Simon Wren-Lewis is not yet an MMT convert but moving closer. He is still clinging to the illusion of monetary policy effectiveness and in this piece he does not address the MMT critique of monetary policy. Moreover, he thinks that a floating rate system requires monetary policy rather than freeing the need for it as under a fixed rate convertible system in which interest rate policy addresses demand for conversion.
His answer to the question, Is it true that "anything we can actually do we can afford”?, is sort of. That is, yes, with qualifiers. MMT would agree with this although there might be some disagreement over the qualifiers.But the take-away is his agreement with MMT that the state does have a "magic money tree," and the constraint is inflation.
While Simon Wren-Lewis doesn't mention it, and in fact, he assumes that central banks have the knowledge and tools they need, the issue then becomes a testable theory of inflation and how to control price stability. But is it so? Former Fed governor Daniel Tarullo wrote a paper questioning this.
Mainly Macro
Is it true that "anything we can actually do we can afford”?
Simon Wren-Lewis | Emeritus Professor of Economics, Oxford University
Anyway, worth a read.
Mainly Macro
Is it true that "anything we can actually do we can afford”?
Simon Wren-Lewis | Emeritus Professor of Economics, Oxford University
19 comments:
My suspicion is that the debate is where the floating exchange rate boundary is - and few economists can see that
Effectively government doesn't spend in green dollars. It spends in yellow dollars which via the interest rate has an exchange rate with green dollars.
QE makes that exchange rate impure and more like the 'dirty peg' that the Chinese run between the Yuan and the dollar.
MMT says scrap yellow dollars and just use green dollars, which then puts government in the same floating exchange rate zone as the rest of us. The floating rate boundary then moves from around Treasury out to the border of the currency zone.
The difference between Keynesians and MMT people is whether they believe having a variable cost parameter on government spending that comes from the silly shuffle that they call 'borrowing' has any economic value.
Ann Pettifor blocked him on Twitter because he kept going on about MMT. That was last year, so I don't know if she ever unblocked him.
Wow.
Kaivey, That's hilarious about Pettifor blocking Wren-Lewis. You don't have the source for that do you?
While she has made numerous sarcastic remarks about MMT, I Googled "MMT, Pettifor" and couldn't find a single article where she actually sets out detailed reasons for objecting to MMT. Moreover in one of her most recent articles, (link below) she objects to what she calls "magicked up money" to deal with recessions (i.e. government / central bank created money). And she calls herself a "progressive". As Bill Mitchell said, many self styled "progressives" are nothing of the sort.
https://www.prospectmagazine.co.uk/magazine/quantitative-easing-qe-magicked-up-money-finance-economy-central-banks
Wren-Lewis says, “There are two clear situations today where debt needs to rise. The first is in severe recessions, where interest rates get stuck at their lower bound [3]. The second is where large investments are required to produce a large future benefit. The most obvious example of the latter is climate change."
The first flaw there is that zero interest yielding so called “debt” is not debt: it's money. Or to be more accurate, the lower the yield on so called debt and the more short term it is, the more it resemble money – with the end point being dollar bills which yield nothing by way of interest, with the time to maturity being zero.
Second, while many households and firms borrow to fund investments, it does not follow that the fact of making an investment is a reason to borrow: if someone wants a new car and happens to have enough cash to pay for it, they probably won't borrow to pay for it. Why pay interest when you don't need to?
Governments can access almost limitless amounts of cash any time they want: first via tax, and second they (along with their central banks) can print a certain amount of money most years.
But having said that, the question as to whether governments should borrow to fund investments IS COMPLICATED. I'm not 100% sure what the correct answer is.
The problem is the Art Degree side doesn’t do anything real they are not trained to do anything …
So if you put these people into positions of authority over policy of what gets done you have a major problem…
Then you have idiots like this guy asking “can we do what we do?” when manifestly the ex-Art Degree people trained to do it are already doing it…
Neil , eg Oct 1 Fed is going to offer a SRF to foreigners so the regulations are going to be modified again…. You can’t speak of the system in a context of zero regulatory modifications over time which you seem to be doing..
Prior to a few months ago Fed never did Reverse Repo so reserve assets would accrue at depositories In unlimited fashion now Depositories can reduce those assets overnight to maintain compliance…
The regulations are always being adjusted so you can’t talk about the system like this is not happening …
For decades Fed had a Reserve Requirement Ratio of 10% of deposits now it is zero…
“ But the take-away is his agreement with MMT that the state does have a "magic money tree," and the constraint is inflation.”
Well then why are the MMT people advocating for 3.5T of infrastructure work increase when we don’t have enough people to do the lesser rate of that type of work right now?
"But having said that, the question as to whether governments should borrow to fund investments IS COMPLICATED."
It isn't. Because it doesn't - and can't.
There is no such thing as borrowing and saving at the cash level. There are just today's hours which disappear if not used. All government does is decide whether to commandeer those hours, or not. That's where the 'crowding out' happens. Nowhere else.
"The regulations are always being adjusted so you can’t talk about the system like this is not happening "
They're not a relevant concern to the MMT analysis. The answer is always "stop doing that then because it doesn't work".
I have no concern with interest rate juggling or silly attempts by central banks to try and control loan volume. We know that is a waste of time that does nothing other than unbalance the ship.
"The first flaw there is that zero interest yielding so called “debt” is not debt: it's money. Or to be more accurate, the lower the yield on so called debt and the more short term it is, the more it resemble money – with the end point being dollar bills which yield nothing by way of interest, with the time to maturity being zero."
It's always money. All of them are essentially spot and forward transactions. The short stuff in particular works entirely on discount.
“Money” is a figure of speech….
I tried a search, but nothing came up. But I'm sure I'm right. She said she deeply regreted it, but Simon wouldn't stop going on about it.
MMT says scrap yellow dollars and just use green dollars, which then puts government in the same floating exchange rate zone as the rest of us. The floating rate boundary then moves from around Treasury out to the border of the currency zone.
Interesting. What do you recommend to accomplish this.
"What do you recommend to accomplish this."
That's what ZIRP and getting rid of bonds does. It means the Treasury operates in green dollars from the get-go.
MMT recommends a fixed exchange rate between Treasury and the central bank. Other Keynesians want a floating exchange rate - so they discount Treasury Bills of various types via various ever more complicated mechanisms which effectively means Treasury operates in a different currency (yellow dollars).
It struck me after re-reading Paragraph 2 of Kalecki's famous essay "Political Aspect of Full Employment" and realised he was explaining how two floating rate currencies interact with each other.
And it explains why other Keynesians get upset when you propose consolidating the Treasury and the Central Bank. To them that would be like consolidating the Fed and the Bank of England.
Thanks, Neale. One further question.
I am not sure that "ZIRP and no bonds" is the "MMT position." Bill is the only one I am pretty sure is for ZIRP and no bonds. Warren is for ZIRP + short-term securities presumably at some minuscule interest to make them cash equivalent. I don't recollect what other MMT economists have said on this or who has weighed in. It hasn't seemed to me to be front and center like the JG. The JG is undoubtedly the MMT position in that all present MMT economist agree on this.
Oops, sorry for the name mixup, Neil. (I have a dear friend named Neale.)
" Warren is for ZIRP + short-term securities presumably at some minuscule interest to make them cash equivalent."
Not sure about that.
https://docs.google.com/document/d/1gvDcMU_ko1h5TeVjQL8UMJW9gmKY1x0zcqKIRTZQDAQ/edit
"...forward pricing is a direct function of the Fed’s policy rate, and with a policy of a positive term structure of interest rates, the forward price level increases continuously at the policy rate, which is the academic definition of inflation.
MMT understands that a permanent 0% policy rate is the base case for analysis for a floating exchange rate policy.
MMT understands that with a permanent 0% policy rate asset prices reflect risk adjusted valuations, and do not “continuously accelerate” as presumed by the term “asset price inflation.”
"
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