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Tuesday, November 29, 2011

MMT Update

Been following some interesting back and forth regarding MMT at (see below - the comments are public so I feel ok in re-posting them. It's not my intent to remove from context but I truly feel they epitomize the main back-and-forth re: MMT). I am thankful that the MMTers are finally having a discussion on the points that are causing the confusion - the "should/could" instead of "does". As I observe this from afar it becomes apparent that most MMTers prefer to start with the abstract theory and make 'should/could' assumptions about how the Treasury interacts with the Fed (namely consolidating their operations) - assumptions that at least in some cases are factually inaccurate. When one points out the inaccuracies, the response is, "that's a political problem, not an economic one." And then, you are back to my basic beef with MMT in that you cannot, ever, separate political institutions from economic institutions. The only reason the US is a monopoly of its fiat currency is due to the political institutions. So, ignoring real barriers upfront to a 'should/could' philosophy makes ones theory rather moot, in my opinion. This will become even more of a reality as the Fed is continued to be scrutinized for its actions and calls for audits are mandated.

But I am still learning this new and seemingly more realistic way of thinking about the government's role in money. Is my beef for style than substance? Commenters....please discuss.

One specific thought, reading the comments shows that perhaps the focus is existing solely on the interaction on the spending side of the coin - whether its a style disagreement or a substance disagreement. But I'm much more concerned about any real barriers on the tax side of the coin. What if the government made an error and released too much money. According to MMT, taxes could be raised to effectively remove it from the system. But taxation is political and SOLELY in the hands of the executive and legislative branches....

UPDATE - ongoing discussion

JKH said...
(The following is not directed at Dan K.’s articulate comment; it is rather a broad observation.)

I could almost get more value from reading “market monetarist” posts these days than from witnessing the blogosphere train wreck of tortured conceptualizations that has become "MMT”.

MMT has valuable insights into the nature of the monetary system. But it is ineffective as a platform for conceptual exposition of the monetary system. It seems incapable of distinguishing consistently between factual and counterfactual monetary operations. It seems intent on conflating these two parallel modes of analysis, with such stuff as “the government neither has nor doesn’t have money”.

It is not logically possible to present any interpretation of a monetary system that does not reference explicit institutional design assumptions. Monetary systems don’t exist without specific institutional design. In this regard, there are facts of actual prevailing design, and there are counterfactuals, and there are differences between those two things.

It is certainly possible to design an institutional monetary configuration in which “the government neither has nor doesn’t have money”. But the existing system as it is designed does not have this property.

I’d love to see MMT turned upside down in its expositional approach. But the MMT’ers are a small group, with a thoughtful investment in their chosen presentation, so I don’t expect this sort of change to happen. And understandably, like most of us, they probably don’t appreciate criticism at a fundamental level.

6:29 AM

Neil Wilson said...
"But the existing system as it is designed does not have this property."

It does when you consolidate the balance sheet of the government sector and 'zoom out'.

It very much depends what level of abstraction you are working on at the time.

I do this all the time when designing systems. Sometimes I'm zoomed out ignoring the specifics, and sometimes I'm zoomed in dealing with the nitty gritty - often below the level you talk about (how do transaction records get from A to B in a timely and secure fashion?).

Sticking at one level of abstraction, or constraining yourself by the 'current design' is a huge mistake.

What we can learn from the 'current design' we largely have. Now to explore what the new design should be to deliver the required goals.

7:42 AM

JKH said...

I'm aware of the abstraction. It's not a question of constraining one's view. It's about being clear on the starting facts.

If you consolidate all of the balance sheets in the world, what you end up with is a single balance sheet. On the left is all of the real assets of the world. On the right is a global net worth valuation of them.

All financial claims net out in such a consolidated view. But the conclusion from that is not that I "neither have nor don't have money".

Such a conclusion would be the height of silliness (unless you assume a design change to barter).

Yet it's the same point.

winterspeak said...
JKH: I think that's an excellent way to put things. The Federal Reserve is the currency issuer, not the Federal Government.

To what degree those two entities are truly distinct is a worthy topic, but fundamentally political, not economic.

10:41 PM


Nathan Tankus said...

It feels like we've finally gotten somewhere. on raising taxes in response to inflation the usual neo-chartalist (i refuse to call it modern monetary theory) argument is that automatic stabilizers should be designed so that increases in spending beyond excess capacity will increase tax revenues (and reduce public expenditures) so inflation is prevented. this avoids needing something absurd like congress desperately trying to respond to every change in the economy. to them the job guarantee is the ultimate automatic stabilizer since it stabilizes (and reduces) labor costs by buying up unemployed labor when private employment expands, increasing demand and reducing supply simultaneously and essentially "selling" (by allowing workers to be hired out of the jg program) which reduces demand and increases supply simultaneously. the job guarantee is essentially the principle of holding a buffer stock of commodities to keep prices constant applied to labor time.

the more advanced/minskyan/kaleckian/marxian argument is that to prevent inflation inside a full employment economy you need to slow the growth in demand that emanates from consumers who don't produce consumer goods. in economies that attempt to achieve full employment through stimulating private investment (minsky argues the post-WWII economy is this) inflation eventually accelerates because resources and workers are transferred to building private investment goods. consumer goods must of course be used to build this investment and provide subsistence for those involved (usually at above median incomes at that) so that increases in that kind of demand will increase claims on consumer output that can only be solved by increases in productivity, rises in price, or reductions in effective demand. this problem is compounded by the fact that increases in private investment tend to go along with increases in debt financing which increase capital's share of national income which necessitates further consumer demand emanating from non-consumer producing areas.

for a more detailed and better exposition see Minsky's paper entitled the strategy of economic policy and income distribution. also see stabilizing an unstable economy and pay close attention to the algebra.

Garth A Brazelton said...

I've read Minsky's "Stabilizing." It is a fascinating read and I highly recommend as well.

My question is less in the theory though - though that in and of itself I agree is important...I'm more concerned about the operational implementation.

Given our political animal, how would such corrective policies work effectively?

Nathan Tankus said...

well i have a bit of radical interpretation of Minsky.

My argument is heavily influenced by Minsky's (co-written) paper Market Processes and Thwarting Systems ( "A transitory semblance of stability can be achieved by policy interventions and institutionally constrained behavior. However, units learn how policies and institutions
affect the outcomes that result from their actions and try to adjust their behavior in the light of what they think
they know." I push this argument further by pointing out that one of the ways units adjust their behavior is through changed political behavior. following Minsky's argument that the industrial and financial structure is largely determined not by consumers but by "business men and bankers", i extend this out to being true for the political structure as well (i think the investment theory of politics backs this up theoretically and empirically).

Therefor policy interventions can only be effective (as in counteracting financial instability and creating a more equitable, better functioning economy) in two ways. The first is the businessmen and bankers who invest most in the political process are interested in policies that generate effective policy (either as an unintended byproduct or prevention of societal breakdown). The second is ordinary people investing more time (and to a lesser extent money) so as to constrain or eliminate the possible returns to political investment by businessmen and bankers interested in policies that generate instability and more inequitable outcomes. This, at it's best, takes the form of mass movements such as the thirties unionist movement, the civil rights movement and now, in my opinion, Occupy Wall Street.

In my eyes, over the long term (as in decades), the only way a sustainable, equitable and somewhat tranquil economy can truly be sustained is through an informed and critically thinking populace willing to use direct action (or the threat of direct action) at any time to limit the returns to political investment. Or, to make a long story short, Occupy Wall Street forever!

Tschäff said...
This comment has been removed by the author.
Tschäff said...

Here is a blog from one of the wiser of MMT students: discussing the same topic.

I haven't read the full post yet, or Nathan's comment yet (but will tomorrow). It is absolutely possible for the govt to not raise taxes enough to dampen spending. It's possible for them to keep taxes too high that spending is suppressed to the point of depression. This is (one of the many reasons) why a country can't function well without an effective govt. I posted on my wall a nice quote I found in Abba Lerner's 1947 classic Money as a Creature of the State:

The second most important problem that modern civilization has to solve if it is to survive the totalitarian threats to its existence is the prevention of severe inflations and depressions. (The first problem is, of course, the establishment of world peace before we slip into an atomic war by way of appeasement and/or preparedness.)

Depression occurs only if the amount of money spent is insufficient. Inflation occurs only if the amount of money spent is excessive. The government- which is what the state means in practice-by virtue of its power to create or destroy money by fiat and its power to take money away from people by taxation, is in a position to keep the rate of spending in the economy at the level required to fill its two great responsibilities, the prevention of depression, and the maintenance of the value of money.

Up till now governments have shirked these responsibilities, seeking refuge in an alibi of helplessness.

Tschäff said...

OK read the post and comments. Nothing more to add, and I agree with Nathan's first comment.. Regarding the second comment I adopt Max Weber's view that captialism's dynamism depends on a fragile balance between entrepreneurs, labor and lenders, with no one interest getting monopoly power. These interests are perpetually locked in a war for economic existence, so indeed we need occupy forever, but we could do without the rents (monopoly rents, financial rents, land rents) and be better off.

Garth A Brazelton said...

Interesting thoughts but still sounds rather idealistic to me....particularly your second thought Nathan. I don't see the populace engaging or even wanting to engage absent a complete revolt in the system....and I just don't think that likely. I think you may give people too much credit. Many people are idiots and I actually view it that too much involvement may be a bad thing if those that get involved are idiots.

Garth A Brazelton said...

...funny you post that's that link that made me post this post ;). I didn't think they answered the question very well (at all)...hence why I'm asking.

Garth A Brazelton said...

the biggest problem with OWS is that their need for 100% consensus...which is the same thing as assuming everyone is smart enough and on the same level so as to engage and agree on the most pressing issues. In fact, they can't agree on much of anything of substance and a good chunk of them are just 'mad'. OWS needs a leader - absent that their cause is hopeless, which is unfortunate because I do think some of the things some of them are fighting to change are very important.

Tschäff said...

What part wasn't cleared up?

MMT provides an extremely detailed framework for analyzing monetary systems. It strives to include institutional and political elements- they are necessary to include to avoid junky conclusions. As someone with a natural science background, their attention to the real world has been their greatest selling point for me.

The trouble is how to communicate this vast body of knowledge as simply as possible. Usually this involves metaphors and excluding nuances. It has been problematic. I started with Ingham's (a sociologist) Nature of Money and moved on to all of Scott Fullwiler's blogs and academic papers for my tactical logic.

Tschäff said...

it was a major time commitment, but you end up with the fullest story.

Nathan Tankus said...

of course it's an ideal. I don't think that's a criticism. How can you judge the good and ill of a society without an ideal to hold it against? I think you're too caught up in the negative experiences you've had with people in our society to see that their is nothing essential(as in essential to human nature) about their behavior. their is no "inherent" level of understanding of the world around us. what you perceive to be stupidity or intelligence is a social outcome of the institutions we have. those things are fungible.

I went to a high school that served students who predominately got kicked out, hated or failed at their old high schools. We had a very racially and economically diverse group student body. I watched as students streamed in who in other contexts some might call "stupid". I also watched as these same people transformed once they stopped getting treated like a prisoner and where given a chance to voice and develop their own opinions and critical analysis. Visitors from all over the world come to my high school. Unfortunately many leave assuming that the school is some sort of gifted program and only the "smart" kids can do something like we're doing. I think that narrative is unhelpful and untrue.

To the extent that consensus building gives people an outlet to start critically analyzing the world around them, i think it can be effective.

remember that consensus is not 100% of people voting for the same thing. it is the willingness to let something happen even if you disagree with it for the good of the group. also of course, their are many different consensus theorists who are very critical of the decision making process at OWS. Saying Consensus can never work because people, who have spent their entire lives competing in one way or another, who just started trying to build consensus are hitting some problems is like saying a baby will never be able to speak because the first sounds it makes don't make much sense.

Nathan Tankus said...

In addition, what is the alternative? hoping that some leninist style vanguard of smart people will all decide that they're gonna use their smarts for "good" and not for "evil? they will be some benevolent oligarchy of smartness that transforms our society for the better and makes life better for the "stupid" people? Sounds a lot more idealist then what I'm talking about...

I think the history of social movements throughout world history contradicts your notion that we "need" some particular leader to do the thinking for us.

Garth A Brazelton said...

I don't know what social movements you are talking about it....most/all major movements of our time have had a leader make them come to fruition.

Tsch: I've read some of Scott's stuff....he has not at all in my opinion addressed political constraints....if he has, please cite something specific.

Garth A Brazelton said...

I'm not sure what the best alternative is. I do know that no alternative will work - Repub or Democrat, libearal or conservative until our political processes and organizations are completely changed. I think I'm in agreement with many OWS on that point. But the only way to change the political process is via politics - but people won't engage in the current environment or if they do, because the environment is broken, their engagement is futile.

Those that do seem to engage are mostly just political-party motivated or liberal-vs-conservative ideology motivated or motivated because others force 'get out the vote' style pressure on them.

So regardless if you agree or disagree that a good chuck of our free-thinking populace is apathetic etc., I don't see a way out of the vicious circle.

Anonymous said...

Hi Garth,

Unfortunately, Scott is really the only guy being nuanced about the operations and taxonomy.

The consolidated/general/strong-form view most MMTers use to explains things is not how things work. I share in your frustration that many MMTers and their supporters are not clear about this. It seems some of them have even convinced themselves it does.

"When one points out the inaccuracies, the response is, "that's a political problem, not an economic one.""

I agree that's an unsatisfying response (though still a point worth making).

However, if you read Fullwiler's piece on operational realities, he explains why even assuming that the political constraints that exist today are never repealed, they are still not real constraints. And the reasons is the Fed still has the ability to set interest rates along the yield curve if it needs to. That's your answer.

Unfortunately, almost everyone over at Winterspeak and Heteconomist and the other MMT blogs can't seem to articulate it, and fall back on the insufficient answer that 'things can be if we wanted them to be.' They also confuse themselves because they don't understand the detailed accounting and operational tactics implemented at the Fed.

Regarding taxes and spending, the relevant issue is the relative quantities of each, not each alone. So for example, you state, 'what if we spend to much but can't raise taxes?' The option is also, instead of raising taxes, to cut spending. Same net effect on the deficit assuming the other is held constant.

That being said, both are still political issues. However, politics doesn't disprove MMT as an economic description/theory, though it might impact policy decision making.

That being said, I take nowadays as an interesting lesson in politics and fiscal policy. That is, society seems to be so afraid of inflation, that the main focus right now is on deficit reduction when we don't even have inflation (yet sky high unemployment and a balance sheet recession).

So, IMO, I don't think we need to worry about our society/politicians acting properly in response to inflation, if it actually ever happens.

wh10 said...


I think Mosler's reply to you here sums up the politics pretty well -

Though still, as I say, I see no reason why running larger deficits, if appropriate, when not at full employment will rid society's fear over inflation.

wh10 said...


I guess I would like to understand what type of research into the politics you would like to see. Models incorporating historical political decision making to indicate optimal fiscal policy?

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