Bill Mitchell — An economist trying to stay relevant long after he lost it

This is my Wednesday blog post where I write less or perhaps research the blog post less – both of which save me time to do other things. Today a few snippets. One snippet looks at an article in Marketwatch – What Modern Monetary Theory gets ‘plain wrong,’ according to former IMF chief economist (June 11, 2019). This article should put to rest any claims that the mainstream New Keynesian macroeconomic consensus understands Modern Monetary Theory (MMT) or that MMT is somehow explainable within the mainstream framework. The ‘we knew it all along’ camp who are trying their hardest to stay relevant at a time when it is increasingly obvious that the mainstream economics they preach has nothing valid to say about the realities of the world just had the carpet pulled out from under them by one of their own....

Bill Mitchell – billy blog
An economist trying to stay relevant long after he lost it
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brad DeLong — Debt Derangement Syndrome

"We knew it all along."

Project Syndicate
Debt Derangement Syndrome

Brad DeLong | Professor of Economics, UCAL Berkeley

Matias Vernengo — Functional Finance, MMT and Blanchard's Presidential Address

More about Blanchard than MMT but worth a read since it provides more evidence that MMT is getting noticed — and attacked by the mainstream (read Establishment). Both are positive signs. When they can no longer ignore you, they attack you..

Naked Keynesianism
Functional Finance, MMT and Blanchard's Presidential Address
Matias Vernengo | Associate Professor of Economics, Bucknell University

See also

Below the text of the first Godley-Tobin Lecture by James K. Galbraith.

A global macroeconomics – yes, macroeconomics, dammit – of inequality and income distribution

Olivier Blanchard tweet

https://twitter.com/ojblanchard1/status/1070776221741580288

Bill Mitchell — The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 2

This is the second and final part in my discussion about the latest attempts by the IMF and notable New Keynesian macroeconomists to keep the ‘fiscal contraction expansion’ lie alive. The crisis in Italy is once again giving these characters a ‘playing field’ to rehearse their destructive ideas that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. In their article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics continue to argue the case for austerity in Italy as the only way to engender growth. In this second part of my analysis of their argument I show that there is little evidential basis for concluding that Italy is a special case. I argue that imposing fiscal austerity on Italy will turn out badly. The broader conclusion is that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises.

Bill Mitchell – billy blog
The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – 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 Mitchell — The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1

Pathetic was the first word that came to mind when I read this article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – written by Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics. Here is a former IMF chief economist and a former German economic bureaucrat continuing to rehearse the failed ‘fiscal contraction expansion’ lie that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. But the ‘boys are back in town’ (sorry Thin Lizzy) and Blanchard and Zettlemeyer are falling in behind the IMF and the European Commission against the current Italian government by demanding fiscal cutbacks. It will turn out badly for Italy if the government buckles under this sort of pressure. It once again shows that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises. This is Part 1 of a two-part analysis of the latest incarnation of this ruse my profession inflicts on societies....

Bill Mitchell – billy blog
The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

David F. Ruccio — Laughter is the best medicine

So what are the problems according to Blanchard and Summers? In their view, “the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities.”

Only mainstream macroeconomists could possibly have thought that capitalism is self stabilizing. The rest of us—who have read Marx and Keynes as well as the work of Robert Clower, Hyman Minsky, and Axel Leijonhufvud—actually knew something about the roots of capitalist instability: the various ways a monetary commodity-producing economy might (but not necessarily) generate imbalances and instabilities based on the normal workings of the system.

Yes, of course, temporary shocks can have permanent effects. How could they not, when tens of millions of people are thrown out of work and, especially in the wake of the most recent crash, inequality has soared to new heights?

And then there are those “non linearities,” the idea that financial crises are characterized by feedback effects such that shocks, even small ones, “are strongly amplified rather than damped as they propagate.” Bank runs are the quintessential example—whether customers demanding their deposits in the first Great Depression or the run on financial institutions (including insurance companies that issued credit default swaps) that occurred in the midst of the second Great Depression. But that’s not all: when corporations, facing a declining profit rate, choose to sell but not purchase, they make individually rational decisions that can have large-scale social ramifications—for workers, indebted households, and other corporations (on both Main Street and Wall Street).

So mainstream macroeconomists appear to be waking up from their slumber and seeing capitalism as it is—and as it has functioned for 150 years or so.

Moreover, the reason that conventional economists are concerned is not economics but politics. Capitalism is not working and the result is social dysfunction that is creating a political backlash against not only politicians but also economists. I suspect that if this were not happening, everything would be just fine. Even so, they are not actually questioning basic assumptions, the adverse consequences of which heterodox economists and political theorists have pointed out from many different angles.

Occasional Links & Commentary
Laughter is the best medicine
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

The real sea change is the third one -- the reconsideration of what recessions really are. Most modern econ theories posit that recessions arrive randomly, instead of as the result of pressures that build up over time. And they assume that recessions are short-lived affairs that go away of their own accord. If these assumptions are wrong, then most of the theories written down in macroeconomics journals over the past several decades -- and most of those being written as we speak -- are of questionable usefulness....

Bloomberg View
Fixing Macroeconomics Will Be Really Hard

Noah Smith, columnist

Lars P. Syll — NAIRU religion

Olivier Blanchard learns worse than nothing from his stint as chief economist for the IMF.

Lars P. Syll’s Blog
NAIRU religion
Lars P. Syll | Professor, Malmo University

Bill Black — The IMF “Defense” of it Actions against the Greeks is an Unintended Confession

Bill skewers the Troika and the IMF in particular.

New Economic Perspectives
The IMF “Defense” of it Actions against the Greeks is an Unintended Confession
William K. Black | Associate Professor of Economics and Law, UMKC

Frances Coppola — Colds, strokes and Brad Delong

Economic and policy malpractice. Who do we sue for damages?

Having said that, Brad's last comment is spot on:

The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.

This is only half right. It's treating a preventable condition after the fact. Why did governments adopt ideologies that enabled not only rent capture but also state capture in the first place. 

The answer is simple. It is the result of a failure of representative democracy to prevent the development of oligarchic "democracy." This is a form of plutonomy similar in many ways to feudal aristocracies. It is based on institutional arrangements dictated by special interests, namely, the vying factions of a ruling elite who carve up the spoils among themselves based on their ability to gain and wield power.

Coppola Comment
Colds, strokes and Brad Delong
Frances Coppola

Dirk Ehnts — IMF’s Blanchard: fiscal policy part of the solution against stagnation

In a modern economy with a sovereign currency, both banks and the government can create additional deposits for the private sector. Banks achieve that through lending, and the government through bond issuance. A third way, which doesn’t work for everybody, is to have exports higher than imports, which must result in a net inflow of net financial assets, among them deposits (ex-post). In the euro zone, the private sector does not want to borrow even though interest rates are at zero. If you want a cause, then name it confidence: the firms and households are pretty confident that in this situation of weak demand, high unemployment and falling prices they do not want to more borrow. 

It seems like the only way to get the monetary circuit going in Europe is through the creation of private sector deposits by a) cutting taxes (for those who can reasonable expected to use the additional deposits for spending) or b) increasing government spending (which directly creates deposits for the private sector). What this does not mean is a) government has to be bigger (let them hire private companies to do public jobs if you think that it is welfare-improving) or b) that this will become a permanent feature of the economy. As long as the private sector does not spend, government jumps in. When aggregate demand runs hot, taxes can be increased and the central bank’s interest rate hiked up. This would constitute a return to normal. No mass unemployment, the usual bickering about higher taxes, and savers getting money for nothing.

The problem lies in the insistence on "structural reform" (lower public spending and instituting wages "flexibility") in order to become "more competitive" globally, which is a race to the bottom that is deflationary.

econoblog 101
IMF’s Blanchard: fiscal policy part of the solution against stagnation
Dirk Ehnts | Berlin School for Economics and Law

Olivier Blanchard — Where danger lurks

Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.

Well, he has the right idea anyway. Now he just needs the right method. Calling MMT. And cue Hyman Minsky.

vox.eu

Where danger lurks
Olivier Blanchard | Chief economist, IMF, on leave from MIT

See also Peter Radford, Study the Shocks at The Radford Free Press

Randy Wray — Where Danger Lurks: The Dark Recesses of the Orthodox Mind

Here’s an unintentionally–but riotously–hilarious mea culpa by Olivier Blanchard.…

In the world that Blanchard and other mainstreamers modeled, “economic fluctuations occurred but were regular, and essentially self correcting. The problem is that we came to believe that this was indeed the way the world worked.” …

In other words, like the drunks who look for their keys under the street lights, Blanchard preferred to model impossible worlds because the math was easier. The world—obviously—is not linear, but the math skills of economists were not sufficient to model real, nonlinear worlds.

New Economic Perspectives
Where Danger Lurks: The Dark Recesses of the Orthodox MindL.
Randall Wray | Professor of Economics, University of Missouri at Kansas City

The first principle of general semantics is, "The map is not the territory." The great temptation of rationalism is confusing maps with territory. It's why the scientific method is empirically grounded in testing in addition to being rationalistic with respect to theory. Theory alone is speculation.

Matias Vernengo — Blanchard and the lessons of the crisis, again

The excuses that aren't.

Naked Keynesianism
Blanchard and the lessons of the crisis, again

Matias Vernengo | Associate Professor of Economics, University of Utah

circuit — Fiscal austerity: A solution looking for a problem

circuit shows how expansionary fiscal austerity is not supported by fact but is ideologically driven.

Fictional Reserve Banking
Fiscal austerity: A solution looking for a problem
circuit

Ann Pettifor — If the god Janus were an economist, he would work for the IMF

In our 2010 report, Professor [Victoria] Chick and I warned explicitly and on the basis of a century of publicly available data, that in a slump, fiscal consolidation increases unemployment and cuts private investment. 

An institution with a staffing of about 1100 professional economists (most of whom have PhDs) and an overall personnel budget of about$800 million– failed to make that correct call.

Instead, the IMF now admits that it ‘significantly underestimated’ the impact of public spending cuts on employment and investment.

Getting macroeconomic forecasts and policies wrong has consequences: in the low income countries in the 80s and 90s the consequences of the IMF’s failed policies were bankruptcy and impoverishment for many nations.

Millions of people lost a future – and the opportunity to thrive.

PRIME — Policy Research in Macroeconomics
If the god Janus were an economist, he would work for the IMF
Ann Pettifor | Director

At least Blanchard and Leigh have admitted a problem. The eurocrats? Not so much.

But, even then, Blanchard's explanation is also mistake, as Pettifor explains.

On the two-faced Janus analogy, perhaps the Native American observation, "the white man speaks with forked tongue," is more apt.

See also Paul Krugman, The Big Fall