I had an impromptu debate with Warren Mosler, the founder and still one of the leading figures of "Modern Monetary Theory" recently. We disagreed on the role of trade deficits, and this has led another MMT luminary, Bill Mitchell, to write two commentaries critiquing my position (see "Trade and external finance mysteries – Part 1" and "Trade and finance mysteries – Part 2".
This is my partial reply to Mitchell—there are more issues that I want to take up when I have time to do so....Patreon
Some Preliminary Questions for MMT
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London
Now they are running around with this exports are cost and imports are benefit argument. Mosler has always said that exports are paying for imports. What he meant by saying that imports are benefit is that if everyone wants to hold your currency then let them do that because it benefits the domestic economy and that is correct.
ReplyDeleteUsually It is not that simple case and those countries borrow in foreign currencies. Developing countries have constraints even if they spend in their own currency but those constraints are not financial. Fadhel Kaboub is talking about those issues in this radio show
https://www.buzzsprout.com/50892/659073-fadhel-kaboub-of-the-binzagr-institute-must-listen?client_source=twitter_card&player_type=full_screen
Those are structural deficiencies by him
1. Food production
2. Energy production
3. High value imports(computers smart phones) versus low value exports.
Thinking that "exports are cost and imports are benefit " is wrong is simply insane. It doesn't have to do with any special case, anybody wanting to hold your currency.
ReplyDeleteTo disagree is to simply not understand what is being said, to misunderstand the words involved. But I think I finally got to the heart of the failure of communication here down at billy blog, as Some Guy. People are reading something into it which is not being said.
You can export things without being paid for them, that is the basic meaning of "export".
So what is being said is "Unpaid exports are a cost, unpaid imports are a benefit." How on earth can anyone disagree with this?
Keen:So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.
This doesn't follow. Because what should go along with the other phrase is: "Payments for exports are a benefit, payment for imports are a cost." You have to look at both of them to begin to judge what you should do. What Bill is trying to do is to carefully look at what is happening, piece together the whole picture from that. People often try to grasp it all at once - and start talking nonsense.
Kristjan:Usually It is not that simple case and those countries borrow in foreign currencies.
That is almost always a very bad idea. In any case, always and everywhere, it should be drastically minimized. Much better to do without for a few years, than to do without forever. Borrowing in foreign currencies is not necessary and is self-defeating. You don't need foreign desires to save in your currency in order to export and import and avoid the nightmare of foreign denominated borrowing.
That is the primary means by which the rich countries keep the poor countries poor. Advice that it is necessary or innocuous is nonsense, and has led to many countries being less food self-sufficient than they were a generation ago - something that really is troubling.
Keen:So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.
ReplyDeleteExactly.
What MMT actually says is that exports are a (real) cost and imports a (real) benefit in real terms of trade. This is a truism that all economists are with. It's not up for debate. From this truism it follows, that if one understands monetary operations, the balance of payments doesn't change that.
It's true in any case, even in the case of balanced trade, where each country is receiving an equal monetary amount of real goods, or where real goods are being gained by one country in exchange for real assets. This has nothing to do with the amount or sign of the trade balance.
But SK thinks it is not the case.
Moreover, a currency sovereign as the ability to offset effects of this using fiscal policy iaw functional finance. For example, it can offset the effect of importing embedded labor by fiscal policy that creates domestic jobs.
MMT economists don't claim that trade deficits are "good" as such, but rather irrelevant as such. Just like fiscal deficits. It's situational. All countries are not the same, and they should run fiscal policy, monetary policy, domestic economic policy, and trade policy that suits their interests, trading off short term and long term interests.
What MMT economists have actually said it that since imports (of real goods) are a real benefit, a currency sovereign should not be concerned that a net exporter desires to save it its currency. In all monetary transactions involving real goods or real assets, the counterparty must be willing to save in the currency, however briefly, by accepting it in exchange.
As soon as a net exporter doesn't wish to net save in that currency, it's trade surplus will begin to decline. Moreover, those savings (stock) can either be saved indefinitely (stock), sold to others (flow that changes stock), or exchanged for goods or assets (flow that changes stock) in the currency zone.
In other words, it is a pseudo-problem.
MMT economists never recommended that all countries run deficits (surpluses) at once, as SK asserts, since as SK notes, that is logical impossible owing to the accounting identity that external accounts must sum to zero. Does he really think that MMT economists don't know that?
I am willing to git people the benefit of the doubt but SK's response looks bonkers to me.
That is not exactly what they argue against Tom. They are saying that MMT-ers say that once you have your own currency, you don't have to worry about trade deficits because your country issues its own currency and MMT-ers say that imports are benefit and exports are cost in real terms. There is nothing wrong in this saying, rather countries that are dependent on foreign sector should consider how they spend. All is not available to them but not because of monetary reasons.
ReplyDelete"As soon as a net exporter doesn't wish to net save in that currency, it's trade surplus will begin to decline."
Imagine government deficit spending and people buying foreign goods, you don't have to have a trade deficit for your currency to go down and have inflation.
So yes, the trade deficit argument is mostly wrong.
Steve should stop digging he has just created a bigger hole for himself.
ReplyDeleteFirst of all this was not his arguements in the debate with Warren they were completely different. Now they've been answered comprehensively by both Warren and Bill he has decided to ignore his original mistakes and veer off in different direction.
What he is saying now is beyond belief.
This is what happens when you are backed into a corner because of previous mistakes you start making things up. MMT claims none of these things and have answered the crux of Steve's complaint a million times over 20 years.
In the debate with Warren he argued it was all about the money and stated clearly that when exporters brought their money back home this was a new form of money printing.
ReplyDeleteBoth Warren and Bill proved to him that this was nonsense
His second argument was about countries using their currencies held at foreign central banks to buy companies in those countries.
Both Warren and Bill explained why this was nonsense and that Steve clearly didn't know the difference between FPI and FDI.
By getting these 2 wrong his circuit model will end up looking like one big joke when it is finished.
He actually spent 10 mins explaining in the debate that he was furious that other countries ran trade surpluses against Australia. Now has turned 180 and supports Germany running trade surpluses by selling cars to the world !
Steve hasn't even taking the time to admit he was wrong about these 2 arguements. Instead he has now marched head on into a blind alley.
Originally, he had over 30 things he thought dispproved MMT and now after reading the economic papers by MMT'rs he now has one.
This one which is complete nonsense and does not represent the views of MMT.
Why is it so difficult for an economist to understand it has been Germany's choice to use their skills and resources to build cars for other countries to consume?
When all MMT'rs say is they could actually choose to use their skills and resources in a completely different way. In a way that promotes public purpose than benefits everybody and not just car makers and those that work in the industry.
Trade is always balanced and how you use your skills and resources can make or break a country. See venezula for details. That's what's important.
Bill as we speak is covering these very issues with his current Timor-Leste series.
ReplyDeleteSteve should read them.
When things get complicated, go back to basics.
ReplyDeleteI can never understand why the argument does not start with a few simple facts and the logical threads develop from there?
All I know is that there is the skin of the earth and its resources (that belong to everyone); and human ingenuity and duty. The $monetary system simply a recording system of arbitrary magnitude in theory, constrained by common sense (price stability and resource availability) operationally. The essence of trade is sharing and helping out. The material support system meant to sub stand Life; not metastasise as the be-all.
The real problem is greed; ignorance. Greed is the absence of generosity; ignorance the absence of Knowledge. It’s a human problem.
Surely people have to start with the basics .... ? The arguments seem to take place in cloud nine?
We are human beings. The goal of a material support system is to be in a place where we can enjoy life, learn, grow, and expand as human beings. Politics and economics are useless without that goal in mind. Why evolve a human being at all, just to get lost in mind?
That is to say fulfillment is not in the material support system; fufillment is in the human being. [Being Alive 101]
ReplyDeleteInteresting mantra from Steve Keen "Workers of the world don't unite under Bill Mitchell!"
ReplyDeleteArt majors....
ReplyDelete"Bill as we speak is covering these very issues with his current Timor-Leste series.
ReplyDeleteSteve should read them."
LOL never going to happen but Foot also dont assume Keen can abstract like you are here...
"Abstraction, the cognitive process of isolating, or “abstracting,” a common feature or relationship observed in a number of things, or the product of such a process. "
https://www.britannica.com/science/abstraction
This cognitive ability varies in people..
Maybe Keen is simply not well trained in abstracting....
Maybe Keen is simply not well trained in abstracting....
ReplyDeleteI suspect it may be his lack of accounting background. Math and programming chops don't substitute for accounting savvy.
But SK says he is not providing his rationale in this post and we'll probably have to wait until 2019 to have it! (eyes roll)
Accounting is ideally a Science degree too...
ReplyDeleteYes, when the economy is running at full employment, then imports are a real net benefit because we get to consume everything that we produce + everything the foreigners produce.
ReplyDeleteThe problem though, is that full employment is a special and rare and fleeting circumstance. Our governments are not running full employment economic policy. And so there is a very real cost to exports, and it is the lost demand that would otherwise generate closer to full employment domestically.
Therefore is it not disingenuous to say exports are a benefit and imports are a cost without the "at full employment" qualifier?
......
(As an aside - for a developing country, wouldn't it be fair to say that exports are a real benefit because of foreign direct investment and the accompanying technology (capital) transfer from developed countries to developing countries?)
.....
Any thoughts?
No, it isn't disingenuous, because people who disagree misinterpret what is being said.
ReplyDeleteExports are always a cost, imports are always a benefit, in real terms, looking at them apart from finance, from payment. Nothing to do with full employment or whatever. True individually and in aggregate.
To be sure, this is about exporting goods, which is most exporting. Exporting bads (e. g. toxic waste) is a benefit, importing bads is a cost. Maybe thinking about bads clarifies the intended meaning and the logic.
The other things may have some validity, but first things first. One can only talk sensibly about them, combine them into a correct complete understanding after getting clear on the basics.
Therefore is it not disingenuous to say exports are a benefit and imports are a cost without the "at full employment" qualifier?
ReplyDeleteThe full answer is yes and no, or it's nuanced and needs some explanation. But the principle that imports (of real goods) are a benefit and exports (of real goods) are a cost in real terms of trade is necessarily true by definition. It's a truism (tautology). It's true just by understand the meaning of the terms involved.
What it says is that iImports (meaning receiving real goods) are always and everywhere a benefit in real terms of trade, and exports (losing real goods) are always a cost in real terms of trade. The qualifier "in real terms of trade" alerts that there may be more to it, and there is.
In balanced trade, each party receives real goods in exchange for real goods. The goods imported are a real benefit and the goods exported are real cost. Even though the exchange is mediated through money in a monetary exchange, it's a barter or real goods for real goods in aggregate.
Each side is being not only goods but embedded labor and losing real good and embedded labor in the exchange.
Each situation has to be evaluated situationally. For example, developed economies transacting with undeveloped are often receiving extracted materials in exchange for finished goods. Persistence in this leads to Dutch disease for the extractor. However, if the emerging country gets technology in exchange, then it can become more developed. These are quite different in their economic effects, as well as social, political and historical effects.
In a monetary transaction balanced trade is not necessarily the outcome and if this is the case, then the situation also has to be evaluated situationally. Is the net exporter using the surplus to acquire real assets in the issuing country (foreign direct investment aka FDI) or saving by increasing its foreign portfolio investment aka FPI. Note that "investment" is being used in different senses here — real investment as "bricks and mortar" in the case of the former and financial investment as savings in the case of latter. There are many other questions that arise.
When trade is not balance, the importer is gaining real goods and embedded labor, which may affect employment unless replacement jobs are created by some other means, at minimum a JG, but ideally through investment in higher quality employment than is being leaked away.
Nuance implies, "It's complicated."
This may be along the lines of what SK is driving at. I guess we'll see when he gets around to giving his full response.
Calgacus: "Exports are always a cost, imports are always a benefit, in real terms, looking at them apart from finance, from payment. Nothing to do with full employment or whatever. True individually and in aggregate."
ReplyDeleteThis is hand waving. If you are going to consider nothing else, then me getting something is better than me giving something. Ironically that's assuming we are homo economicus, an assumption heterodox economists in other contexts tend to reject.
Ultimately imports are only a net benefit to a society at full employment. At less than full employment, the people with jobs get to buy cheaper shit at the cost of a portion of the population being without jobs. I know MMT economists understand this, which is one of several reasons a JG makes macroeconomic sense as a policy. Cause with a JG, we're continually operating at full employment and "exports are a cost and imports are a benefit" actually makes sense without the qualification "at full employment."
Tom, I mostly agree with your elaboration.
Tom, I mostly agree with your elaboration.
ReplyDeleteLet me summarize it for clarity and ease of understanding.
The statement that imports are a real benefit and exports a real cost is a truism, that is, tautology similar to an accounting identity.
The truism doesn't become interesting until it is interpreted causally, which then introduces nuance based on contingencies that are situational.
For example, saying that imports are a real benefit at full employment includes the concept of embedded labor as a real resources. The importer is gaining real goods that include material, labor and use of capital goods lost in the exchange by the exporting nation.
Exports are are real cost in that labor as real resource is being exported but it is not a factor at full employment, since it is a resource in excess of what the country needs at time to perform at optimal capacity.
But that, too, depends on how "fun employment" is defined, as well as changing conditions.
It's nuanced.
"fun employment" should obviously be "full employment."
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteSDB:This is hand waving.
ReplyDeleteNo, it is the opposite of hand waving. Hand waving is a phrase from mathematics. It is the sort of thing that one does at the end of a course, when everybody understands what is going on and can fill in the details themselves. These are "beginning of the course", fundamental, chapter zero things. I am trying to go slowwwly because that is where people are getting confused and end up saying strange things, and denying tautologies and accounting identities, because they are misinterpreting what is being said.
MMT and accounting and business rigorously use the normal, dictionary definitions of words, but people start unconsciously changing them in these arguments. They don't slow down and listen to what the MMTers are saying, even when the MMT economists agree. And you have to do things the careful way MMT does it, say all these things, use words rigorously, to see all the nuances. There is a very similar conversation going on down at Billy blog, where I post as "Some Guy"; I gave some relevant personal experience there.
Ultimately imports are only a net benefit to a society at full employment. At less than full employment, the people with jobs get to buy cheaper shit at the cost of a portion of the population being without jobs.
Sure, "ultimately" in many or most senses- but that means here "skipping to the end of the course", that is "handwaving" while I am saying get the beginning, the skeleton of the arguments and definitions straight. If people misuse language, they usually end up blaming the wrong things, and getting policy wrong.
The ultimate point is that there is nothing whatsoever in MMT that needs to be changed for trade, for an open economy.
Alright: ~In real terms, exports are a cost and imports are a benefit~
ReplyDeleteTranslation: When we talk about exchange of good and services, doing work and not getting to consume the fruit of that work is bad, offering an IOU and getting to consume the other person's work is good, and this is from the perspective of the narrow self-interested consumerism of homo economicus.
I understand the meaning. I get that this is a truism in generic economic terms.
All I'm really saying is what Tom said right here: "The truism doesn't become interesting until it is interpreted causally, which then introduces nuance based on contingencies that are situational." That is, there are actual downsides and upsides to trade deficits and trade surpluses that are not captured in those definitions. For example, one of the downsides to deficits is less demand domestically, and one of the major upsides is technology transfer to the developing country that is running a current account surplus / export-oriented growth strategy (China for example). In other words there are often huge "benefits" (upsides) to running a trade surplus. And there are often huge "costs" (downsides) to running a budget trade deficit.
"The ultimate point is that there is nothing whatsoever in MMT that needs to be changed for trade, for an open economy."
I agree the MMT framework theoretically accounts for everything I've said. But in the actual world we live in, without an effective full employment policy, then balanced trade or a trade surplus is probably preferable to running a trade deficit, for the reasons I've been emphasizing, especially for a developing country but really for all countries.
Alright: ~In real terms, exports are a cost and imports are a benefit~
ReplyDeleteGracias!
I wrote more, but erased it as we really don't disagree. My point is that you must write it the way MMT & Lerner et al did it to be logically consistent and bulletproof and convince skeptics.
I have a three part course on MMT & Foreign Trade, which you can get by sending a SASE & $10,000 .... Just kidding.
Part One is FDR's message to the 1933 London Conference, a one page message that is very obscure now, but which he was prouder of doing than the WPA, Social Security, etc - with good reason.
Part Two is Keynes's article National Self-Sufficiency, which makes many of the sort of points you do above, so is superficially inconsistent, but deeply consistent with MMT & fucntional finance.
Part Three is the chapters on Foreign Trade and Investment in Abba Lerner's Economics of Employment which is imho the best systematic exposition ever written. They're at the end of the book, but imho can be and maybe should be read first, because in important ways the foreign trade theory is more basic.
I can send anybody interested links or a pdf of Lerner's book. Of course the $10,000 would be welcome for this onerous labor.
Please send the book , let the incremental growth in the edonomic enlightment (mine) be your reward 🙂
ReplyDeletekindle@wp.pl
BTO: Sent it from my wife's gmail, starts with xues.... subject line: Abba Lerner Book
ReplyDeleteTom Hickey
ReplyDeleteFor the full resolution of the MMT-foreign trade issue see
Additional proof of MMT’s inconsistency
https://axecorg.blogspot.de/2018/05/additional-proof-of-mmts-inconsistency.html
or Bill Mitchell — A surplus of trade discussions
here at MNE
https://mikenormaneconomics.blogspot.de/2018/05/bill-mitchell-surplus-of-trade.html
Egmont Kakarot-Handtke