Tuesday, March 26, 2019

Warren Mosler - MMT White Paper

DRAFT
3/26/19
MMT White Paper
The purpose of this white paper is to publicly present the fundamentals of MMT.
What is MMT?
MMT began largely a description of monetary operations, which are best thought of as debits and credits to accounts kept by banks, businesses, and individuals.
Warren Mosler independently originated what has been popularized as MMT in 1992.  And while subsequent research has revealed writings of authors who had similar thoughts on some of MMT’s understanding and insights, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith, and former Fed Chairman Ruml, MMT is unique in its analysis of monetary economies, and therefore best considered as its own school of thought.
What's different about MMT?
MMT Alone Recognizes that the US Government and its Agents are the Only Supplier of That Which it Demands for Payment of Taxes
That is, the currency itself is a simple public monopoly.  
The US government levies taxes payable in $US
The $US to pay those taxes can only originate from the US government and its agents.
The $US to purchase US Treasury securities can only originate from the US Government and its agents.
The economy has to sell goods and services to the US Government or borrow from the US Government, or it will not be able to pay its taxes or purchase US Treasury securities
 Ramifications:
1.  The US government and its agents, from inception, necessarily spend first, only after that can taxes be paid or state securities purchased.


This is in direct contrast to the rhetoric that states the US government must tax to get US dollars to spend, and what it doesn't tax it must borrow from the likes of China, and leave the debt to our grandchildren.  
MMT thus recognizes that it's  not the US government that needs to get dollars to spend.  Instead, the driving force is that taxpayers need the US government’s dollars to be able to pay taxes and purchase US Treasury securities.
2.  Crowding out private spending or private borrowing, driving up interest rates, federal funding requirements and solvency issues are not applicable for a government that spends first, and then borrows.  
How are You Going to Pay for It?  
     
The US government, for all practical purposes, spends as follows:
After spending is authorized by Congress, the Treasury instructs the Fed to credit the recipient's account (change the number to a higher number) on the Fed's books.  

For MMT, the Money Story Begins with a State that Desires to Provision Itself:
1.  The state imposes tax requirements in the form of financial obligations.  
2.  Consequently goods and services are offered for sale to get the funds required to pay the taxes.
MMT recognizes that taxation, by design, is the cause of unemployment, defined as people seeking paid work.
3.  The state can then buy those goods and services.
4.  Taxes can then be paid.  
5.  If people on average want to earn more than just enough to pay taxes, goods and services will be offered for sale in sufficient quantity to obtain those extra dollars.
6.  State spending in excess of taxes- deficit spending- provides those dollars to be saved.  
7.  The public debt equals the dollars spent by the state that haven't yet been used to pay taxes.
8.  After the state has spent those extra dollars, Treasury bills, notes, and bonds can then be purchased which depletes dollars the state has already spent.  
8.  Payments by the US government are added to reserve accounts of Fed member banks.
9.  When securities are purchased the Fed debits reserve accounts and credits securities accounts.
10.  When interest on the public debt is paid, the Fed credits securities accounts.
How is the Public Debt Repaid?  


When US Treasury securities mature, the Fed debits the securities accounts and credits the appropriate reserve accounts.  
There are no taxpayers or grandchildren in sight when that happens.
 What is the Relevance of MMT Today? 
The MMT understandings put policy options on the table that were not previously considered viable.
Interest Rates
MMT recognizes that higher interest rates can impart an expansionary, inflationary (and regressive) bias through two types of channels- interest income channels and forward pricing channels.  This means that what’s called ‘Fed tightening’ by increasing rates may increase total spending and foster price increases, contrary to the intended effects of reducing demand and bringing down inflation.
MMT understands that a permanent 0% policy rate is the base case for analysis for a floating exchange rate policy.    
The MMT understanding of interest rates is at times in direct conflict with central banks and the large majority of academics.  We see those “mainstream” views as at best applicable to fixed exchange rate regimes, but in any case not applicable to today’s floating exchange rate regimes.
Inflation
Only MMT recognizes the source of the price level.  The currency itself is a public monopoly.  Monopolists are necessarily “price setters”.  
Therefore:
The price level is necessarily a function of prices paid by the government’s agents when it spends, or collateral demanded when it lends.
In a market economy the government need only set one price, letting market forces continuously determine all other prices as expressions of relative value, as further influenced by institutional structure.   

The Job Guarantee
The Job Guarantee is a proposal for the US Government to fund a full time job for anyone willing and able to work at a fixed rate of pay.  A $15 per hour wage has currently been proposed, which becomes the numeraire for the currency- the price set by the monopolist that defines the value of the currency while allowing other prices to express relative value as further influenced by the institutional structure.  
The Job Guarantee works to fight inflation more effectively than the current policy of using unemployment to fight inflation.  An employed buffer stock policy better facilitates the transition from unemployment to private sector employment, as private employers don't like to hire the unemployed.  
It also provides for a form of full employment, and at the same time is a means to introduce minimum compensation and benefits “from the bottom up”, as private sector employers compete for Job Guarantee workers. 

6 comments:

Ryan Harris said...

At least he didn't bring the wildly unpopular GND into it. MMT's big moment was such an policy blunder and unremittent disaster, not a single vote in the Senate!!! and polling in single digits, I wonder if Kelton is going to become politically toxic as well.

AXEC / E.K-H said...

MMT: fundamentally false
Comment on Warren Mosler on ‘MMT White Paper’

The purpose of Warren Mosler’s white paper is “to publicly present the fundamentals of MMT.”

This is the first fundamental proposition: “MMT Alone Recognizes that the US Government and its Agents are the Only Supplier of That Which it Demands for Payment of Taxes
That is, the currency itself is a simple public monopoly.
The US government levies taxes payable in $US
The $US to pay those taxes can only originate from the US government and its agents.
The $US to purchase US Treasury securities can only originate from the US Government and its agents.
The economy has to sell goods and services to the US Government or borrow from the US Government, or it will not be able to pay its taxes or purchase US Treasury securities.
Ramifications: 1. The US government and its agents, from inception, necessarily spend first, only after that can taxes be paid or state securities purchased.”

Because the first MMT axiom is false the rest of MMT is false.

MMT lacks sound macroeconomic foundations. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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 in each period, the price is given by P=W/R (1a). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.#1 The elementary production consumption economy is shown on Wikimedia.#2

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender. These institutions have to be established by the State.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the Central Bank over the course of one period is shown on Wikimedia.#3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern.

See part 2

AXEC / E.K-H said...

Part 2

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium.

Ramifications: (i) The State is needed for the institutional setup of the monetary order, (ii) the State is NOT needed for injecting money into the economy, (iii) what is needed is an accommodative Central Bank, (iv) neither the State nor the Central Bank interferes with the autonomous transactions of the household and business sector, (v) money is a generalized IOU, (vi) money is created and destroyed by the transactions between the household and the business sector, (vii) the value of money is given by W/P=R (1b), i.e. is equal to the productivity, (viii) the value of money does NOT depend on the (average) stock of money M, (ix) the functionality of monetary institutions and the value of money does NOT depend on the taxing power of the State.

If the State deficit-spends money into the elementary production-consumption economy it follows from the macroeconomic Profit Law#4, #5 that Public Deficit = Private Profit.

Bringing money into the economy by public deficit spending is NOT distributionally neutral, just the opposite: it is a free lunch for the Oligarchy.

So, MMT is not only scientifically worthless#6 but economically harmful to the ninety-nine-percenters.

Egmont Kakarot-Handtke

#1 Geometrical Exposition of Structural Axiomatic Economics
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2060073

#2 Wikimedia, Elementary production-consumption economy
https://commons.wikimedia.org/wiki/File:AXEC31.png

#3 Wikimedia, Idealized transaction pattern
https://commons.wikimedia.org/wiki/File:AXEC98.png

#4 Profit Law Q=Yd+(I−S)+(G−T)+(X−M)

#5 How counterfeiters save America with an extra profit and make WeThePeople pay for it
https://axecorg.blogspot.com/2019/02/how-counterfeiters-save-america-with.html

#6 Refuting MMT’s new Macroeconomics Textbook
https://axecorg.blogspot.com/2019/03/refuting-mmts-new-macroeconomics.html

Noah Way said...

"At least he didn't bring the wildly unpopular GND into it."

Too much Rush Limbaugh and Koch brothers media, you need to up your game. In fact the GND is very well received, especially considering how recently it was unveiled. Conservative media is shocked at how well the GND has polled and is doing everything in its power to denigrate it - exactly the same way they are trying to quash MMT.

https://thehill.com/policy/energy-environment/421765-poll-majorities-of-both-parties-support-green-new-deal

https://www.businessinsider.com/alexandria-ocasio-cortez-green-new-deal-support-among-americans-poll-2019-2/

http://climatecommunication.yale.edu/publications/the-green-new-deal-has-strong-bipartisan-support/

Kaivey said...

I wouldn't be surprised if Warren Mosler likes the GND, as he's no conservative. I might ask him.

Ryan Harris said...

He said the GnD is part of MMT recently. I was horrified.

Those polls are pretty old, before most people knew what was in the GND. The name is kind of snappy and innocuous sounding.