Simple stock-flow analogy using faucet, sink, and drain. Too simplistic, maybe, but it gets the fundamental point across.
What this analogy focuses on is inflation and the sweet spot. But there is also not enough flow so that stock becomes low (deflation).
The available policy space is between inflation and deflation. The sweet spot is optimal deployment of real sources including human resources (full employment).
This would be difficult to impossible to hit using discretionary fiscal policy alone. The residual is handled with automatic stabilization and a guaranteed job opportunity that matches workers with work in their locale.
Ever heard of modern monetary theory?
Kai Ryssdal, Maria Hollenhorst, and Rose Conlon
2 comments:
That’s where tax policy comes in. Kelton said taxes can act as a “release valve” for inflation.
Except the economy runs off bank deposits and while Federal taxation destroys bank deposits 1-to-1 with bank reserves, the banks are not reserve constrained anyway and can replace those destroyed deposits with new deposits ("Bank loans create bank deposits").
Moreover, by destroying reserves, Federal taxation INCREASES the ability of banks to create new deposits since it improves their Supplemental Leverage Ratios.
I've yet to hear an MMT advocate answer these objections.
Millennials like to rail against banks and push politicians to reign in lending
They also like to complain that they can't afford housing even though Millennials tend to earn more and have more financial assets than previous generations at their age. The difference is that they can't get loans because they have pushed for tighter lending regulation --lending data are clear. What is worse, they constantly whinge about identity politics and their anti bank screeds have been incredibly racist in impact, unambiguously, 90% of tighter lending standards have locked POC out of the housing market.
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