Neo-Chartalism, Part II

I respond to the back-and-forth between Paul Krugman and MMT proponents (Wray, Galbraith).

I will put this caveat up front:  I may not 'get' MMT...despite reading numerous papers, blogs, etc. on the subject.  I don't see this as my failure.  I see this as the proponent's of MMT's failure.  They only ever respond with vague notions - never anything substantial.  This is a challenge.  Try convincing me.  Because if you can't convince me, you sure as hell won't convince mainstream economics, or this country. 

Krugman and Wrary back and forth: HERE

Garth Brazelton July 20 at 1:36pm - my general discussion with an MMT proponent
Still not convincing. No economist denies the obvious that technically the government faces no legal or operational constraint to money creation- or I should say bank reserves so as not to contradict circuitism. Krugman makes a valid argument that the government does however face choice of default or risk hyperinflation. Wray counters that by either putting his faith in politicians (which never makes for good policy) or then denying the problem outright by pointing to automatic stabilizers. I would say his latter argument is more assumption laden than anything I've ever read in any mainstream text. Who is to say the stabilizer would offset the spending over time? If taxes do need to be raised because spending occurs past so-called full employment (which is defined as what by MMTers), who is taxed and for how long? And politicians will do this for economic reasons only? I don't think so. MMT is the challenger - it has the burden of proof here.... So far I don't see remotely resembling a useful or reasonable argument to justify it's existence as a "theory.". It keeps saying that everyone else thinks the government is operationally constrained. No one is saying that. I at least am saying they are "effectively" constrained due to the reality that there are costs associated with deficits (including country credit ratings and foreign perception which seems to be often ignored by MMTers), which MMTers seem to just shrug off.
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Now, my thoughts...
So very clearly, Wray does not agree with me that defaults matter / are a policy concern. Wray is suggesting governments would 'rationally' fight against hyperinflation - that assumes a lot about the abilities and intellect of politicians, which I for one, am not going to go there. As Zimbabwe attests (and I know quite a bit about Zimbabwe), hyperinflation can develop faster than most politicians can draft 800 page pieces of legislation - let alone passing it.

Countries can go bankrupt. If we reach the point where our currency is worth less than the stuff we use to wipe our asses with, then we will become Zimbabwe. That may not be government bankruptcy, but that is private sector bankruptcy as corruption, cronism, milita activity along with the inevitable call for price controls, net capital outflow (flight) ensues. Worse case scenario but it's possible - and MMT (chartalism) is all about telling people that all this stuff is 'impossible.' Once the government is over-thrown (like Zimbabwe almost was) ...well...there's your governmental default... there's your restart button.

Even if it doesn't reach that extreme, the fluctuations in exchange rates, price levels, tax levels, the level of uncertainty that all that would create (something 'true' followers of Keynes and Minsky should appreciate) would surely become serious problems. I don't prefer deflationary risk to inflationary risk - I recognize the pitfalls of both - frankly, in this recession, I don't see risk of either to any huge degree right now. If prices started declining dramatically in the broad economy I'd be concerned, but they are not. I agree Ricardian equivalence (so called) is perhaps the most idiotic idea ever to come out of economics - but it doesn't follow that we should be creating inflation expectations by actually creating inflation risk via spending.

In the end, DUH, the government is monopolizer of our currency. That doesn't mean anything special - and no real economist is saying otherwise. It's pretty clear the Chartalists have this obsession with talking about how the government is not operationally constrained and about absolutes (very much counter to the post-Keynesian tradition which I find interesting). They seem to ignore that we, and the government are all politically, economically, and realistically constrained. In the end, I don't want to put all that power in the hands of politicians. I'm no monetarist, but they are correct in their critique of fiscal policy in this regard.

I remember when post-Keynesianism used to stand for realism and challenging assumptions. It was about promoting certain regulations and private market behaviors to fix the inherent problems in the private sector of a capitalist society - not about liberal spending. Government can do good work, and some spending is important which I've talked about here before (infrastructure, promoting a new direction in terms of energy) but to base a whole monetary (really, a fiscal) movement around amorphous 'spending' is contrary to common sense. Chartalism is not seemingly based in reality and is riddled with assumptions - They have created this Bolshovikian "reality" in their own minds - that our politicians can save the day and smooth out the business cycles - that deficits don't matter because we are going to create this automatic employment mechanism - a philosophy not wholly different from the 1960's Keynesians. If this is the new post-Keynesianism, count me out.

Re-reviewing Chartalism / Neo-Chartalism

At request, I am re-reviewing this hot-button post-Keynesian topic. There seems to still be a debate within the post-Keynesian world about whether chartalism (of which I am still very skeptical) is in competition with or in conjuction with circuitism (of which I believe).

I am therefore revisiting chartalism - re-reading things I've read, and reading new stuff. I have to say I still have concerns about chartalism - about it's seeming tendency to ignore inflation, about the seeming assumption of a foreign exchange market in equilibrium, about its assumption that the demand for money is a function of the need to pay taxes as opposed to cancel bank obligations, etc. Basically, I have concerns like this and of those as outlined by Febrero here.

I note that Bill Mitchell, a current proponent and leader in the chartalism area, seems to answer the 'inflation' critique I mention above by pointing out that apparently with chartalism the fiscal authority (government) would need to create a base wage / full employment mechanism in order to control inflation - this as opposed to the current classical thinking of having monetary authority controlling inflation. I have to say that that this is a novel idea to me, and I'm considering buying his book to read up on his thoughts. And who knows, maybe it will help alay some of my concerns about chartalism. I have to say, so far, I'm less than impressed with the movements seeming inability to adequately and coherently answer these critiques. ...I'm continually pointed to this person's blog, or this person's unpublished (or sometimes published) paper. But none of it seems very cohesive.

I am calling it: we are in a depression

Kudos to someone who usually I don't agree with for calling this a year and a half ago, but I feel comfortable, now half-way through 2010 declaring that we are in a depression.

Economists have no quantitative definition of depression (which is ironic given that mainstream econ is nothing but a series of mathematical definitions and assumptions). Some say it's only when GDP fall by double-digit percent points, others have other definitions, still others have no real definitions - stating that the 1930s were the one and only 'depression'.

I would personally like someone to come up with the 'richter scale' for recessions...or at least the terrorist color grid: Code yellow, code orange, code red - defined by unemployment, underemployment, under-capacity, bank reserve hoarding...some combination thereof.

But, absent this, I would like to offer the following definition:

A DEPRESSION is "where unemployment or GDP growth is under typically defined 'full' levels for a period of time that exceeds the norm of the generation."

For my generation, the average economic recession lasts less than a year. This recession has gone on for 2.5 years SO FAR - with no turnaround yet projected for employment for months to come yet. Hence, we are in a depression. Maybe you are thinking, 'well duh.' If so, good for you. You shouldn't need someone like me pointing out the obvious to you.

BP Debacle: Relearning a Lesson from Karl Marx

Karl Marx's dream of capitalism dying off to be replaced by a more utopian existence never really happened, and never will happen, largely because for all it's faults, capitalism works.

That being said, the BP oil spew can teach us of the primary lesson that Karl Marx taught which still holds true - labor has been and will always be exploited to some degree under capitalism.

Now, we can differ in opinion on exactly how/what is being exploited by the capitalist (business) on the laborer (the average Joe), but this exploitation can explain why some people are expressing reservation about talking down or financially hurting BP, despite their obvious failures. The reasons often provided often come down to just one thing: 'Americans work for BP, we are dependent upon them and other oil companies to live.' I like to imagine that Marx might be able to translate were he alive:

Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks.

-Karl Marx, "Das Kapital", 1867

Liberals flunk mainstream econ? Or conservatives don't look outside the theoretical box?

Zogby released stats showing that liberals / Democrats have a huge lack of economic understanding compared to their more conservative counterparts. Daniel Klein recently wrote a WSJ op-ed about this which my friend asked me to comment on. My comments are as follows:

I disagree with Mr Klein, and appears my point of disagreement is largely with his statement,

To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.

Having just glossed over the full Zogby questionnaire, I would still offer that perhaps these questions do more at highlighting philosophical / political differences than economic intelligence. I suspect that many liberals felt their core identity would be threatened if they didn't answer in ways that were sympathetic to their core beliefs. It is a strongly known psychological fact that when our basic beliefs are threatened, so are our identities. For example, one of the questions was "Third world workers working for American companies overseas are being exploited, agree or disagree...?" Liberals of course would agree statistically compared to conservatives - to do otherwise would suggest an attack on their identities, whether they were technically correct or not from an economic point of view. The issue is NO issue should ever be looked at STRICTLY from a mainstream economic point of view - which is precisely why this study is hogwash. To say liberals don't understand economics is an assumption. One could just as easily say, based on the data, that liberals don't see answers as being black-and-white or defined by just one method of study.

Other questions like, "minimum wage laws raise unemployment, agree or disagree?" is just as problematic, if not just for the fact that many economists (some even in the mainstream) have done studies suggesting that unemployment rates are negligibly or not affected or in some cases enhanced in the long-run with minimum wage standards. Mainstream economic theory says "agree," but it's not a fully testable hypothesis since unemployment and wage levels are not set in an experiment that mimics real life. Obviously liberals, who believe that there should be minimum standards of earnings would "disagree." And as I mentioned in the above paragraph, they might disagree regardless of whether or not they are technically wrong or right because they might view the issue of wage rates as affecting things other than unemployment - like creating a better life for workers that might otherwise be below the poverty level. It's a matter of framing, and of looking beyond textbook economics.

My final issue with the study and the op-ed I can explain by talking about another question that was asked: "Overall, the standard of living is higher today than it was 30 years ago, agree or disagree?" Mainstream economics of course shows that it has - unequivocally...based on the following assumptions: (1) that standard of living is defined as income per capita growth, (2) that income is defined by GDP, (3) that GDP is solely and sufficiently representative of income, and therefore standard of living, and on, and on ....

I teach in my class that many heterodox (outside the mainstream) economists have come up with other tools, besides GDP per capita growth to measure standard of living. One has to take into account resource depletion, externalities, inequality, number of work vs. leisure hours....

So do liberals lack a solid economic education? Or do they just see things other than the bottom dollar as being important? The flip-side question is, are conservatives too ideological/theoretically driven? Do they think outside the box?

In the end, this study doesn't really highlight which group knows more about economics, it highlights how ideologically one-sided and shallow the current state of mainstream economics is.

Why the Tea Party will Fail

The tea party will fail, and I submit as evidence, Mr. Rand Paul, the recent winner in KY's GOP primary election. He is backed by the Tea Party and its supporters.

Recently, just after his election win, Mr. Paul went on the Rachel Maddow show and Rachel played some (typical) 'gotcha' journalism and caught him in a loop of trying to explain his positions on discrimination policies, particularly those applied to private companies, and institutions.

Maddow: Do you think that a private business has a right to say that 'We don't serve black people?'

Paul: I'm not in favor of any discrimination of any form. I would never belong to any club that excluded anybody for race. We still do have private clubs in America that can discriminate based on race.

But I think what's important in this debate is not getting into any specific "gotcha" on this, but asking the question 'What about freedom of speech?' Should we limit speech from people we find abhorrent. Should we limit racists from speaking. I don't want to be associated with those people, but I also don't want to limit their speech in any way in the sense that we tolerate boorish and uncivilized behavior because that's one of the things that freedom requires is that we allow people to be boorish and uncivilized, but that doesn't mean we approve of it...

Of course some in the media and on the left have said, due to these statements, that Paul would try to get rid of the Civil Rights Act, or that he's some sort of racist. All that is ridiculous. Frankly, everyone should have expected Paul to say something like that. Because he's something much more scary than a racist: he's an extremist Libertarian (albeit in Republican clothes).

Rand, like many extremist Libertarians are ideologically and narrowly driven in their beliefs. They believe that government should be severely curtailed or abolished altogether, especially as it pertains to private industry and homes (taxes should be cut to next to nothing, subsidies should be eliminated, regulations on behavior, including hiring practices, should be limited to none). It also means condemning any government 'hand-slapping' when private industry does things that are bad for the public (because to an ideologue of this bent, that simply isn't possible). I hope this ideology sounds familiar to you, because it lines up very nicely with the Tea Party's stated beliefs and goals.

And so this brings me to my point. There are reasons that the Rand Paul's of the world, when they speak, don't stay in power long or are not elected in the first place - it's because they are extremists with no room for shades of gray. They believe in abstract principles and make the leap of faith that when practiced, these principles will make sense - without ever really developing any real plans. So, the Tea Party will die as well - because it is based on the same black-and-white extremist philosophy. People are voting for these candidates now because they are scared. Many tea partiers are backing people because they are scared, not because they necessarily agree or even understand the reality behind the Tea Party's principles.
Once the fear dies off, so too will the Tea Party --- along with the Libertarian extremists they support.

What does this have to do with economics? Well I've mentioned myriad times on this blog the connection between mainstream economic thinking and 'black-and-white' textbook ideology. The problem is the same - the reality of our economic system is in sharp contrast to this ideology. But is it fear that keeps the extremist side of mainstream economics alive? No, it's the power and the confusion I believe. They wrap themselves in a cocoon of dazzling math lights, distracting the students until their message simply becomes so convoluted or confusing or assumption-laden, that many just proclaim, well, that must just be 'how things are'. Then from this refusal to think beyond the dazzling light display, comes the power, accumulated over decades. We won't change the system by attacking the power. We will only change the system by exposing the ideology, and breaking the dazzling light display.

Downside of European Monetary Union?

When the US is in financial crisis, our Fed, for better or worse, can flood with system with money (either in the form of loan, or just out-and-out money supply cash. And that's exactly what it did in 2008 and 2009, and it did so fairly quickly, and consistently over the months.

The European Central Bank, because it has no real central governing body, and because it represents multiple distinct European countries, takes what seems like forever to initiate emergency monetary policy - causing increased uncertainty and market volatility in the process (the US stock market plunged hundred of points last week on concern for Europe, and then rose by as much today as Europe, with the help of the IMF, finally proposed a bailout package for Greece, Spain and other fiscally irresponsible countries in the Euro Zone.