Bill Mitchell — A response to Greg Mankiw – Part 3

On the MMT JG and the buffer stock approach to controlling inflation. Important. For some reason, most critics ignore this approach, which is central to the MMT approach to both macroeconomics and policy formulation and policy space.

Interestingly, both Paul Krugman and Greg Mankiw, who come from different ideological perspectives (left and right respectively), but share much of the conventional paradigm (New Keynesianism), have difficulty coming to grips with what MMT economists are saying, apparently because they are trying to view it in terms of their own approach and conceptual frame instead of the very different MMT approach and framing.

This demonstrates the value of a pluralist and historical approach to the study of economics in learning to appreciate different perspectives and approaches on their own terms before critiquing them on the basis of one's own position. To do otherwise is an elementary mistake.

Bill Mitchell – billy blog
A response to Greg Mankiw – Part 3
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

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

Bill Black — Mankiw Whiffs on “Learning the Right Lessons from the Financial Crisis

So how does Mankiw answer the question he raises in his first sentence: “What caused the financial crisis of 2008?” He does not answer it. He not even explain why he does not answer his own question.

New Economic Perspectives
Mankiw Whiffs on “Learning the Right Lessons from the Financial Crisis”
William K. Black | Associate Professor of Economics and Law, UMKC

Lars P. Syl — The loanable funds hoax

Zombie theory.

Lars P. Syll’s Blog
The loanable funds hoax

Krugman and Mankiw on loanable funds — so wrong, so wrong
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Inequality and education

Greg Mankiw provides an empty argument that would be completely uninteresting to anyone without implicit appeal to his authority.

Lars P. Syll’s Blog
Inequality and education

Lars P. Syll | Professor, Malmo University

Peter Dorman — The Identity-Equals-Causation Fallacy, Yet Again

Informal fallacy of false cause.

Econospeak
The Identity-Equals-Causation Fallacy, Yet Again
Peter Dorman | Professor of Political Economy, The Evergreen State College

Greg Mankiew — Trumponomics

Greg Mankiw betrays his astonishing ignorance of monetary economics and the institutional structure of international finance. He thinks that the capital markets set US interest rates and determine the yield curve, so a shrinking trade deficit would reduce buyers of US Treasuries, driving up interest rates across the yield curve.

Their analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX. NX is negative (the trade deficit). Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up! They calculate this will bring in $1.74 trillion in tax revenue over a decade.

But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment.

As Professor Mankiw observes, this is a freshman error, and is he the one making it! Apparently he cannot distinguish between a model with simplifying assumptions and the real world. The good professor is describing a the world as he would like it to be, not the way it actually is at present.

The Fed sets the interest rate and the yield curve is a projection of the interest and expectations about future Fed rate policy. There is never a lack of USD existing as settlement balances to purchase Treasury securities because the amount of Treasury securities offered is equal to the reserves injected into the settlement system by government spending. Treasury security issuance simply serves to drain the excess reserves created by government spending from the settlement system as reserve accounts at the Fed into Treasuries, which are transferable time deposits held at the Fed.*

Furthermore, the Fed has the capacity to manage the amount of settlement balances in the settlement system so that all transactions clear. When the Fed is not paying IOR and doesn't choose to set the rate to zero, then it sets its target and lets quantity float, by using open market operations, for example.

There is nothing wrong with Professor Mankiw's model as an economic model. However, it is not representational model of way the real world works. While it might have relevance as a teaching gadget, students would be given the wrong idea if they were lead to conclude that the world works like that.

Greg Mankiw's Blog
Trumponomics
Greg Mankiw | Robert M. Beren Professor of Economics at Harvard University

* L. Randall Wray, Modern Money Theory: The Basics, at New Economic Perspectives

Bill Black — The Unprincipled and Mythical Mankiw Principles of Economics

In this first installment I discuss the unacknowledged contradiction that lies at the core of the two meta-myths in the preface to N. Gregory Mankiw’s textbooks. Mankiw is among the leading providers of introductory economics textbooks. In his preface to these volumes he preaches his first meta-myth in his first substantive sentence about economics.…

New Economic Perspectives
The Unprincipled and Mythical Mankiw Principles of Economics
William K. Black | Associate Professor of Economics and Law, UMKC

Bill Black — Stop Calling Deals That Help CEOs Pillage with Impunity “Free Trade”

This is the second column in my series on the “Mankiw’s myths and Mankiw morality.”  In the first column I showed that N. Gregory Mankiw’s own unprincipled principles of economics predicted that the financial system would be rigged by and for the financial CEOs.  In his New York Times column Mankiw purported to be writing to dispel myths, but actually did the opposite, asserting that the financial system could not be rigged.  I explained in the first column how Mankiw famously decreed that it would be “irrational” (rather than ethical) for a CEO not to “loot” a firm that he controlled.  I term this view that being ethical is irrational for a CEO “Mankiw morality.”  Under Mankiw morality, financial CEOs would have the incentive and the ability to rig the system and would do so repeatedly. 

My second column responds to some of Mankiw’s myths about the “trade deals.”  I again apply Mankiw morality and theory to refute Mankiw’s myths about “trade deals” being good for America.  Mankiw morality predicts that CEOs, whenever they can personally get away with it, will rig the system to create a “sure thing” allowing the CEO to become wealthy through fraud and other abuses.  The CEOs see regulators and prosecutors as the paramount risks to their ability to get away with rigging the system.  They look for every opportunity to discredit and render ineffective regulation, to make it difficult to prosecute elite white-collar criminals, and to ensure that agency heads and attorney generals will be appointed who are unwilling to effectively regulate and prosecute corporate elites.…

New Economic Perspectives
Stop Calling Deals That Help CEOs Pillage with Impunity “Free Trade”
William K. Black | Associate Professor of Economics and Law, UMKC

Bill Black — Mankiw Morality in a Mash Up with Mankiw Myths

Classic smackdown of Mankiw, part one.

New Economic Perspectives
Mankiw Morality in a Mash Up with Mankiw Myths
William K. Black | Associate Professor of Economics and Law, UMKC

My comment there:

1. Nice takedown. 

   Alan Greenspan himself admitted making a mistake in assuming deregulation would not be taken advantage of by leaders who would undermine their own institutions owing to perverse personal incentives.

   Greenspan - I was wrong about the economy. Sort of

   A perverse incentive is one that promotes rent-seeking, which is a form of free riding – in biological terms, parasitism. Neoclassical economics was designed to ignore or minimize the concepts of economic rent and rent-seeking that lie at the foundation of classical economics. 

   Historically, this can be traced to a reaction to Karl Marx and Henry George’s success at the time in calling attention to rent, which is another name for exploitation where rent extraction involves unpaid work rather than simply criminal or corrupt behavior. 

   The counter-attack was led by John Bates Clark, whose has been memorialized in conventional economic through the John Bates Clark medal. That’s right, they give a medal for this stuff!

   
   

ProGrowthLiberal — Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

Greg Mankiw of Team Republican tries to counter an attack from Paul Krugman on Rubio’s tax cut for the rich, which may come as breathing spell from the flap over that “analysis” by Gerald Friedman (my two cents on that flap in a bit).…

Econospeak
Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

ProGrowthLiberal

Bill Mitchell — A “Budget Responsibility Lock” – a ridiculous proposal

Technocrat smackdown.

If you have read Caplan’s book you will understand that these free-market zealots have a basic, inbred hatred for democratic choice and believe it interferes with the purity of the market and its ‘value free’ determinations.

It is a particularly odd argument when you think about it. The idea is that voters basically misunderstand economics and so pressure politicians to make poor decisions about matters relating to employment, immigration, growth, welfare etc.

But if we are so riddled with these misunderstandings how could we be trusted to ‘vote’ in the free market properly, when the optimality of that institution-free arrangement requires us to be rational decision-makers with perfect (or rational) foresight?

Caplan fudged the answer to that question by arguing that mostly we are rational – when it hurts us in dollars not to be. But apparently we are dichotomised individuals who jump from cool-headed rational decision-making when buying milk to irrational and fanciful ideas when supporting political decisions [that affect one's economic future].

Bill Mitchell – billy blog
A “Budget Responsibility Lock” – a ridiculous proposal
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Black — Obama & TPP: Every One That Doeth Evil Hateth the Light

President Obama wants the world to know that he takes it personally that the Democratic Party’s base opposes his latest effort to sell out the people of the world to the worst corporations through the infamous Trans-Pacific Partnership (TPP) deal. Obama blurted out at a press conference a number of conservative Republican memes as his sole basis for pushing TPP. He then launched personal attacks on Senator Elizabeth Warren and labor leaders (without naming them). Obama, who is famous for keeping his cool when criticized by the GOP, is thin-skinned when criticized by Democrats. Obama never raged at the Republicans’ “death panel” attacks on him, but he raged at Warren as supposedly making an equivalently openly dishonest attack on TPP’s secret drafting process.

One of the most reprehensible aspects of TPP is that it is (still) being drafted in secret – that it from us, the people – but with corporate lobbyists literally drafting their wish list. Obama made the critical mistake of personally attacking Warren, which is roughly equivalent to a small town mayor launching a personal attack on Jon Stewart. You know the results will be that Stewart will wipe the floor with the mayor....

Serious smackdown. Bill gives Barack a "black eye."

Obama is the one who infamously told the bankers he was protecting them from the American people’s demands for the restoration of the rule of law so that the banksters would be held accountable for leading the fraud epidemics that drove the financial crisis and the Great Depression. Obama, being Obama, phrased that in the form of a vile slander of the American people, claiming that they wanted to use “pitchforks” rather than prosecutions.

Ouch.

TPP is the opposite of “free trade.” In the jargon of its economic supporters, it is a moldering midden hiding the secretly drafted “rent seeking” provisions designed to help CEOs enrich themselves at the expense of the people of the world. Adam Smith, who supported freer trade, warned over two centuries ago that when CEOs meet secretly it promptly turns into a conspiracy against the public interest and warned that CEOs use their power to aid their own interests at the expense of shareholders and the public. Smith’s warned that it “ends in a conspiracy against the public, or in some contrivance to raise prices.”

Similarly, the even more conservative Frédéric Bastiat famously warned:

“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”

TPP is the legal system designed to authorize plunder with impunity....

The roundhouse punch.

Obama did not simply allow lobbyists to largely draft TPP in secret – he classified their drafts – treating them as national security secrets. This would be downright funny if it were not so wicked....

Because "national security."

OMG, the religious right was right. Obama is Satan!

TPP is a deal that Obama, the failed economists, and the CEOs knew could not survive the light. They were aware of the truth of Justice Brandeis’ famous observation that “Sunlight is said to be the best of disinfectants.” TPP was drafted in secret to avoid that disinfectant. People who are doing straight up deals in the public interest would never allow lobbyists to draft the deal and would have welcomed criticisms of their drafts. The secret drafting of TPP largely by the CEOs’ lobbyists was designed to maximize the ability of CEOs to plunder...

Read the whole screed. It's Bill in all his awesomeness.

New Economic Perspectives
Obama & TPP: Every One That Doeth Evil Hateth the LightWilliam K. Black | Associate Professor of Economics and Law, UMKC

Dessert.

The actual purpose of his column, however, was to smear any member of Congress (and he singled out Senator Elizabeth Warren as his example) who opposes TPP as not simply economically ignorant, “failing” a “no brainer” exam, but also engaged in “mendacity.” Given that mendacity is Mankiw’s primary area of expertise – and that President Obama soon joined Mankiw in claiming that Warren was lying in her criticisms of TPP – I thought someone should respond to Mankiw

Smackdown follows.

Bill fails Mankiew in Economics 101. As a former philosophy prof. I give him and F in Ethics 101.

Mankiw: "“it would be irrational for savings and loans [CEOs] not to loot.”

So it's OK.

Mankiw Mendacity and Morality and his League of Failed Economists

Ramanan — Free Trade? Heterodox Dissent

Useful quotes from Joan Robinson and Wynne Godley. Definitely keepers.

The Case For Concerted Action
Free Trade? Heterodox Dissent
Ramanan

Lars P. Syll — ‘How I became a Keynesian’ (Richard Posner)

Comparable to Nixon's "We are all Keynesians now," Richard Posner embraces Keynes and throws Mankiw under the bus. This is a quote you will want to keep and cherish.

Lars P. Syll’s Blog
‘How I became a Keynesian’Lars P. Syll | Professor, Malmo University

Greg Mankiw’s libertarian quasi philosophy

My comment there:

It boils down to asymmetric power in a class-based society, since the ruling elite determine the legal and other institutional arrangement that underlie markets. The chief flaw of conventional economics is failure to look at political science and sociology, which explain the issues clearly and show the reasons for conventional economics being a waste of time in that the models described ideal systems that don't actually exist and cannot actually exist in a modern society. Of course, heterodox economists do too because they get out while conventional economists seldom bother to look out the window.

This is revealed by the basic neoliberal and Libertarian utopian premise that everything would be fine if there were no government intrusion in markets. This is really the assertion that everything would be fine if there were no institutional arrangements at all other than a general agreement not to aggress. Remarkable that they cannot see that this is utopian idealism that makes no practical sense in the contemporary world.

The basic difference between neoliberalism and Libertarianism is that Libertarianism is actually utopian, where as neoliberalism is based on the ruling elite controlling the process and pretending "freedom and democracy," when the reality is oligarchic plutonomy, as the Citigroup plutonomy report acknowledged.

Until conventional economics takes cognizance of poli sci and sociology, not to mention complexity, conventional economists will have their heads either in the clouds or buried in the sand on which they stand. There is no foundation there in the real.

The bottom line is power and who holds it. Economically, power enables the extraction of economic rents that are the basis of wealth and influence. Power is class-based. Of course, flaks for the ruling class will never admit this and demonize it as "Marxism" and "communism." Other conventional economists go along to get along even though they must realize the truth of the matter unless they are incredibly stupid.

Lars P. Syll’s Blog
Greg Mankiw’s libertarian quasi philosophyLars P. Syll | Professor, Malmo University

Chuck Colins — Nit-Picking Piketty

Conservative economists tried to embarrass Thomas Piketty at the American Economic Association annual meeting in Boston. They ended up embarrassing only themselves.…

Piketty’s one poke back at the nitpickers came in response to their unanimous support for a progressive consumption tax as an alternative to any other progressive income or wealth tax. “We know something about billionaire consumption,” Piketty observed, “but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.”

Perfect response.

Inequality
Nit-Picking Piketty
Chuck Collins |  senior scholar at the Institute for Policy Studies (IPS) and directs IPS's Program on Inequality and the Common Good
h/t David Ruccio

Greg Mankiw - The New Economics of the Left

Greg Mankiw notices Bernie Sander's appoint of Stephanie Kelton as Senate Budget Committee (minority) chief economist and the rise of "heterodox economic theory."

Greg Mankiw
The New Economics of the Left

Lars P. Syll — The loanable funds fallacy

Keynes and Minksy answer Krugman and Mankiw.

Lars P. Syll’s Blog
The loanable funds fallacy
Lars P. Syll | Professor, Malmo University

Nick Rowe — The orthodox New Keynesian position on liquidity preference and loanable funds

Nick Rowe jumps into the fray between Lars P Syll and the New Keynesians over loanable funds, first stating his understanding of the New Keynesian position.

Setting those problems aside, I have my own disagreements with the ONKM perspective on this question. But this post is not about my own views.

This post is about Lars Syll's views. I would like to ask Lars if he agrees or disagrees with the ONKM view, as I have presented it/translated it above. Because a lot of stuff really does get lost in translation sometimes.

[My guess is that both Paul Krugman and Greg Mankiw would roughly agree with the above, but I could be wrong.]

Worthwhile Canadian Initiative
The orthodox New Keynesian position on liquidity preference and loanable funds
Nick Rowe | Associate Professor of Economics, Carleton Univerity