mainstream economist to publicly flip from deficit dove to deficit owl will be the first.
"Go easy on Simon"
ReplyDeleteI agree Neil, take the win but don't be arseholes about it.
While I think that SWL has thrown in the towel on the really important foundational issues, it's not yet a total win, since he points out that there is still be bi issue to be debated. But at least we are now debating it in terms of a framing that is at least open to MMT.
ReplyDeleteThis is a debate that MMT proponents should welcome and are ready for.
The quote I intended to include got delete in the posting.
ReplyDeleteSWL concludes his post with, "Of course having a fiscal authority following MMT and a central bank following the Consensus Assignment once rates are above their lower bound could be a recipe for confusion, unless you believe what happens to interest rates is unimportant. I personally think we have strong econometric evidence that changes in interest rates do matter, so once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment? That is a question for another day"
Lars comments.
ReplyDeletehttps://larspsyll.wordpress.com/2017/10/02/why-mmt-is-so-popular/
"This is a debate that MMT proponents should welcome and ready for"
ReplyDeleteIndeed, we have been discussing it for years. Should be relatively easy compared to being noticed.
SWL has frame the issue nicely, too. This is really what the world should be talking about — again.
ReplyDeleteAfter all, as he admits, the fiscalists were in the drivers seat back then.
How well have things gone since monetarism was adopted? We now seen to be nearing the end of that cycle.
Why is MMT so false?
ReplyDeleteComment on Simon Wren-Lewis on ‘Why is MMT so popular?’
Simon Wren-Lewis positions himself as follows: “Policymakers following austerity when they clearly should not annoys me a great deal, and I am very happy to join common cause with MMT on this. By comparison, the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay.”
When the all-pervasive cloud of blather is blown away the hard formal core of MMT emerges in the form of the familiar sectoral balances equations.#1 These equations can be traced back to Keynes’ General Theory and they are provably false since then. Here is the mother of all false macro relationships: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)
Being scientifically incompetent, After-Keynesians did not spot the lethal blunder in this two-liner. Fact is that Keynes got macroeconomic profit wrong. Because the formal core as given with the two-liner is false the whole analytical superstructure of Keynesianism, Post Keynesianism, New Keynesianism, and MMT is false. All share the same foundational defect. This means that MMT policy proposals are plucked out of the thin air of common sense and populism.
For the general public, the essential points are:
• MMT has NO sound scientific foundations,#2
• MMT’s sectoral balances equations are mathematically false,
• MMTer violate scientific standards on a daily basis,
• MMTer camouflage the profit effects of their economic policy agenda,#3
• MMT policy advances the cause of the one-percenters,
• MMT is political agenda pushing in a scientific bluff package.#4
Egmont Kakarot-Handtke
#1 Wikipedia, Modern Monetary Theory
https://en.wikipedia.org/wiki/Modern_Monetary_Theory
#2 For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
#3 MMT and the magical profit disappearance
https://axecorg.blogspot.de/2017/08/mmt-and-magical-profit-disappearance.html
#4 MMT: Just political heat, no scientific light
https://axecorg.blogspot.de/2017/10/mmt-just-political-heat-no-scientific.html
Constructive, seems like mainstream Macro no longer does the dismissive handwave to MMT. Progress is slow but steady.
ReplyDelete
ReplyDeleteI left a comment after SW-L's article as follows - it normally takes him a day or two to publish comments.
Two weaknesses in the conventional assignment…
First, artificial adjustments to the rate of interest do not on the face of it maximise GDP because GDP is presumably maximised where interest rates are at their free market level.
Two, according to SW-L, the purpose of fiscal policy under the conventional assignment is “controlling the level of government debt”. But what’s the optimum level of that debt?
“Conventional assigners” presumably think the optimum is whatever level gives a rate of interest which leaves room for interest rate cuts come a recession. But that, to repeat, is an ARTIFICIAL level. It presumably does not maximise GDP.
Warren Mosler (founder of MMT) argued that the natural rate of interest (on government liabilities) is zero. That’s in his paper “The Natural Rate of Interest is Zero”. Milton Friedman thought likewise.
Yours, devoted MMTer - prepared to convert to another religion when presented with persuasive arguments….:-)
ADDENDUM
ReplyDeleteIn their Working Paper No. 37 ‘The Natural Rate of Interest is Zero’ Warren Mosler and Mathew Forstater state:#1
“The government budget deficit is also ‘normal’ in the sense that it is the mirror image of the non-Government surplus in the basic macroeconomic accounting identity:
Government deficit = non-Government surplus
where non-Government surplus includes both the domestic (or resident) private sector and the foreign (non-resident) sector, which includes foreign firms, households, and governments. It is therefore equivalent to the well-known identity:
(G – T) = (S – I) + (M – X)
Government budget deficit = domestic private sector surplus + foreign sector surplus where the foreign sector surplus is another way of expressing the trade deficit. The government budget deficit permits both the domestic private sector and the foreign sector to ‘net save’ in the government’s unit of account. Only a domestic government budget deficit permits the domestic private sector and foreign sector to actualize their combined desired net saving.”
Let us ignore foreign trade here, i.e. M, X=0, then MMT asserts
Government deficit = non-Government surplus
This is false because non-Government consists of the household sector and the business sector. Therefore, for any given level of household sector saving/dissaving holds:#2
Government deficit = Business profit
Because the fundamental balances equation of Mosler/Forstater is false most of the paper’s content is worthless or misleading or mere historical storytelling.
Egmont Kakarot-Handtke
#1 http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
#2 Rectification of MMT macro accounting
https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html
MMT was always right: Gov-Deficits do NOT cause inflation
ReplyDeleteComment on Simon Wren-Lewis on ‘Why is MMT so popular?’
The quasi-automatic Pavlovian argument against MMT is that ‘sustained reliance on printing money to finance deficits can lead to escalating price inflation’.#1 This view is based on the commonplace Quantity Theory, which is provably false.#2
MMT has gone to great lengths to demonstrate that the inflation fear is unfounded. What the layperson cannot see, though, is that not only Orthodoxy but MMT, too, has NO sound scientific foundations. The MMT policy proposals are based on Keynesian macro which has been refuted long ago.#3, #4 Both Walrasian microfoundations and Keynesian macrofoundations are provably false and have to be fully replaced.
As the correct analytical starting point, the pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market clearing X=O and budget balancing C=Yw the price is given by P=C/X=W/R, i.e. the market clearing price is in the initial period equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Figure 1.#5
The market clearing price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory to rest.
Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the Profit Law. Under the condition of budget balancing, total monetary profit is zero.
Now, the sovereign government decides to run a budget deficit in the next period. Government spending is given with Cg and taxes T are initially zero. Total expenditures is now C=Ch+Cg and this yields a price hike: P1=C/X=(Ch+Cg)/X=P0+Cg/X with market clearing X=O. If deficit spending is exactly repeated period after period the price remains on the elevated level but there is NO inflation. No matter how long the government sector’s debt increases by Cg, there is NO further price increase.
Monetary profit for the economy as a whole is now given by Qm≡(Ch+Cg)−Yw. Because of the household sector’s budget balancing, i.e. Ch=Yw, profit is Qm=Cg. It always holds Public Deficit = Private Profit.
The amount Cg = government budget deficit comes from the central bank, i.e. is created out of nothing. The two sides of the central bank’s balance sheet, overdrafts and deposits, rise by the same amount. The combined transaction pattern of the household and government sector is shown in Figure 2.#6 Through deficit spending the business sector’s pile of cash rises continuously and is, at the end of the period, equal to profit which in turn is equal to the deficit Cg. The newly created money ends in the ‘cash box’ of the business sector, i.e. government sector’s overdrafts = business sector’s deposits.
This can go on for an indefinite time with the quantity of money = deposits at the central bank rising continuously ― but with no further price increase.
See Part 2
Part 2
ReplyDeleteIt is assumed now that the government consolidates its overdrafts by selling bonds to the business sector. The quantity of money in Figure 2 drops back to zero exactly at period end. Thus, the newly created money = deposits of the business sector is mopped up. The government sector’s debt rises period after period and the business sector’s stock of bonds, too, as an exact mirror image. This can go on for an indefinite time with no inflation.
The problem arises at another corner. The bonds bear interest and in order to pay the interest the government has to raise taxes. For simplicity, it is assumed that taxes T are exactly equal to total interest and interest payments start in period 3.
The net income of the wage income receivers in period 3 is Yw-T. Under the condition of budget balancing, consumption expenditure fall, i.e. Ch3=Yw-T. This causes the market clearing price to fall, i.e. P3=C3/X=(Ch3+Cg)/X=(Yw-T+Cg)/X. The tax T has a deflationary effect under the condition that employment is kept constant for a while.
The profit of the business sector was zero in the initial period, i.e. Qm=C−Yw=0 because of C=Yw, and is now Qm3=C3+T−Yw. The business sector now receives interest which is here equal to the household sector’s taxes T. Because of C3=(Yw-T)+Yg this yields again Qm=Yg. So, total profit remains unchanged but profit from selling the output goes down. This effect of the falling price is exactly compensated by interest income. This can go on for a while. Problems arise when the profit from normal business operations approaches zero and total profit consists alone of interest income.
This, in turn, depends on the development of the interest rate. If it is constant interest payments on bonds increase with the continuously growing public sector’s debt. The necessary increase of taxes eventually drives profit from normal production to zero. This, in conjunction with deflation, is the real hazard of a growing public debt and NOT inflation. It is no wild guess to assume that business will react to falling operating profit with curtailing employment. The problems can be pushed into the indefinite future with a parallel reduction of the interest rate on the public debt, preferably to zero. The central bank can support this process by buying back bonds and thus increasing the liquidity in the system. This has NO effect on the price P.
As long as the debt is revolved, all is fine. Interest for the public debt is taken from the household sector via taxes and transferred to the bond holding business/banking sector. The ensuing deflation and the decline of profit from consumption good production ― and NOT inflation ― is the real damage of MMT economic policy. The orthodox critique has always been way beside the point.
Egmont Kakarot-Handtke
#1 Cited from Scott T. Fullwiler, Interest Rates and Fiscal Sustainability, p. 3
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986
#2 Forget Friedman, forget the Quantity Theory
https://axecorg.blogspot.de/2017/09/forget-friedman-forget-quantity-theory.html
#3 How Keynes got macro wrong and Allais got it right
https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
#4 For the full-spectrum refutation of MMT see cross-references
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html
#5 Figure 1, Wikimedia, Pure production-consumption economy
https://commons.wikimedia.org/wiki/File:AXEC31.png
#6 Figure 2, Wikimedia, Transaction pattern
https://commons.wikimedia.org/wiki/File:AXEC100.png
Egmont, I've commented elsewhere that your steady-state analysis has not utility for understanding inflation. I will not repeat that.
ReplyDeleteBut it's hard to let this stand unchallenged -
"MMT has gone to great lengths to demonstrate that the inflation fear is unfounded."
Can you provide an actual quote from an actual well-known MMTer (or actually any MMTer) that inflation is NOT the penultimate constraint to their basic notion that there could be much more central government spending?
I have criticized MMTers lip service to the inflationary constraint from a policy or implementation standpoint, but I would never suggest that they believe the "fear is unfounded."
Salsabob
ReplyDeleteI said: "MMT has gone to great lengths to demonstrate that the inflation fear is unfounded."
You say: “Can you provide an actual quote from an actual well-known MMTer (or actually any MMTer) that inflation is NOT the penultimate constraint to their basic notion that there could be much more central government spending?”
In his multi-part series ‘Modern monetary theory and inflation’ Bill Mitchell concludes: “First, unemployment is always a greater problem than inflation in almost any dimension you want to define it and which are calibrated by metrics that different ideological persuasions agree on – such as lost GDP. There is nothing ideological in the statement that the losses from unemployment dwarf those associated with inflation. Even mainstream textbooks struggle to come up with large estimates of the costs of inflation that they itemise.”*
By and large, MMT says, as long as there is unemployment inflation is not a problem. It may become eventually the penultimate constraint. But this is not the burning issue.
So, perhaps I should have been more explicit: “… that the inflation fear is unfounded under the prevailing conditions.”
Egmont Kakarot-Handtke
* http://bilbo.economicoutlook.net/blog/?p=10554
Egmont
ReplyDeleteWe have enough going on with bigger fish that we don't need to engage with someone unknown who simply trolls us. If you want to engage and truly have something worthwhile to say, find a different approach and a different tone. Or continue to be ignored. Your choice.
STF, perhaps you have a reading comprehension problem. Let me see if I can help.
ReplyDeleteIf you are following my posts that closely to conclude trolling, you should be able to pick-up the fact that I am an adherent of MMT's basic tenants which INCLUDES the penultimate limit to federal deficit spending being the inflation constraint. My critique is centered on the disconnect between (a) MMTers understanding that constraint but giving only lip service to how it would actually be operationized and (b)their constant whining about how their obviously superior view of the world is not taken seriously by the vast majority of the public let alone nearly all, by far, policy makers.
Some MMTers have provided some elements (e.g., Cullen's avoid unproductive spending on ponies, R. Mitchell's rely on monetary policy on steroids, B. Mitchell's don't worry inflation's never been a problem) but generally most MMTers' fallback is that they're just economists and that's not their job. I see your blowing off as trolling what I see as the fundamental issue holding MMT's actually operational acceptance as a form of the typical fallback... you're just a tad more cowardly about it.
Edmont,
ReplyDeleteThank you for providing a priceless example of MTTers' blind spot in trying to grapple with why their view of the world is not being accepted. Mitchell is considered one of the top thinkers of the school, and yet his approach to trying to convince operational adoption of a new MMT-based policy approach is just to ignore its stated constraint because, well, its never been a problem before (at least under the current budgetary constraint). Pretty bizarre..to be kind about it.
On another note, I recognize that you have problems with MMT, but just looking at the relationship between spending (federal deficit or otherwise) and price levels, are you sure your equations truly capture that dynamic? Yes, this balanced equation -
2C7H5(NO2)3 (s) --> 7C (s) + 7CO (g) + 3N2 (g) + 5H2O
- provides a lot of information, but if that's all your considering, you might get your hands blown off.
Salsabob
ReplyDeleteI was not referring to you or anything you've said above whatsoever in my comment, so I have no idea where your response or insults of my character came from.
That said, yes, it's well known among us that we need to do a lot more research on the mechanics of inflation. This is not a blindspot at all--it's a core goal in our collective research agenda. There are several publications with more details by Bill, Randy, myself, but it is still very insufficient coverage for sure. There are fewer than 10 of us, and we've all had full research/teaching/speaking agendas, so we haven't gotten to everything we want to do (there's a lot more than just inflation to get to, IOW, but I'd still put the quantity and breadth of research output from our small group up against many others). Contrast this with several thousand neoclassicals building their own macro/money paradigm. If you'd like to do some research on this in the same vein as you've presented above, it would be very much welcome by us.
(BTW, CR and R.Mitchell are not MMTers.)