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Monday, December 23, 2019

Bill Mitchell — A response to Greg Mankiw – Parts 1 & 2

On October 2, 2019, I received an E-mail from Gregory Mankiw. It was sent to me, Randy Wray and Martin Watts and asked us some questions about our textbook – Macroeconomics – which had been published by leading textbook publisher Macmillan in March 2019. The book has been selling strongly with a third printing already in the pipeline and a second edition coming, hopefully, later next year. Macmillan also publish Greg Mankiw’s macroeconomics textbook, which has been the dominant teaching book in undergraduate programs. I will take you through the E-mail correspondence that followed because it puts in context what Greg Mankiw decided to do next. Instead of continuing the correspondence on academic terms, which was a reasonable expectation at the time, given the initial approach and our replies, he decided to submit a paper – A Skeptic’s Guide to Modern Monetary Theory (December 12, 2019) – to the American Economic Association meeting in early January, which purports to be a ‘guide’ (meaning in English – a framework to convey an appreciation of something) to Modern Monetary Theory (MMT). After his initial entreaty and our responses in good faith, Greg Mankiw clearly decided that engaging with us on the terms he initially set out was not going to be in his interests and thus took another tack, without any further consultation or reference to his initial contact with us. I wasn’t impressed with that strategy. I was less impressed with the ‘guide’ that emerged. It says very little about MMT. It demonstrates how hard it is for someone deeply locked into a dominant but failing paradigm to think outside the ‘box’ for a while and try to understand that the ideas of a new and emerging paradigm cannot be meaningfully reduced back into the conceptual framework of the failing paradigm that the contender is seeking to usurp. I guess his strategy is understandable – after all – our book is now a direct competitor for his textbook and offers a new approach that has much stronger empirical correspondence. In that context, it is in Greg Mankiw’s self interest to attack our book in any way he can. The problem is that attacks have to have some foundation to resonate. Greg Mankiw’s attack is so lateral that he would have been better to have remained silent. Sure, he is playing to the mainstream groupthink echo chamber. But the echoes will die eventually as more and more people realise the mainstream is in its last death throes. This is Part 1 of a two-part response to Greg Mankiw’s paper. In Part 1, we review the E-mail trail that started all this. In Part 2, I will discuss his response.
Bill Mitchell – billy blog
A response to Greg Mankiw – Part 1

A response to Greg Mankiw – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

34 comments:

  1. “Government increases spending such that G > T – what is normally called a spending deficit (a flow)......

    The MMT view is that if G > T,


    G does not include Transfer Payments G is only govt direct purchases , if G=T and Transfer Payments were $500b then Treasury would have to issue 500b of bonds to keep TGA stable .... would still be looked upon as a deficit in Cash Basis...

    “bank reserves will have been net credited and hence the pressure on the overnight interest rate will be downward,”

    Only if there is a RRR imposed by the central bank AND the CB maintains reserve levels in excess of the RRR 10% of Bank Deposit levels....

    Which conflicts with bills statement here:

    “MMT says that:

    1. Reserves do not constrain lending – loans create deposits (not the other way around) – a demand-determined approach

    2. The central bank does not control the amount of reserves.”

    How can you say ‘the CB does not control the amount of reserves” ????

    The CB creates both 1. the requirement for reserves thru regulatory policy RRR (10% of Deposits) and 2. Controls the amount of reserves thru OMOs

    ????

    Why did rates spike in September then??? Fed reduced Reserves below the 10% threshold without modifying its 10% requirement...

    I’ll assume in Sept G>T so according to MMT here rates should have been anchored at zero.... but they obviously were not....

    Crickets....

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  2. The events in Sept either falsify MMT or at least identify significant deficiencies....

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  3. “MMT predicted that bank lending would not accelerate as a result of QE because the sluggish lending was not due to a deficiency of reserves (banks do not loan out reserves) but, rather, a shortfall of creditworthy borrowers due to the uncertain conditions following the GFC.”

    Completely ignores leverage regulation....

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  4. Here:

    “The G represents government consumption expenditure and gross investment. “

    https://www.investopedia.com/terms/g/gdp.asp

    ReplyDelete
  5. Mankiw vs Mitchell ― another clown show
    Comment on Bill Mitchell on ‘A response to Greg Mankiw’*

    To recall, Kennedy claimed that his administration was the “best and the brightest”. This elitist ambition has turned into the opposite: the rule of the worst and dumbest. A similar development can be observed in academic economics. There seems to be a general pattern in the staffing of top positions.

    Outwardly, economics is a science. However, there has always been political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

    The goal of theoretical economics (= science) is the TRUE theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    Theoretical economics, though, had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. The major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism, MMT — are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept profit wrong. Economics is a failed science.

    To this day, economists lack the true theory and this is why economic debates inevitably degenerate into a clown show. The current Mankiw-Mitchell stand-off is no exception.#1-#4

    Mankiw repeats the already refuted standard arguments against MMT and Mitchell pulls off the standard MMT fraud.#5 How can one tell in two seconds that the whole debate is a freak show? Easy, all one has to do is to put the word profit in the Ctrl+F search field: no hit. Two economics textbook writers debate Money- and Employment Theory without once mentioning the foundational economic concept profit.

    Because of the macroeconomic Profit Law, i.e. Q=Yd+(I−S)+(G−T)+(X−M), the MMT policy of deficit-spending/money-creation has an immediate effect on distribution, i.e. Public Deficit G−T = Private Profit Q which means that the Oligarchy’s financial wealth and public debt grow in lockstep. The Profit Law explains the extremely skewed distribution of income and financial wealth between the one- and the ninety-nine-percenters.#6, #7 Obviously, neither Mankiw nor Mitchell knows how the monetary economy works.

    There is much social and save-the-world rhetoric in MMT from the Employment Guarantee to the Green New Deal, however, the fact of the matter is that MMT is a free-lunch program for the Oligarchy. However, Mankiw does not mention once MMT’s massive political fraud.

    What can one conclude from all this? Both Mankiw and Mitchell are either stupid or corrupt or both. The whole Mainstream vs MMT brawl shows that the Oligarchy has changed the communication strategy: the mainstream loudspeakers Mankiw/Krugman/etc are retired for good and the fake Progressives Mitchell/Kelton/etc take over. The free market economy can only survive with massive deficit-spending of the State, that’s why the Oligarchy has to replace their useful academic idiots.

    Egmont Kakarot-Handtke

    References
    https://axecorg.blogspot.com/2019/12/mankiw-vs-mitchell-another-clown-show.html

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  6. This comment has been removed by the author.

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  7. “So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.

    But for the mainstream economist like Greg Mankiw, the GBC represents an ex ante (before the fact) financial constraint that the government is bound by.”

    Ok that is an acceptable description of the time domain aspects but what are the cognitive aspects?

    iow WHY are they thinking ex ante when it concerns abstractions of Accounting? Because they think the abstractions are REAL....

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  8. “What can one conclude from all this? Both Mankiw and Mitchell are either stupid or corrupt or both. “

    Yo that’s not a conclusion....

    ReplyDelete
  9. “The point is that fiscal deficits increase bank reserves and hence the pressure on the overnight interest rate will be downward, all else equal.”

    But what we just saw in September was there were excess reserves (slightly above the 10% system level requirement) over 1.3T and interest rates for reserves still went UP well above the support IOR rate... iow the rate didn’t exhibit downward “pressure”... so it is not this simple...

    The central bank creates the requirement for reserves (“demand!” in economoron speak) via various regulations in the first place...

    ReplyDelete
    Replies
    1. But what we just saw in September was there were excess reserves (slightly above the 10% system level requirement) over 1.3T and interest rates for reserves still went UP well above the support IOR rate... iow the rate didn’t exhibit downward “pressure”... so it is not this simple...

      Response :

      There are 4 reasons for what happened. 1. Treasury's decision to use general account at the Fed. 2. Foreign repo at the Fed. 3. Fed's decision to reduce its balance sheet for ideological reasons. 4. Basle III regulations.

      Delete
    2. "3. Fed's decision to reduce its balance sheet for ideological reasons"

      That was by far the most important

      Delete
  10. The very next words in wray's response was "all else equal." I would look for what else wasn't equal as mwarang'ethe did.

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  11. “for ideological reasons"

    That’s a f-ing conspiracy theory...,

    ReplyDelete
  12. “4. Basle III regulations.”

    The Basel 3 min leverage ratio is waaaaaaaaaay below what theUS banks are running at....

    Leverage sub Basel << US bank observed leverage ratio

    ReplyDelete
  13. "all else equal."

    In complex systems, “all else”is never equal...

    ReplyDelete
  14. “in wray's response ”

    Wray doesn’t even know what G is....

    ReplyDelete
  15. https://en.m.wikipedia.org/wiki/Basel_III

    “Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of 4.5% must be maintained at all times by the bank.[”

    https://www.fool.com/investing/2019/04/17/3-impressive-numbers-behind-jp-morgans-earnings-be.aspx

    “Last quarter, JPMorgan's CET1 ratio was 12.1%, higher than both the fourth quarter's 12% mark and the year-ago quarter's 11.8% mark.”

    How can “Basel 3!” Regulations be operative when US banks exceed those minimum requirements by 3x ????

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  16. ““So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.

    But for the mainstream economist like Greg Mankiw, the GBC represents an ex ante (before the fact) financial constraint that the government is bound by.”


    So Bill is saying Mankiw is out of time ....

    https://en.m.wikipedia.org/wiki/Timing_(music)


    “Research in music cognition has shown that time as a subjective structuring of events in music differs from the concept of time in physics.[”

    This isn’t music we’re talking about.... Bill is biased by his training in musical art.... not qualified in STEM.... will continue to get NOWHERE....


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  17. Bill is saying “Mankiw is coming in at the wrong time! ,” as if Mankiw is in bill’s band....

    Completely inappropriate cognitive training and form of analysis....

    ReplyDelete
  18. In Art Degree terms , think of “ex ante!” as an artist coming in early on the beat and “ex post!” as an artist coming in late on the beat..,,

    Bill is saying Mankiw is coming in too early...

    Systems properly understood run in “continuous time.... not “on a beat”...

    http://pilot.cnxproject.org/content/collection/col10064/latest/module/m10855/latest

    Music does not run under continuous time.... systems do...


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  19. "In complex systems, “all else”is never equal..."
    Technically false, but commonly true.
    The game of life is a super simple, yet a complex system where you can make minute changes keeping all else equal.
    Chaotic complex systems that are exquisitely sensitive to initial conditions are nevertheless deterministic and with enough enough precision would allow for "all else equal" type changes to be made.

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  20. I guess is should say, "Chaotic complex systems that are exquisitely sensitive to initial conditions *can* nevertheless be deterministic..."

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  21. Matt Franko

    You say: “‘So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance. But for the mainstream economist like Greg Mankiw, the GBC represents an ex ante (before the fact) financial constraint that the government is bound by.’ Ok that is an acceptable description of the time domain aspects but what are the cognitive aspects?

    NO, that is NOT an acceptable description, that is is the lethal defect of macroeconomics and the smoking-gun proof that both Mankiw and Mitchell are too stupid for elementary algebra.

    Every academic economist who uses or swallows the phrase “just an ex post accounting identity that has to be true by definition” loses automatically his tenure.

    Here is the full Mitchell quote that explodes the whole debate: “The GBC says, in English, that a fiscal deficit equals Government spending + Government interest payments – Tax receipts and, must, in turn, be ‘financed’ (equal) by a change in outstanding bonds (issuing debt) and/or a change in high powered money (‘printing money’).

    While the mainstream infer that this statement delivers causality from the financing side to the spending side (as if the currency-issuing government is like a household), in fact, it is merely an accounting statement that is of no particular importance in the MMT framework.

    In a stock-flow consistent macroeconomics, as an accounting statement the relationship must always hold. That is, it has to be true if all the transactions between the government and non-government sector have been correctly added and subtracted.

    So in terms of MMT, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.”

    The axiomatically correct accounting identities read with increasing complexity
    (1) Qm=−Sm in the elementary production-consumption economy,
    (2) Qm=I−Sm in the elementary investment economy,
    (3) Qm=Yd+I−Sm in the investment economy with profit distribution,
    (4) Qm=Yd+I−Sm+(G−T)+(X−M) in the general case with government in an open economy.#1,#2, #3

    So in terms of elementary algebra, the economics textbooks of both Mankiw and Mitchell are proto-scientific garbage and their debate is a lowest-level academic clown show.

    Egmont Kakarot-Handtke

    #1 MMT and the magical profit disappearance
    https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html

    #2 DrainTheScientificSwamp
    https://axecorg.blogspot.com/2018/12/drainthescientificswamp.html

    #3 For more details see cross-references Accounting
    http://axecorg.blogspot.com/2016/12/accounting-cross-references.html

    ReplyDelete
  22. This AXEC guy is a true piece of art. He makes statements like "this is garbage" and never attempts to explain anything. Deeply disturbed individual.

    ReplyDelete
    Replies
    1. Kristjan: Don't mind him/it.

      I have a theory that AXEC is some kind of robot programmed to spam blogs (and it's not just MMT blogs, he/it is all over the place!) with hate messages and fake papers. Also, it seems to me that he/it automatically attacks anyone that mentions his/its name, so I now will be attacked too.

      Everyone that encounters him/it probably has a similar reaction to yours.

      You don't gain anything discussing with him/it except some hate messages. Not productive at all.

      Delete
  23. ”Music does not run under continuous time.... systems do...”

    You know much about music? Nah.

    ReplyDelete
  24. Kristjan

    You say: “He [this AXEC guy] makes statements like ‘this is garbage’ and never attempts to explain anything.”

    Take notice that MMT is refuted on all counts. If you had more than two brain cells you would have looked up the explanations.

    Egmont Kakarot-Handtke

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  25. Andre, Kristjan

    Economics is about how the economy works. The foundational question of macroeconomics is about how the balances of the different sectors are related. There are at least two answers to this question
    a) MMT (I−S)+(G−T)+(X−M)=0
    b) AXEC (I−S)+(G−T)+(X−M)−(Q−Yd)=0.

    Only one equation can be true. Which one is it? Both Mankiw and Mitchell cannot answer the foundational question of economics because they are too stupid for elementary algebra.

    So, the world is waiting for your answer. Is it a) or b) or c) (= fill in your equation)?

    There can be no progress in economic theory and by consequence in economic policy before the foundational macroeconomic question is answered.

    “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    The fact is, you have nothing to offer but brain-dead blather.

    Egmont Kakarot-Handtke

    ReplyDelete
  26. Yes I have seen your writing. You are unhappy that MMT accounting identities are not further disaggregated. I get that. But you calling MMT accounting statements fraud and false is simply false on your part.

    "The business sector’s monetary profit Qm is equal to the household sector’s dissaving"

    This is not true even if the government sector is in balance. Depending on the rules of a given country, business profits don't necessarily mean cash in vault or deposits in bank account. Businesses very often spend their profits before the accounting period is over. So the "accounting identity" that you have come up with is simply wrong. Let's say business earns profit 20 dollars in a given accounting period but in the middle of accounting period spends 10 dollars and that stays in the household sector. Now Egmont Kakarot-Handtke says that business has made a profit of 20 dollars and he says the households have dissaved that amount. It is not true.

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  27. Egmont doesn't understand that monetary profit doesn't fit in the same kind of frame as deficit spending. Monetary profit is calculated. It is not an accounting statement. A company can receive monetary profit but this doesn't mean household sector dissaving in the same amount like Egmont says.

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  28. Kristjan

    You say “… business profits don’t necessarily mean cash in vault or deposits in bank account.”

    Total macroeconomic profit/loss Q consists of monetary and non-monetary profit Q=Qm+Qn with Qm=Yd+(I−Sm)+(G−T)+(X−M) Legend: Qm monetary profit/loss of the business sector, Yd distributed profit, I investment expenditures, Sm monetary saving/dissaving of the household sector, G government expenditures, T taxes, X exports, M imports. Non-monetary profit Qn has been dealt with elsewhere. Monetary profit is as tangible/real/testable as cash in a vault or deposits in a bank account.

    You say “Businesses very often spend their profits before the accounting period is over.”

    Under the condition that accounting is complete, this spending is for example recorded as Yd distributed profit or I investment expenditures. Accounting refers to a period of a given length and records ALL transactions during that period.

    You say “Egmont doesn’t understand that monetary profit doesn’t fit in the same kind of frame as deficit spending. Monetary profit is calculated. It is not an accounting statement. A company can receive monetary profit but this doesn’t mean household sector dissaving in the same amount like Egmont says.”

    Incorrect. The Profit Law boils down to Qm=−Sm in the most elementary case of a production-consumption economy with the balances Qm≡C−Yw and Sm≡Yw−C. If the household sector’s budget is balanced, i.e. C=Yw, then monetary saving Sm and monetary profit Qm are both zero. If monetary saving is greater than zero, the business sector makes a loss, i.e. profit is less than zero. If monetary saving is less than zero, the business sector’s monetary profit is greater than zero. C and Yw are recorded transactions, the balances Qm and Sm are calculated.

    Sectoral balances add always up to zero, i.e. Qm+Sm=0, this is the Fundamental Law of Macroeconomic Accounting.#1

    All this is nothing but elementary algebra. The thing is that economists are too stupid for it from freshmen to Nobel laureates, including you, of course.

    Egmont Kakarot-Handtke

    #1 For more details see cross-references Accounting
    https://axecorg.blogspot.com/2016/12/accounting-cross-references.html

    ReplyDelete
  29. !If monetary saving is greater than zero, the business sector makes a loss, i.e. profit is less than zero."

    That is not true. Monetary profit is not an accounting statement as you think. Monetary profit is calculated. So theoretically business sector profit could be 100 and household sector saving could be 0 (not -100 like you think) government budget is assumed to be in balance. This could happen if businesses invested all (100) profits during the accounting period. You are clearly wrong.

    ReplyDelete
  30. Let' make It really simple. Government sector is in balance. So there is household sector and business sector. Business sector profits 100 but invests the 100 by building a new factory and paying salaries out of this 100, so the 100 ends up in household sector. At the end of the accounting period the financial positions of both sectors are the same as they were to begin with. Business sector made a monetary profit 100 but the household sector has not dissaved 100. Clearly Egmont is wrong.

    ReplyDelete
  31. Kristjan

    You say “Monetary profit is not an accounting statement as you think.”

    I do NOT think that monetary profit is an accounting statement, I clearly stated that “C and Yw are recorded transactions [= accounting statements], the balances Qm and Sm are calculated.”#1

    You say “So theoretically business sector profit could be 100 and household sector saving could be 0 (not -100 like you think) government budget is assumed to be in balance. This could happen if businesses invested all (100) profits during the accounting period.”

    For the elementary production-consumption economy holds Qm=−Sm. If the household sector gets a wage income of Yw=1000 and spends C=900 then the monetary saving is 100 (Sm≡Yw−C) and monetary profit is −100 (Qm≡C−Yw).

    For the investment economy, the Profit Law boils down to Qm=I−Sm (see equation (2) above Dec 25). Clearly, if I=100 and Sm=0 then Qm=100. Your example does NOT refute the macroeconomic Profit Law but CONFIRMS it.

    You are the living proof for the stupidity of the representative economist.#2

    Egmont Kakarot-Handtke

    #1 A tale of three accountants
    https://axecorg.blogspot.com/2017/07/a-tale-of-three-accountants.html

    #2 No future for the representative economist
    https://axecorg.blogspot.com/2015/08/no-future-for-representative-economist.html

    ReplyDelete