Eric Tymoigne and L. Randall Wray — MMT 101: Response to the Critics Part 3

Adding the domestic private sector

New Economic Perspectives
MMT 101: Response to the Critics Part 3
Eric Tymoigne and L. Randall Wray

So Every Eligible Citizen is Guilty of Electoral Fraud?

(commentary by Roger Erickson)

Documents in JPMorgan settlement reveal how every large bank in U.S. has committed mortgage fraud

Are they all guilty as hell? Absolutely.

Are all of our politicians either liars or fools? Absolutely.

What's that say about our electorate? Must be something wrong with our mirrors!*




* Right. Couldn't be us. Or does this mean that people will do everything in their power to avoid thinking? Come to think of it, that could also explain our obesity epidemic. Thinking burns calories. The evidence is overwhelming ... but that never seems to matter, does it?

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Think Left — Why do politicians tell us Debt/Deficit myths which they must know to be untrue?

The New Economic Perspectives’ video clip on the Government budget, Deficits and Debt presented below (produced for educational purposes), debunks the myths that politicians tell their populations to justify ‘austerity’. In the case of the clip, it starts with 3 full minutes of American politicians misinforming the electorate. An identical montage aimed at the UK electorate could undoubtably just feature George Osborne’s utterances from his forthcoming Autumn statement scheduled for this Thursday (5th December 2013).

However, the reality is that all economists know that the deficit and debt mythologies are not true and ’have long known that the idea of balancing budgets over the cycle is a bit like a fairy story we tell to frighten the kids’.

Nice post. Nice intro to MMT.  Good work, JK.

Think Left

Why do politicians tell us Debt/Deficit myths which they must know to be untrue?

(h/t Andy Blatchford on FB)

James Leitner and Ian Shapiro — How to avert another debt-ceiling crisis

Consols. Like Chris Cook has been saying.

The Washington Post
How to avert another debt-ceiling crisis
James Leitner, president of Falcon Management based in Wyckoff, N.J., and Ian Shapiro is a professor of political science at Yale
(h/t Stephanie Kelton on FB)

Eric Tymoigne — The Fair Price of a Bitcoin is Zero

Everything you wanted to know explained.

*Footnote: Is all this consistent with MMT? Yes. MMT does not state that all monetary instruments are government issued or that every unit of account must have its origin in a government declaration. Monetary instruments can be created by anybody but their capacity to be widely used will vary with the capacity of the issuer to make others (willingly or forcefully) indebted to him. The state usually determines the major unit of account used and what the legal tender is but anyone can issue promises and use any unit of account they want (Easter Egg, Buckaroo, etc.).

New Economic Perspectives
The Fair Price of a Bitcoin is Zero
Eric Tymoigne

AFP — Germans want UNESCO listing for beer ‘purity’

German brewers say a five-century-old beer purity law deserves a spot on the UNESCO list for “intangible cultural heritage”. 

The law, called the ‘Reinheitsgebot’ in German, was introduced in Bavaria in 1516 and adopted nation-wide in 1906. It dictates that only water, malt, hops and yeast, and no flavourings or preservatives, may be used to make beer.

“If Germany is still regarded as the undisputed beer nation, that is due to the Reinheitsgebot,” said Hans-Georg Eils, president of the German Brewers Federation.

Its acceptance to the world heritage list “would be for German brewers and maltsters a sign of appreciation and an incentive at the same time,” Eils added.

The Federation calls the Reinheitsgebot the oldest still-valid food regulation in the world....

The Raw Story
Germans want UNESCO listing for beer ‘purity’
Agence France-Presse

Travis Gettys — Study suggests Occupy Wall Street movement undone by liberals’ need to feel unique (via Raw Story )

Study suggests Occupy Wall Street movement undone by liberals’ need to feel unique (via Raw Story )

Liberals tend to underestimate their similarity to other liberals, according to a recent study, while conservatives overestimate their similarities — and those differences may account for the relative political success of the tea party in comparison…

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Gennaro Zezza — The Next Bubble?

Is the U.S. economy heading towards another bubble? Since last week, the number of commentators on this subject has been growing, from Robert Shiller to Nouriel Roubini (on housing markets)...

Summing up, our findings suggest that U.S. non-financial corporations are in a healthy state – as measured by their net profits – but that this will not necessarily imply stronger U.S. growth and job creation. On the contrary, the data are coherent with a further increase in the concentration of income leading to financial speculation, in the U.S. as well as in foreign financial markets.

Restoring jobs and prosperity in the U.S. does not seem to be what U.S. corporations are working towards, and yes, the soaring stock market may change course very quickly, if “financial markets” make this decision.

Restoring sustainable growth in the U.S. (and elsewhere) requires a reversal of the trend in income distribution, since, as Stockhammer reminds us, “rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups,” and “higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages” – a fact we already investigated a few years ago.

Multiplier Effect

The Next Bubble?
Gennaro Zezza | Associate Professor in Economics at the Department of Economics of the University of Cassino, Italy, and a Research Scholar at the Levy Institute of Economics

Peter Cooper — Transcripts of Warren Mosler's Talk and Q&A session in Sofia, Bulgaria

Warren Mosler's contributions to the MMT Round Table in Sofia required a translator for the Bulgarian audience. As an alternative to watching the videos (see here), some might find it convenient to read transcripts of his talk and Q&A session.

heteconomist.com
Transcripts of Warren Mosler's Talk and Q&A session in Sofia, Bulgaria
Peter Cooper

Lars Syll — Modern economics — emperor without clothes

Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies toequilibria. What we do know is that — under very restrictive assumptions — unique Pareto-efficient equilibria do exist.

But what good does that do? As long as we cannot show, except under exceedingly unrealistic assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil.

Modern economics — emperor without clothes
Lars P. Syll | Professor, Malmo University

See also Dumb and dumber in modern macroeconomics and Microfounded angelic agents

Eric Tymoigne and L. Randall Wray — MMT 101: Response to the Critics Part 2

The Simplest Case: The Circuit with a Consolidated Government

New Economic Perspectives
MMT 101: Response to the Critics Part 2
Eric Tymoigne and L. Randall Wray

Why US baby boomers are retiring in Latin America (+video) (via The Christian Science Monitor)

Why US baby boomers are retiring in Latin America (+video) (via The Christian Science Monitor)

Former US Marine James Cummiskey is seen on one of his coffee farms near Medellín, Colombia.(Courtesy of Christian Gonzales/CIMA Coffee Farms) After 20 years in the US military, James Cummiskey was divorced and looking for a change. Relenting to his…

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Matias Vernengo — ISLM: a further explanation and a defense

The problem with mainstream theory is the notion of a natural rate, which is based on the principle of substitution which allows for 'factors of production' to be fully utilized. These are the problems that Keynes, by negating the idea of a natural rate, and Sraffa, by showing the logical problems of the principle of substitution, undermined. An ISLM without the natural rate is not only possible, but actually reasonably good as a tool for analyzing real economies.

Naked Keynesianism
ISLM: a further explanation and a defense
Matias Vernengo | Associate Professor of Economics, University of Utah

Noam Chomsky — America Hates Its Poor

This is an excerpt from the just released second edition of Noam Chomsky’s “Occupy: Class War, Rebellion and Solidarity,” edited by Greg Ruggiero and published by Zuccotti Park Press.

AlterNet
Noam Chomsky: America Hates Its Poor
Noam Chomsky

The bottom 70 percent or so are virtually disenfranchised; they have almost no influence on policy, and as you move up the scale you get more influence. At the very top, you basically run the show.

Sorry, Neoliberals: Inequality Is Driven by Greed, Not Technology

A new study shows low wages are really caused by low minimum wage, weakened unions and the effects of globalization....

As Eugene Debs said, “the class which has the power to rob upon a large scale has also the power to control the government and legalize their robbery.” 

AlterNet

Sorry, Neoliberals: Inequality Is Driven by Greed, Not Technology
Sean McElwee | Salon

Ohiyesa — Simplicity

"The native American has been generally despised by his white conquerors for his poverty and simplicity. They forget, perhaps, that his religion forbade the accumulation of wealth and the enjoyment of luxury. To him, as to other single-minded men in every age and race, from Diogenes to the brothers of Saint Francis, from the Montanists to the Shakers, the love of possessions has appeared a snare, and the burdens of a complex society a source of needless peril and temptation. Furthermore, it was the rule of his life to share the fruits of his skill and success his less fortunate brothers. Thus he kept his spirit free from the clog of pride, cupidity, or envy, and carried out, as he believed, the divine decree — a matter profoundly important to him.

"It was not, then, wholly from ignorance or improvidence that he failed to establish permanent towns and to develop a material civilization. To the untutored sage, the concentration of population was the prolific mother of all evils, moral no less than physical. He argued that food is good, while surfeit kills; that love is good, but lust destroys; and not less dreaded than the pestilence following upon crowded and unsanitary dwellings was the loss of spiritual power inseparable from too close contact with one's fellow-men. All who have lived much out of doors know that there is a magnetic and nervous force that accumulates in solitude and that is quickly dissipated life in a crowd; and even his enemies have recognized the fact that for a certain innate power and self-poise, wholly independent of circumstances, the American Indian is unsurpassed among men."

Ohiyesa (Dr. Charles Alexander Eastman), Santee Sioux

The Soul of the Indian

Houghton, 1911 (Public Domain)

Brian Romanchuk — What Is The Primary Fiscal Balance, And Why Its Use Should Be Avoided

As I noted in my article describing the impact of rising rates on fiscal policy, my model did not follow standard conventions in mainstream economic analysis. This was deliberate, as I feel that standard analysis techniques have limitations when analysing fiscal policy dynamics. I will break up this discussion into a several posts, each discussing one topic, as there is considerable background information to cover for each subject.

A great deal of analysis of fiscal policy is based upon analysing the trend in the primary budget balance. I explain in this post why this is a mistake, as the primary budget balance gives a misleading view of fiscal settings…

Bond Economics
What Is The Primary Fiscal Balance, And Why Its Use Should Be Avoided
Brian Romanchuk

Take away:

The paper “Fiscal Policy In A Stock-Flow Consistent Model”, by Wynne Godley and Marc Lavoie, gives a more formal explanation of how to approach fiscal policy using SFC models. They have a number of results within that paper, but here is one interesting point with regards to "explosive" debt dynamics:

Our simple SFC model can, however, provide us with a more surprising result. It is usually asserted that for the debt dynamics to remain sustainable, the real rate of interest must be lower than the real rate of growth of the economy for a given primary budget surplus to GDP ratio. If this condition is not fulfilled, the government needs to pursue a discretionary policy that aims to achieve a sufficiently large primary surplus. We can easily demonstrate that there are no such requirements in a fully-consistent stock-flow model such as ours.

They additionally argue that the emphasis on monetary policy is misplaced, and that fiscal policy could theoretically achieve the inflation and output targeting that has been currently delegated to central banks.

Robert Oak — Worker Wage Inequality Myth Exposed

It's cyclical rather than structural.

In America today there is a crisis. That crisis is economic inequality. The U.S. workforce has been blamed and dismissed for the growing gap between rich and poor. Much effort has gone into blaming the victim. Americans have been called fat, lazy and stupid along with the never ending drumbeat claim U.S. workers are uneducated and do not have enough technological skills. The droning mantra to blame workers themselves for the growing income gap just got a loud blast ofnot so fast. Now a new study blows that blame the workers mantra out of the water. There is no evidence that technological shifts, a lack of education or the lack of technical skills is the cause of the great, growing cataclysmic chasm of income inequality in the United States.

The Economic Populist
Worker Wage Inequality Myth Exposed
Robert Oak

Peter Turchin — Blame Rich, Overeducated Elites as Our Society Frays

Complex human societies, including our own, are fragile. They are held together by an invisible web of mutual trust and social cooperation. This web can fray easily, resulting in a wave of political instability, internal conflict and, sometimes, outright social collapse.
Analysis of past societies shows that these destabilizing historical trends develop slowly, last many decades, and are slow to subside.

The Roman Empire, Imperial China and medieval and early-modern England and France suffered such cycles, to cite a few examples. In the U.S., the last long period of instability began in the 1850s and lasted through the Gilded Age and the “violent 1910s.”

We now see the same forces in the contemporary U.S. Of about 30 detailed indicators I developed for tracing these historical cycles (reflecting popular well-being, inequality, social cooperation and its inverse, polarization and conflict), almost all have been moving in the wrong direction in the last three decades.

The roots of the current American predicament go back to the 1970s, when wages of workers stopped keeping pace with their productivity. The two curves diverged: Productivity continued to rise, as wages stagnated. The “great divergence” between the fortunes of the top 1 percent and the other 99 percent is much discussed, yet its implications for long-term political disorder are underappreciated. Battles such as the recent government shutdown are only one manifestation of what is likely to be a decade-long period....

Bloomberg
Blame Rich, Overeducated Elites as Our Society Frays
Peter Turchin | Vice President of the Evolution Institute and Professor of Biology and Anthropology at the University of Connecticut

JKH — Comments on – “Modern Money Theory 101: A Reply to Critics” by Éric Tymoigne and L. Randall Wray

JKH responds to Eric and Randy's “Modern Money Theory 101: A Reply to Critics.”

Monetary Realism
Comments on – “Modern Money Theory 101: A Reply to Critics” by Éric Tymoigne and L. Randall Wray
JKH

Sam Pizzigati — From Rome, Five Basic Insights on Inequality

In plain yet powerful language, Pope Francis is challenging the givens of our deeply unequal world - and helping inspire resistance to it.

Sometimes you don’t have to say anything “new” to make news. Consider, for instance, the “apostolic exhortation” the Vatican released last Tuesday.

This statement from Pope Francis, observers note, didn’t really break any bold new theological ground. But the Pope’s exhortation, the first all his own since he stepped onto the world stage last March, still made front pages the world over — and fully merited all that attention.

What makes this new papal statement so significant? No global religious figure has likely ever before denounced economic inequality with as wide-ranging — and as accessible — an assault.

Commentators are already tracing the roots of the new exhortation, formally titled Evangelii Gaudium, or The Joy of the Gospel, in the Catholic religious tradition. But the statement also seems to draw inspiration from the world’s most insightful research into inequality’s economic, social, and political impact.

And just what insights can we take from what Pope Francis has to say about inequality? These five jump out most dramatically.....

Truthout
From Rome, Five Basic Insights on Inequality

Sam Pizzigati, Inequality.org | Op-Ed

Peter Buffett: Big Philanthropy and Philanthro-Feudalism — Laura Flanders Interview

Laura Flanders' interviews stream at GRITtv.org. This week, Peter Buffett, son of billionaire investor Warren on the conflict between capitalism and humanism. Says Buffett: "You can't have both."

Truthout
Peter Buffett: Big Philanthropy and Philanthro-Feudalism
Laura Flanders, GRITtv | Video Interview

Reuters — Robert Shiller, Nobel Winning Economist, Warns Of U.S. Stock Market Bubble

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.

The Huffington Post
Robert Shiller, Nobel Winning Economist, Warns Of U.S. Stock Market Bubble
Reuters

David Ruccio — "Such an economy kills”

Marxian Notre Dame economics professor David Ruccio reviews Evangelii Gaudium and its implications. Nice analysis by Professor Ruccio, and a good blueprint for change by Francis in which he sets the objectives but not the means, since different countries will have to address these goals in their own way based on context.

... Francis, without providing institutional details, outlines a general approach to work that simply cannot be provided by the current wages system. It creates an opening to imagine a radical reorganization of the economy, at both the microeconomic and macroeconomic levels, in which workers participate in making the fundamental decisions in their workplaces and the economy as a whole is coordinated (might we say planned?) so that existing inequalities and forms of exclusion are eliminated.

In the end, Evangelii Gaudium suggests a fundamental reorientation of the current economic debate: to admit the devastating effects of current economic arrangements on the broad masses of the population and to take up the imperative of restructuring the economy in the interests not of the tiny minority at the top but of those at the bottom who are subjected on a daily basis to processes of exploitation, oppression, and exclusion.

Occasional Links & Commentary
"Such an economy kills”
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Der Spiegel — Netherlands loses AAA rating

The Netherlands lost its top credit rating on Friday as S&P moved to downgrade the country as a result of its weak economy. Holland had previously been a stable point in the euro crisis. Only 10 countries, including Germany, still retain AAA status worldwide.

Spiegel Online International

Weak Growth: Agency Strips Netherlands' AAA Rating
(h/t Naked Capitalism)

What An Obscene Concept - The NAIRU Straight Jacket

(commentary posted by Roger Erickson)

NAIRU Straight Jacket

It was malformed from the start, by starting from the unacceptable position that NOMINAL is equatable to REAL.

Hint to Uncle Milt. Try starting from an axiom based on the unceasing demand for unpredictable adaptation, rather than mal-adaptation. NAIRU is what you get if a rentier takes a stab at redefining reality.

An offshoot of Creationism?

How did Economic Creationism become "mainstream?" When Luddite rentiers made a stab for uber-merchant supremacy over nominal vs real policy? And the tail-end "succeeded" in wagging the Middle Class dog? (And thereby began to kill the Middle Class.*)

Watch “OECD NAIRU stupidity” on YouTube.

Then consider reconsidering EVERYTHING about how you vote.

For our Adaptive Rate to stay the same (or preferably increase), everything must change? Why? In order to adapt to unfolding reality ... NOT just to arbitrarily nominal imagination, or merchant preferences (which obviously must float, in order to continuously chase unpredictable reality).


* Note, a tail wagging a dog is equivalent to a parasite wagging the host it lives within. The parasites only real choice is to let both live, or kill both. Everything in between is tilted one way or the other.

Chris Dillow — Building Character

The fact that we are discussing this itself shows the depth of the problem. Aristotle decided this issue in the Nichomachean Ethics, summarizing the classical education of Aristotle's day. It's the staple of virtue ethics based on the progressive unfolding of excellence (Ancient Greek: ἀρετή). 

Virtue ethics was not only the key classical teaching about development in the West but also in China and India, and judging from what we know of tribal cultures, there as well. 

In tribal cultures the hero is the great distributor rather than the great accumulator. Recall the scene in Lawrence of Arabia where the shaykh says to Lawrence, "I am a river unto my people," and the tribe cheers wildly.

Virtue ethics and deontological (rule-based) ethics overlap in many cases, since cultural institutions make arrangements though rules, customs, and conventions for education based on building character. 

Since the Golden Rule (reciprocity) is the most predominant deontological principle historically, the overlap with virtue ethics should be evident. Human beings are social animals. Hence, reciprocity, fairness and justice are key elements in character. All parents — or almost all parents anyway — teach their children sharing as part of the socialization process.

Consequentialism was considered to follow from developing excellence since a person of character would act in accord with the good of all and not chiefly out of self-interest. However, some versions of consequentialism are based on pursuit of self-interest. Classical authors like Aristotle addressed and rejected such arguments, showing why the pursuit of fame, fortune, power or pleasure cannot be considered the summum bonum.

BTW, without understanding this debate over approaches to ethics it is difficult to critique the contemporary assumption of utility maximization based on so-called rationality fully. It has been dismissed by the wise for ages as puerile and leading to bad character.

“It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question.”
― John Stuart Mill, Utilitarianism

Stumbling and Mumbling
Building Character
Chris Dillow | Investors Chronicle

Merijn Knibbe — Shocking! Breaking! Young economists discover that lower income leads to lower consumption!

This line of reasoning is of course influenced by the ideas of people like Milton Friedman who mixed up non-monetary consumption (i.e. the use of consumer goods) and ‘utility’ with monetary consumption (i.e. the purchase of consumer goods) and production, to argue that consumption was non-cyclical, signifying that all kinds of counter-cyclical government policies were not necessary. But monetary consumption is cyclical and contrary to the statements of Gerlach-Kirsten, Merola and O’Toole it has been quite cyclical all along, especially expenditure on consumer durables. In the real world, the smoothing of the use of these durables leads to more cyclical purchases!

Dear friends, if post war consumption did not show the large cyclical developments of the past this was because incomes were smoothed by automatic stabilizers, minimum, wages, whatever, and not because households smoothed expenditures. However – governments have given up on this, at least in the EU, and ultra-unemployment (oops, ultra-unemployment is not even mentioned in their article…) and volatile expenditure are back, together with highly volatile consumer expenditures.

Real-World Economics Review Blog
Shocking! Breaking! Young economists discover that lower income leads to lower consumption!
Merijn Knibbe

Eric Tymoigne and L. Randall Wray — MMT 101: A Reply to Critics Part 1

This is Part 1 of a six part series in which we deal with critics of MMT. As readers of this blog know, our critics continually raise the same old tired critiques of MMT. They scapegoat MMT by attributing to us claims we’ve never made. They take our words out of context to build up a strawman that they attempt to destroy. No matter how many times we respond to a particular critique, another critic tries to use it again. Warren Mosler used to use the analogy of the “Bop a Gopher” game at the arcades: you bop one and another pops up.

While we know that it’s a Sisyphean task to disabuse the critics of their cherished and wrong-headed arguments, we thought it would be useful for those who come to MMT with less prejudice to have at hand responses to five categories of critiques. Today we will provide an introduction to the series. Each of the next five posts will deal with one of the critiques. We’ll also append a list of the references used for this entire series.

For those who want to skip to the chase, you can go to Levy Institute to download the full working paper on which this series is based. Those who prefer bite-sized pieces can wait for the posts. As we go along we’ll respond to comments and will make adjustments to clarify the argument.

For long-time readers of NEP, none of this will be particularly difficult. It will, however, be long. Perseverance will be required. We mean to be as thorough as we can be. Bopping gophers requires diligence.

New Economic Perspectives
MMT 101: A Reply to Critics Part 1
Eric Tymoigne and L. Randall Wray