Thursday, March 28, 2019
Wednesday, March 27, 2019
The Impact and Malleability of Money Design
[Law and Political Economy]. Finance during reconstruction:
We pick up the story…. in the post-Civil War South, a monetary wasteland by any measure. Banks there collapsed along with the Confederacy and its currency. According to Lawrence Goodwyn, the per capita money supply in Arkansas was thirteen cents; in Rhode Island, it was $77.16. Bridgeport, Connecticut had more banks than the states of Texas, Alabama, North Carolina, and South Carolina combined, while Massachusetts alone had a national bank circulation that was five times that of the entire South.Behind the numbers rose the system of debt peonage that came to shape production for millions of poor Southerners, white and black. Bereft of cash, farmers turned to “furnishing merchants” for supplies: everything from clothes to tools, seeds to hardware. The goods came on credit and that credit was extremely expensive—merchants routinely charged exorbitant rates, 100 to 200% annually. In return, each merchant took a lien on the farmer’s crops. Once the lien attached, the merchant virtually monopolized that farmer’s connection to the market. As to consumption, the farmer could buy only from the merchant who held the crop lien because no other lender would advance credit without collateral. And as to production, the farmer had to turn over his crop to the merchant for sale to pay off his debt.The trap was, in fundamental ways, a monetary one. The devastation of the South’s financial infrastructure was only the beginning. After the Civil War, the federal government settled on a long-term deflationary policy; by limiting the amount of money in circulation, it aimed to drive down prices so that it could resume convertibility of the fiat currency that still circulated.
From Mehrsa Baradaran, The Color of Money.
The "furnishing merchant" ... or "furnishing man"...later shortened to "the man" often charged interest for goods purchased on credit that would make a payday lender blush.The lack of money was not helped by Lincoln withdrawing the greenbacks with which he fought the war. There's a reason the South hates the Northern Banks.
In addition to money shenanigans, merchants also colluded to monopolize transportation, so crops could go to market only on authorized rail connections...which further extracted rent from the debt peons.
This was the origin of the Farmers' Alliance and the People's Party, which elected congressmen and lots of state officers, particularly in the Midwest. It also coincided with William Jennings Bryan's "Cross of Gold" campaign for the presidency. Bryan lost to McKinley (the banks' candidate), and is now known mostly as the guy who prosecuted the Scopes trial. (see Inherit the Wind).
Tuesday, March 26, 2019
A Must Read: Why does everyone hate MMT?
Posted on March 26, 2019 by L. Randall Wray
The attacks on MMT continue full steam ahead. Janet Yellen (former Fed chair, but clueless on money and banking)—a centrist–has joined the fray. Jerry Epstein—on the official left–has ramped up his ridiculous claims, now associating MMT with “America First” and fascism (you knew that was coming—it has always been the refuge of critics who couldn’t come up with valid critiques).
But there are some rays of light. Bloomberg published a more balanced assessment (https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide). The authors of that piece actually took the time to go through our new textbook (Macroeconomics, by Mitchell, Wray and Watts—now available for purchase in the USA : And in Australia).
However, here is the best response to the critics I’ve seen:
WHY DOES EVERYONE HATE MMT? Groupthink In Economics, by James Montier, March 2019,
Not only does he take down prominent critics like Summers and Rogoff, he also provides a very useful 400 word summary of MMT. Some of you have asked for a concise statement, and this is as good as you’re likely to find.
I urge you to read the rest of his piece. It is spot-on.
The attacks on MMT continue full steam ahead. Janet Yellen (former Fed chair, but clueless on money and banking)—a centrist–has joined the fray. Jerry Epstein—on the official left–has ramped up his ridiculous claims, now associating MMT with “America First” and fascism (you knew that was coming—it has always been the refuge of critics who couldn’t come up with valid critiques).
But there are some rays of light. Bloomberg published a more balanced assessment (https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide). The authors of that piece actually took the time to go through our new textbook (Macroeconomics, by Mitchell, Wray and Watts—now available for purchase in the USA : And in Australia).
However, here is the best response to the critics I’ve seen:
WHY DOES EVERYONE HATE MMT? Groupthink In Economics, by James Montier, March 2019,
Not only does he take down prominent critics like Summers and Rogoff, he also provides a very useful 400 word summary of MMT. Some of you have asked for a concise statement, and this is as good as you’re likely to find.
- Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
- Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
- An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
- Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
- Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
- Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
- Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.
I urge you to read the rest of his piece. It is spot-on.
Wednesday, March 20, 2019
What Republicans and Billionaires Really Mean When They Talk About ‘Freedom’
Posted on March 20, 2019
Yves Smith comments: This post focuses on an important slice of history in what “freedom” has meant in political discourse in the US. But I wish it had at least mentioned how a well-funded, then extreme right wing effort launched an open-ended campaign to render US values more friendly to business. They explicitly sought to undo New Deal programs and weaken or end other social safety nets. Nixon Supreme Court Justice Lewis Powell codified the strategy for this initiative in the so-called Powell Memo of 1971.
One of the most effective spokesmen for this libertarian program was Milton Friedman, whose bestseller Free to Choose became the foundation for a ten-part TV series.
...
By Thom Hartman, a talk-show host and author of more than 25 books in print. He is a writing fellow at the Independent Media Institute. Produced by the Independent Media Institute
America is having a heated debate about the meaning of the word socialism. We’d be better served if, instead, we were debating the meaning of freedom.
The Oregonian reported last week that fully 156,000 families are on the edge of homelessness in our small-population state. Every one of those households is now paying more than 50 percent of its monthly income on rent, and none of them has any savings; one medical bill, major car repair or job loss, and they’re on the streets.
While socialism may or may not solve their problem, the more pressing issue we have is an entire political party and a huge sector of the billionaire class who see homelessness not as a problem, but as a symptom of a “free” society.
The words freedomand libertyare iconic in American culture—probably more so than with any other nation because they’re so intrinsic to the literature, declarations and slogans of our nation’s founding.
The irony—of the nation founded on the world’s greatest known genocide (the systematic state murder of tens of millions of Native Americans) and over three centuries of legalized slavery and a century and a half of oppression and exploitation of the descendants of those slaves—is extraordinary. It presses us all to bring truefreedom and liberty to allAmericans.
But what do those words mean?
If you ask the Koch brothers and their buddies—who slap those words on pretty much everything they do—you’d get a definition that largely has to do with being “free” from taxation and regulation. And, truth be told, if you’re morbidly rich, that makes a certain amount of sense, particularly if your main goal is to get richer and richer, regardless of your behavior’s impact on working-class people, the environment, or the ability of government to function.
On the other hand, the definition of freedom and liberty that’s been embraced by so-called “democratic socialist” countries—from Canada to almost all of Europe to Japan and Australia—you’d hear a definition that’s closer to that articulated by Franklin D. Roosevelt when he proposed, in January 1944, a “second Bill of Rights” to be added to our Constitution.
FDR’s proposed amendments included the rightto a job, and the rightto be paid enough to live comfortably; the rightto “adequate food and clothing and recreation”; the right to start a business and run it without worrying about “unfair competition and domination by monopolies”; the right“of every family to a decent home”; the rightto “adequate medical care… to achieve and enjoy good health”; the right to government-based “protection from the economic fears of old age, sickness, accident, and unemployment”; and the right“to a good education.”
Roosevelt pointed out that, “All of these rights spell security.”
He added, “America’s own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens. For unless there is security here at home there cannot be lasting peace in the world.”
The other nations mentioned earlier took President Roosevelt’s advice to heart. Progressive “social democracy” has kept Europe, Canada, and the developed nations of the East and South Pacific free of war for almost a century—a mind-boggling feat when considering the history of the developed world since the 1500s.
Just prior to FDR winning the White House in the election of 1932, the nation had been treated to 12 years of a bizarre Republican administration that was the model for today’s GOP. In 1920, Warren Harding won the presidency on a campaign of “more industry in government, less government in industry”—privatize and deregulate—and a promise to drop the top tax rate of 91 percent down to 25 percent.
He kept both promises, putting the nation into a sugar-high spin called the Roaring ’20s, where the rich got fabulously rich and working-class people were being beaten and murdered by industrialists when they tried to unionize. Harding, Coolidge, and Hoover (the three Republican presidents from 1920 to 1932) all cheered on the assaults, using phrases like “the right to work” to describe a union-free nation.
In the end, the result of the “horses and sparrows” economics advocated by Harding (“feed more oats to the horses and there’ll be more oats in the horse poop to fatten the sparrows”—that generation’s version of trickle-down economics) was the Republican Great Depression (yes, they called it that until after World War II).
Even though Roosevelt was fabulously popular—the only president to be elected four times—the right-wingers of his day were loud and outspoken in their protests of what they called “socialist” programs like Social Security, the right to unionize, and government-guaranteed job programs including the WPA, REA, CCC, and others.
The Klan and American Nazis were assembling by the hundreds of thousands nationwide—nearly 30,000 in Madison Square Garden alone—encouraged by wealthy and powerful “economic royalists” preaching “freedom” and “liberty.” Like the Kochs’ Freedomworks, that generation’s huge and well-funded (principally by the DuPonts’ chemical fortune) organization was the Liberty League.
Roosevelt’s generation had seen the results of this kind of hard-right “freedom” rhetoric in Italy, Spain, Japan and Germany, the very nations with which we were then at war.
Speaking of “the grave dangers of ‘rightist reaction’ in this Nation,” Roosevelt told Americain that same speech that: “[I]f history were to repeat itself and we were to return to the so-called ‘normalcy’ of the 1920s—then it is certain that even though we shall have conquered our enemies on the battlefields abroad, we shall have yielded to the spirit of Fascism here at home.”
Although right-wingers are still working hard to disassemble FDR’s New Deal—the GOP budget for 2019 contains massive cuts to Social Security, as well as to Medicare and Medicaid—we got halfway toward his notion of freedom and liberty here in the United States:
You’re not free if you’re old and deep in poverty, so we have Social Security (although the GOP wants to gut it).
You’re not free if you’re hungry, so we have food stamps/SNAP (although the GOP wants to gut them).
You’re not free if you’re homeless, so we have housing assistance and homeless shelters (although the GOP fights every effort to help homeless people).
You’re not free if you’re sick and can’t get medical care, so we have Medicare, Medicaid, and Obamacare (although the GOP wants to gut them all).
You’re not free if you’re working more than 40 hours a week and still can’t meet basic expenses, so we have minimum wage laws and the right to unionize (although the GOP wants to gut both).
You’re not free if you can’t read, so we have free public schools (although the GOP is actively working to gut them).
You’re not free if you can’t vote, so we’ve passed numerous laws to guarantee the right to vote (although the GOP is doing everything it can to keep tens of millions of Americans from voting).
The billionaire class and their wholly owned Republican politicians keep trying to tell us that “freedom” means the government doesn’t provide anyof the things listed above.
Instead, they tell us (as Ron Paul famously did in a GOP primary debate years ago) that, if we’re broke and sick, we’re “free” to die like a feral dog in the gutter.
Freedom is homelessness, in the minds of the billionaires who own the GOP.
Poverty, lack of education, no access to health care, poor-paying jobs, and barriers to voting are all proof of a free society, they tell us, which is why America’s lowest life expectancy, highest maternal and childhood death rates, lowest levels of education, and lowest pay are almost all in GOP-controlled states.
America—particularly the Democratic Party—is engaged in a debate right now about the meaning of socialism. It would be a big help for all of us if we were, instead, to have an honest debate about the meaning of the words freedomand liberty.
Yves Smith comments: This post focuses on an important slice of history in what “freedom” has meant in political discourse in the US. But I wish it had at least mentioned how a well-funded, then extreme right wing effort launched an open-ended campaign to render US values more friendly to business. They explicitly sought to undo New Deal programs and weaken or end other social safety nets. Nixon Supreme Court Justice Lewis Powell codified the strategy for this initiative in the so-called Powell Memo of 1971.
One of the most effective spokesmen for this libertarian program was Milton Friedman, whose bestseller Free to Choose became the foundation for a ten-part TV series.
...
By Thom Hartman, a talk-show host and author of more than 25 books in print. He is a writing fellow at the Independent Media Institute. Produced by the Independent Media Institute
America is having a heated debate about the meaning of the word socialism. We’d be better served if, instead, we were debating the meaning of freedom.
The Oregonian reported last week that fully 156,000 families are on the edge of homelessness in our small-population state. Every one of those households is now paying more than 50 percent of its monthly income on rent, and none of them has any savings; one medical bill, major car repair or job loss, and they’re on the streets.
While socialism may or may not solve their problem, the more pressing issue we have is an entire political party and a huge sector of the billionaire class who see homelessness not as a problem, but as a symptom of a “free” society.
The words freedomand libertyare iconic in American culture—probably more so than with any other nation because they’re so intrinsic to the literature, declarations and slogans of our nation’s founding.
The irony—of the nation founded on the world’s greatest known genocide (the systematic state murder of tens of millions of Native Americans) and over three centuries of legalized slavery and a century and a half of oppression and exploitation of the descendants of those slaves—is extraordinary. It presses us all to bring truefreedom and liberty to allAmericans.
But what do those words mean?
If you ask the Koch brothers and their buddies—who slap those words on pretty much everything they do—you’d get a definition that largely has to do with being “free” from taxation and regulation. And, truth be told, if you’re morbidly rich, that makes a certain amount of sense, particularly if your main goal is to get richer and richer, regardless of your behavior’s impact on working-class people, the environment, or the ability of government to function.
On the other hand, the definition of freedom and liberty that’s been embraced by so-called “democratic socialist” countries—from Canada to almost all of Europe to Japan and Australia—you’d hear a definition that’s closer to that articulated by Franklin D. Roosevelt when he proposed, in January 1944, a “second Bill of Rights” to be added to our Constitution.
FDR’s proposed amendments included the rightto a job, and the rightto be paid enough to live comfortably; the rightto “adequate food and clothing and recreation”; the right to start a business and run it without worrying about “unfair competition and domination by monopolies”; the right“of every family to a decent home”; the rightto “adequate medical care… to achieve and enjoy good health”; the right to government-based “protection from the economic fears of old age, sickness, accident, and unemployment”; and the right“to a good education.”
Roosevelt pointed out that, “All of these rights spell security.”
He added, “America’s own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens. For unless there is security here at home there cannot be lasting peace in the world.”
The other nations mentioned earlier took President Roosevelt’s advice to heart. Progressive “social democracy” has kept Europe, Canada, and the developed nations of the East and South Pacific free of war for almost a century—a mind-boggling feat when considering the history of the developed world since the 1500s.
Just prior to FDR winning the White House in the election of 1932, the nation had been treated to 12 years of a bizarre Republican administration that was the model for today’s GOP. In 1920, Warren Harding won the presidency on a campaign of “more industry in government, less government in industry”—privatize and deregulate—and a promise to drop the top tax rate of 91 percent down to 25 percent.
He kept both promises, putting the nation into a sugar-high spin called the Roaring ’20s, where the rich got fabulously rich and working-class people were being beaten and murdered by industrialists when they tried to unionize. Harding, Coolidge, and Hoover (the three Republican presidents from 1920 to 1932) all cheered on the assaults, using phrases like “the right to work” to describe a union-free nation.
In the end, the result of the “horses and sparrows” economics advocated by Harding (“feed more oats to the horses and there’ll be more oats in the horse poop to fatten the sparrows”—that generation’s version of trickle-down economics) was the Republican Great Depression (yes, they called it that until after World War II).
Even though Roosevelt was fabulously popular—the only president to be elected four times—the right-wingers of his day were loud and outspoken in their protests of what they called “socialist” programs like Social Security, the right to unionize, and government-guaranteed job programs including the WPA, REA, CCC, and others.
The Klan and American Nazis were assembling by the hundreds of thousands nationwide—nearly 30,000 in Madison Square Garden alone—encouraged by wealthy and powerful “economic royalists” preaching “freedom” and “liberty.” Like the Kochs’ Freedomworks, that generation’s huge and well-funded (principally by the DuPonts’ chemical fortune) organization was the Liberty League.
Roosevelt’s generation had seen the results of this kind of hard-right “freedom” rhetoric in Italy, Spain, Japan and Germany, the very nations with which we were then at war.
Speaking of “the grave dangers of ‘rightist reaction’ in this Nation,” Roosevelt told Americain that same speech that: “[I]f history were to repeat itself and we were to return to the so-called ‘normalcy’ of the 1920s—then it is certain that even though we shall have conquered our enemies on the battlefields abroad, we shall have yielded to the spirit of Fascism here at home.”
Although right-wingers are still working hard to disassemble FDR’s New Deal—the GOP budget for 2019 contains massive cuts to Social Security, as well as to Medicare and Medicaid—we got halfway toward his notion of freedom and liberty here in the United States:
You’re not free if you’re old and deep in poverty, so we have Social Security (although the GOP wants to gut it).
You’re not free if you’re hungry, so we have food stamps/SNAP (although the GOP wants to gut them).
You’re not free if you’re homeless, so we have housing assistance and homeless shelters (although the GOP fights every effort to help homeless people).
You’re not free if you’re sick and can’t get medical care, so we have Medicare, Medicaid, and Obamacare (although the GOP wants to gut them all).
You’re not free if you’re working more than 40 hours a week and still can’t meet basic expenses, so we have minimum wage laws and the right to unionize (although the GOP wants to gut both).
You’re not free if you can’t read, so we have free public schools (although the GOP is actively working to gut them).
You’re not free if you can’t vote, so we’ve passed numerous laws to guarantee the right to vote (although the GOP is doing everything it can to keep tens of millions of Americans from voting).
The billionaire class and their wholly owned Republican politicians keep trying to tell us that “freedom” means the government doesn’t provide anyof the things listed above.
Instead, they tell us (as Ron Paul famously did in a GOP primary debate years ago) that, if we’re broke and sick, we’re “free” to die like a feral dog in the gutter.
Freedom is homelessness, in the minds of the billionaires who own the GOP.
Poverty, lack of education, no access to health care, poor-paying jobs, and barriers to voting are all proof of a free society, they tell us, which is why America’s lowest life expectancy, highest maternal and childhood death rates, lowest levels of education, and lowest pay are almost all in GOP-controlled states.
America—particularly the Democratic Party—is engaged in a debate right now about the meaning of socialism. It would be a big help for all of us if we were, instead, to have an honest debate about the meaning of the words freedomand liberty.
Friday, March 15, 2019
MMT Responds to Brad DeLong’s Challenge
Posted on March 12, 2019 by L. Randall Wray |
In recent days MMT has captured the attention of anyone who can fog a mirror—even those long thought dead. The critics are out in full force—from the crazy right to the insular left. A short list includes Doug Henwood, Jerry Epstein, Josh Mason, Paul Krugman, Larry Summers, Ken “Mr Spreadsheet” Rogoff, Bill Gates, Larry Fink, George Selgin, Noah Smith, and Fed Chairman Powell. After laboring for a quarter century in the wilderness, the developers of MMT are pilloried for unleashing a theory that is “crazy”, “disastrous”, “hyperinflationary”, “nonsense”, “garbage” and just plain “wrong”.[1] Summers here; Rogoff here; Powell here; Krugman here; and here for Kelton Response
What all the critics have in common is that they have not bothered to read the MMT literature. Oh, it is just too much effort for the lazy critics! So they imagine what it must say, conjuring up the most ridiculous thing they can imagine, and then tear apart ideas so stupid that no one could possibly hold them.
And here’s the hilarious thing: every time we try to correct them, they say we are changing our arguments. Or, even funnier, they claim they’ve always held the crazy ideas and so we are saying nothing new.
So their critique goes something like this:
MMT claims that the earth is flat, and that the sun goes ‘round the earth. The first claim is false and everyone already knows the second. Heck, I’ve been arguing for two decades that the sun goes ‘round the earth. To prove it, I sat in my lawn chair last summer and saw the sun come up on the left, travel across the sky, and set on the right. It was hot but I persevered in the name of science. Most of what MMT says is false, and what it says that’s true is not new.
No folks. What you claim to be MMT is not MMT; what you claim you’ve always known to be true is neither MMT nor true.
I already offered a response to Doug Henwood’s here embarrassing critique (I notice that even most of his followers chastised him for his attack); Bill Mitchell responded to Professor Epstein’s neoliberal-like rant against MMT here (I might have more to say about it later); Stephanie Kelton has done yeowoman’s work battling the slippery Paul Kruman (demonstrating that he’s not only got MMT wrong, but his prognostications on the way the world works have been consistently wrong, to boot here); and I have a response to mainstreamers Paul Krugman, Larry Summers, Ken Rogoff (hey, Ken, have you figured out what a credit default swap is, yet?), and Chairman Powell in The Hill.
Here I want to respond to a challenge made by Brad DeLong (at the instigation of Noah Smith who garners undeserved attention for cribbing simplistic ideas from intro economics textbooks and passing them along as wisdom). Brad has often weighed-in quite reasonably on issues surrounding MMT so I’ll take his challenge seriously. I do not twit or tweet but these two twits were sent to me and will provide the background to his challenge.
Here’s the second.
To summarize, we have Noah Smith complaining: if we decide to call something MMT, they will just tell us it is not MMT. Poor (Josh) Mason and Jayadev “wrote … about how MMT implied that fiscal policy should be used for price stability. They were told that no, MMT has other tools for price stability.”
Brad DeLong responds: “In which case M&J…should have gone all medieval on their critics—said ‘you can make your arguments or you can play word games to make people believe that the US can have Swedish levels of government spending without Swedish levels of taxes”.
I’m currently writing a longer piece with Yeva Nersisyan on costing and “paying for” the Green New Deal, so I’m not taking up Brad’s argument that we need “Swedish levels of taxes” here. (Hint: We do not need higher taxes to pay for “Swedish levels of spending”—but we do need high taxes on the rich to reduce their power.)
What I’ll focus on here is Mason and Jayadev’s “best understanding” and Brad’s challenge to accept or deny his characterization of MMT as Knapp+Lerner+Minsky+Vertical IS curve.
First, a bit more background. I was on the EEA panel with Mason where he presented his “best understanding” of MMT. He claimed that MMT is not a “settled body of thought” and decided that he can treat its components separately. He then proceeded to reduce MMT to the old Bastard Keynesian “pump priming” version of Functional Finance: just use fiscal policy to pump up aggregate demand until you get to full employment. He then criticized us for supposedly believing that then you’d need to pass tax hikes to fight the inflation set off by full employment. That’s supposed to be MMT.
I objected to this characterization, showing my powerpoint slide from the year 2000 that laid out the various strands of thought incorporated in MMT up to that point. Here’s the slide I showed (with an update noted):
Notably missing was reference to functional finance. In fact, the core of MMT was developed before Lerner was brought into it (by Mat Forstater and Stephanie Kelton in the late 1990s). Most importantly, we ALREADY had our full employment policy: the Job Guarantee (also called employer of last resort, public service employment and buffer stock employment). It was from the very beginning THE central stabilizing component of MMT. Many of our neoliberal critics (who HATE full employment) have always tried to separate the JG from MMT. Josh follows in that tradition. We have always insisted that the JG is inseparable from MMT.
What do you get if you take the JG out? Josh’s neoliberal interpretation of MMT. MMT DOES NOT rely on aggregate demand pump priming to get to full employment. Never has. Never will. That will not work.
In 2005 Bill Mitchell and I argued that if desired, JG can be implemented to achieve full employment WHILE REDUCING AGGREGATE DEMAND.[2] To be sure, we’d recommend that only in very special circumstances, where the economy was already operating beyond full capacity—ie in a major war like WWII. Why would you need the JG if you were beyond full capacity? Because even when aggregate demand is very high, some get left behind. We do not think anyone should be left behind—if anyone wants to work at the program wage, he/she should receive a job offer. Only a JG can ensure this human right—the right to work.
Let me be clear. In the neoliberal era we chronically operate below full employment. That is very obvious in Euroland, which is probably operating 25% or more below full capacity. Even the US today has substantial excess capacity—maybe on the order of 10%, maybe more (maybe less). We won’t know until we ramp it up. Further, operating close to full capacity will bring forth investment and more capacity. I have little doubt that we could achieve Chinese growth rates if we put our minds to it—and sustain them for at least several years.
However, we will need well-targeted spending to do that without sparking inflation. It is hard to imagine how you’d do a general pump-priming; and you really wouldn’t want that even if you could. There are no doubt many sectors of our economy that really are at full capacity. Others lag far behind with substantial excess capacity. The problem with the kind of pump-priming we took in the past (mostly through “military Keynesianism”) is that the spending was targeted to the most advanced sectors, with high unionization and oligopoly or monopoly pricing. Wages and prices there rose and boosted measured inflation rates. That is precisely what we want to avoid.
As I said it is hard to think of a general pump-priming; except perhaps sending a $5000 check to every resident. But even this wouldn’t affect all sectors equally. Most Americans, suffering under huge debt loads, would probably pay down some debt. The comfortably well-off would splurge on fancy restaurants and expensive spas that already have long waiting lists. Or add a gold-plated toilet bowl to their third yacht.
I’ve long argued that rising tides raise all yachts—not the little dinghies. here and here As Pavlina Tcherneva’s empirical work has proven here , that turns out to be true. More than all the gains from growth now go to the tippy top of the income distribution. No wonder the Neoliberals hate the JG approach and love the pump-priming approach. As Tom Palley complains, the JG would give income directly to the poor and they’d want food. Neoliberals love unemployment—it keeps the “help” hungry and cheap. They are our inflation-fighting force to keep the comfortable classes comfortable.
To sum up my response to Noah Smith. Yes, MMT does have another tool to maintain price stability. It is the JG approach to full employment. It has always been a core element of MMT. We have never relied the simplistic version of Functional Finance that was presented by Mason. It would take about five minutes of actual research to demonstrate this.
We do often refer favorably to several arguments of Lerner. His “money is a creature of the state” provided a clear summary of Knapp’s approach (actually best explained in the 1913 and 1914 articles by A. Mitchell Innes); this was always in MMT even from before the beginning as I had read Knapp in 1986 and put him in my 1990 book). Indeed we view that as the other side of the coin to the JG.
What we really like was Lerner’s application of Functional Finance to the budgeting process. The budget should be functional, not sound. That is, to achieve a functional purpose rather than to balance taxes and spending. I never liked the steering wheel metaphor see here —although it can be useful in arguing that it is crazy policy to just let the “market” economy swing from speculative excess to deep depression. But economies are far too complex to “steer” like a car. We can attenuate the swings, but capitalist economies will still swing. That’s the Minsky in MMT. Stability is destabilizing. Our job is never done.
Let me be fair to Josh. When I presented my argument on the panel at EEA, Josh Mason graciously accepted it and said he’d look into the MMT position more deeply. It won’t take much digging.
Turning to Brad’s challenge, some of the answers will now be obvious. Do we accept the elements he lists as fundamental to MMT?
Knapp: yes indeed. He’s always been there. But as noted above, I’d refer readers to Innes instead—simpler, and he much more clearly links State Money to Credit Money. (That shapes our response to another set of critics—who disingenuously claim we ignore private monies. I’d wager there are very few economists who have written more about the private financial system than me—except my colleague Bill Black–but I’m not pursuing that here.)
Lerner: dealt with above. What we reject is the aggregate demand approach to full employment and price (and financial) stability. As Minsky argued in the 1960s, pump-priming might get you to full employment but it will never produce sustainable full employment because it will generate financial and price instability. You have to use the JG. He was right then, and he’s right now. To be sure, the inflation constraint is far less binding now than it was in the late 1960s. Further, once we have the JG in place, its stabilizing features will allow us to operate with higher aggregate demand without fueling inflation. The base wage plus the pool of labor ready for hire out of the JG will stabilize wages and prices at higher aggregate demand; and the access to decent wages will reduce necessitous borrowing thereby reducing financial instability.
Minsky. Yep, he was there from the beginning. In fact he was there before the beginning—I studied with him in the early 1980s and that is where I first came across the JG (he called it ELR) and the concept that taxes-drive-money. And then there’s our approach to financial instability. He’s indispensable.
Vertical IS. Now that is a leap. The ISLM framework is completely incoherent. It is not stock-flow consistent. Even its creator—John Hicks—said he could no longer make any sense of it. I think Paul Krugman and Tom Palley are the only economists who still use it. I doubt Brad uses it, at least, hope not. I have never used it. I reject all mainstream models (an exasperated Wynne Godley came into my office a couple of decades ago and announced that every one he had looked at was incoherent). But I think all Brad means is that MMT rejects the notion that by changing interest rates the central bank can move the economy to full employment by stimulating interest-sensitive spending. And if that is what he means, I whole-heartedly agree.
Unlike Krugman, MMT argues this impotence is not restricted to the “lower bound” of zero interest rates. What MMT has always argued is that when the Fed lowers its rate target, we cannot say for sure whether the Fed is stepping on the gas or hitting the brakes. It depends. One factor that matters a lot is what is the ratio of government debt to nongovernment debt. If you are Japan (high government debt, low household debt), lowering rates almost certainly slows the economy (by sucking interest income out). I did a paper with my UMKC colleague Linwood Tauheed that showed that with low private debt, plausible spending propensities, and government debt above 60% of GDP it is possible that raising rates would stimulate the economy.[3]
Now, that does NOT describe today’s US economy—where nongovernment debt is something like 400% of GDP. I believe that “normal” changes of the Fed’s target rate (up or down) have very little impact on the US economy. However a huge Volcker-like hike does have a big effect—but not due to interest-sensitivity of spending. It works through a present value reversal: the returns to holding real assets go negative. No one will invest in new ones. Debtors with floating rates go bankrupt. Financial institutions go massively insolvent. Volcker monetary policy “works” by causing a debt crisis. Otherwise, raising rates gradually in a boom (like the Fed did after 2004) doesn’t work; it does not reduce the demand and supply of loans, it just puts the debtors in a more precarious situation and shifts more income to the creditors. It is a dangerous policy. And no central bank official would admit they’d even consider such a policy. They prefer the myth that small adjustments to rates affect spending decisions. A myth with no evidence behind it, but so widespread that no one seeks evidence.
So, MMT has always recommended abandoning any attempt to fine-tune the economy through central bank interest rate policy. We prefer a permanently fixed rate. Many MMTers prefer permanent ZIRP. I’m a bit of a fence-sitter. I’d like ZIRP but I’d also accept a policy of paying a higher rate on retirement savings—but that is easily handled through US savings bonds, with personal limits on accumulations receiving the favorable rates. This rate should not be discretionary and should not be used as an inflation-fighting tool, rather as a supplement to Social Security until we can reform that system to provide a decent retirement for all. For me it is the permanent fixing that really matters, and I like a low rate but do not insist on zero.
So there you go, Brad, the ball’s in your court. We seem to be on the same page.
And by the way, I like Brad’s recent call for all the neoliberal Democrats to step aside and let the progressives following MMT take over. See Bill Black’s analysis here
[1] Blanchard announced he’s writing a piece(here ); McCulley’s supportive article is here, and he argues MMT provides a “robust architecture for a fiat currency world”; Fink called MMT “garbage”.
[2] Mitchell, W.F. and Wray, L. R. 2005 “In defense of employer of last resort: a response to Malcolm Sawyer” Journal of Economic Issues.
[3] Wray, L.R. and Linwood Tauheed) Chapter 3: “System dynamics of interest rate effects on aggregate demand”, pp. 37 in edited volume (Wray with Mathew Forstater), Money, Financial Instability and Stabilization Policy, Edward Elgar Publishing, 2006.
In recent days MMT has captured the attention of anyone who can fog a mirror—even those long thought dead. The critics are out in full force—from the crazy right to the insular left. A short list includes Doug Henwood, Jerry Epstein, Josh Mason, Paul Krugman, Larry Summers, Ken “Mr Spreadsheet” Rogoff, Bill Gates, Larry Fink, George Selgin, Noah Smith, and Fed Chairman Powell. After laboring for a quarter century in the wilderness, the developers of MMT are pilloried for unleashing a theory that is “crazy”, “disastrous”, “hyperinflationary”, “nonsense”, “garbage” and just plain “wrong”.[1] Summers here; Rogoff here; Powell here; Krugman here; and here for Kelton Response
What all the critics have in common is that they have not bothered to read the MMT literature. Oh, it is just too much effort for the lazy critics! So they imagine what it must say, conjuring up the most ridiculous thing they can imagine, and then tear apart ideas so stupid that no one could possibly hold them.
And here’s the hilarious thing: every time we try to correct them, they say we are changing our arguments. Or, even funnier, they claim they’ve always held the crazy ideas and so we are saying nothing new.
So their critique goes something like this:
MMT claims that the earth is flat, and that the sun goes ‘round the earth. The first claim is false and everyone already knows the second. Heck, I’ve been arguing for two decades that the sun goes ‘round the earth. To prove it, I sat in my lawn chair last summer and saw the sun come up on the left, travel across the sky, and set on the right. It was hot but I persevered in the name of science. Most of what MMT says is false, and what it says that’s true is not new.
No folks. What you claim to be MMT is not MMT; what you claim you’ve always known to be true is neither MMT nor true.
I already offered a response to Doug Henwood’s here embarrassing critique (I notice that even most of his followers chastised him for his attack); Bill Mitchell responded to Professor Epstein’s neoliberal-like rant against MMT here (I might have more to say about it later); Stephanie Kelton has done yeowoman’s work battling the slippery Paul Kruman (demonstrating that he’s not only got MMT wrong, but his prognostications on the way the world works have been consistently wrong, to boot here); and I have a response to mainstreamers Paul Krugman, Larry Summers, Ken Rogoff (hey, Ken, have you figured out what a credit default swap is, yet?), and Chairman Powell in The Hill.
Here I want to respond to a challenge made by Brad DeLong (at the instigation of Noah Smith who garners undeserved attention for cribbing simplistic ideas from intro economics textbooks and passing them along as wisdom). Brad has often weighed-in quite reasonably on issues surrounding MMT so I’ll take his challenge seriously. I do not twit or tweet but these two twits were sent to me and will provide the background to his challenge.
Here’s the second.
To summarize, we have Noah Smith complaining: if we decide to call something MMT, they will just tell us it is not MMT. Poor (Josh) Mason and Jayadev “wrote … about how MMT implied that fiscal policy should be used for price stability. They were told that no, MMT has other tools for price stability.”
Brad DeLong responds: “In which case M&J…should have gone all medieval on their critics—said ‘you can make your arguments or you can play word games to make people believe that the US can have Swedish levels of government spending without Swedish levels of taxes”.
I’m currently writing a longer piece with Yeva Nersisyan on costing and “paying for” the Green New Deal, so I’m not taking up Brad’s argument that we need “Swedish levels of taxes” here. (Hint: We do not need higher taxes to pay for “Swedish levels of spending”—but we do need high taxes on the rich to reduce their power.)
What I’ll focus on here is Mason and Jayadev’s “best understanding” and Brad’s challenge to accept or deny his characterization of MMT as Knapp+Lerner+Minsky+Vertical IS curve.
First, a bit more background. I was on the EEA panel with Mason where he presented his “best understanding” of MMT. He claimed that MMT is not a “settled body of thought” and decided that he can treat its components separately. He then proceeded to reduce MMT to the old Bastard Keynesian “pump priming” version of Functional Finance: just use fiscal policy to pump up aggregate demand until you get to full employment. He then criticized us for supposedly believing that then you’d need to pass tax hikes to fight the inflation set off by full employment. That’s supposed to be MMT.
I objected to this characterization, showing my powerpoint slide from the year 2000 that laid out the various strands of thought incorporated in MMT up to that point. Here’s the slide I showed (with an update noted):
Notably missing was reference to functional finance. In fact, the core of MMT was developed before Lerner was brought into it (by Mat Forstater and Stephanie Kelton in the late 1990s). Most importantly, we ALREADY had our full employment policy: the Job Guarantee (also called employer of last resort, public service employment and buffer stock employment). It was from the very beginning THE central stabilizing component of MMT. Many of our neoliberal critics (who HATE full employment) have always tried to separate the JG from MMT. Josh follows in that tradition. We have always insisted that the JG is inseparable from MMT.
What do you get if you take the JG out? Josh’s neoliberal interpretation of MMT. MMT DOES NOT rely on aggregate demand pump priming to get to full employment. Never has. Never will. That will not work.
In 2005 Bill Mitchell and I argued that if desired, JG can be implemented to achieve full employment WHILE REDUCING AGGREGATE DEMAND.[2] To be sure, we’d recommend that only in very special circumstances, where the economy was already operating beyond full capacity—ie in a major war like WWII. Why would you need the JG if you were beyond full capacity? Because even when aggregate demand is very high, some get left behind. We do not think anyone should be left behind—if anyone wants to work at the program wage, he/she should receive a job offer. Only a JG can ensure this human right—the right to work.
Let me be clear. In the neoliberal era we chronically operate below full employment. That is very obvious in Euroland, which is probably operating 25% or more below full capacity. Even the US today has substantial excess capacity—maybe on the order of 10%, maybe more (maybe less). We won’t know until we ramp it up. Further, operating close to full capacity will bring forth investment and more capacity. I have little doubt that we could achieve Chinese growth rates if we put our minds to it—and sustain them for at least several years.
However, we will need well-targeted spending to do that without sparking inflation. It is hard to imagine how you’d do a general pump-priming; and you really wouldn’t want that even if you could. There are no doubt many sectors of our economy that really are at full capacity. Others lag far behind with substantial excess capacity. The problem with the kind of pump-priming we took in the past (mostly through “military Keynesianism”) is that the spending was targeted to the most advanced sectors, with high unionization and oligopoly or monopoly pricing. Wages and prices there rose and boosted measured inflation rates. That is precisely what we want to avoid.
As I said it is hard to think of a general pump-priming; except perhaps sending a $5000 check to every resident. But even this wouldn’t affect all sectors equally. Most Americans, suffering under huge debt loads, would probably pay down some debt. The comfortably well-off would splurge on fancy restaurants and expensive spas that already have long waiting lists. Or add a gold-plated toilet bowl to their third yacht.
I’ve long argued that rising tides raise all yachts—not the little dinghies. here and here As Pavlina Tcherneva’s empirical work has proven here , that turns out to be true. More than all the gains from growth now go to the tippy top of the income distribution. No wonder the Neoliberals hate the JG approach and love the pump-priming approach. As Tom Palley complains, the JG would give income directly to the poor and they’d want food. Neoliberals love unemployment—it keeps the “help” hungry and cheap. They are our inflation-fighting force to keep the comfortable classes comfortable.
To sum up my response to Noah Smith. Yes, MMT does have another tool to maintain price stability. It is the JG approach to full employment. It has always been a core element of MMT. We have never relied the simplistic version of Functional Finance that was presented by Mason. It would take about five minutes of actual research to demonstrate this.
We do often refer favorably to several arguments of Lerner. His “money is a creature of the state” provided a clear summary of Knapp’s approach (actually best explained in the 1913 and 1914 articles by A. Mitchell Innes); this was always in MMT even from before the beginning as I had read Knapp in 1986 and put him in my 1990 book). Indeed we view that as the other side of the coin to the JG.
What we really like was Lerner’s application of Functional Finance to the budgeting process. The budget should be functional, not sound. That is, to achieve a functional purpose rather than to balance taxes and spending. I never liked the steering wheel metaphor see here —although it can be useful in arguing that it is crazy policy to just let the “market” economy swing from speculative excess to deep depression. But economies are far too complex to “steer” like a car. We can attenuate the swings, but capitalist economies will still swing. That’s the Minsky in MMT. Stability is destabilizing. Our job is never done.
Let me be fair to Josh. When I presented my argument on the panel at EEA, Josh Mason graciously accepted it and said he’d look into the MMT position more deeply. It won’t take much digging.
Turning to Brad’s challenge, some of the answers will now be obvious. Do we accept the elements he lists as fundamental to MMT?
Knapp: yes indeed. He’s always been there. But as noted above, I’d refer readers to Innes instead—simpler, and he much more clearly links State Money to Credit Money. (That shapes our response to another set of critics—who disingenuously claim we ignore private monies. I’d wager there are very few economists who have written more about the private financial system than me—except my colleague Bill Black–but I’m not pursuing that here.)
Lerner: dealt with above. What we reject is the aggregate demand approach to full employment and price (and financial) stability. As Minsky argued in the 1960s, pump-priming might get you to full employment but it will never produce sustainable full employment because it will generate financial and price instability. You have to use the JG. He was right then, and he’s right now. To be sure, the inflation constraint is far less binding now than it was in the late 1960s. Further, once we have the JG in place, its stabilizing features will allow us to operate with higher aggregate demand without fueling inflation. The base wage plus the pool of labor ready for hire out of the JG will stabilize wages and prices at higher aggregate demand; and the access to decent wages will reduce necessitous borrowing thereby reducing financial instability.
Minsky. Yep, he was there from the beginning. In fact he was there before the beginning—I studied with him in the early 1980s and that is where I first came across the JG (he called it ELR) and the concept that taxes-drive-money. And then there’s our approach to financial instability. He’s indispensable.
Vertical IS. Now that is a leap. The ISLM framework is completely incoherent. It is not stock-flow consistent. Even its creator—John Hicks—said he could no longer make any sense of it. I think Paul Krugman and Tom Palley are the only economists who still use it. I doubt Brad uses it, at least, hope not. I have never used it. I reject all mainstream models (an exasperated Wynne Godley came into my office a couple of decades ago and announced that every one he had looked at was incoherent). But I think all Brad means is that MMT rejects the notion that by changing interest rates the central bank can move the economy to full employment by stimulating interest-sensitive spending. And if that is what he means, I whole-heartedly agree.
Unlike Krugman, MMT argues this impotence is not restricted to the “lower bound” of zero interest rates. What MMT has always argued is that when the Fed lowers its rate target, we cannot say for sure whether the Fed is stepping on the gas or hitting the brakes. It depends. One factor that matters a lot is what is the ratio of government debt to nongovernment debt. If you are Japan (high government debt, low household debt), lowering rates almost certainly slows the economy (by sucking interest income out). I did a paper with my UMKC colleague Linwood Tauheed that showed that with low private debt, plausible spending propensities, and government debt above 60% of GDP it is possible that raising rates would stimulate the economy.[3]
Now, that does NOT describe today’s US economy—where nongovernment debt is something like 400% of GDP. I believe that “normal” changes of the Fed’s target rate (up or down) have very little impact on the US economy. However a huge Volcker-like hike does have a big effect—but not due to interest-sensitivity of spending. It works through a present value reversal: the returns to holding real assets go negative. No one will invest in new ones. Debtors with floating rates go bankrupt. Financial institutions go massively insolvent. Volcker monetary policy “works” by causing a debt crisis. Otherwise, raising rates gradually in a boom (like the Fed did after 2004) doesn’t work; it does not reduce the demand and supply of loans, it just puts the debtors in a more precarious situation and shifts more income to the creditors. It is a dangerous policy. And no central bank official would admit they’d even consider such a policy. They prefer the myth that small adjustments to rates affect spending decisions. A myth with no evidence behind it, but so widespread that no one seeks evidence.
So, MMT has always recommended abandoning any attempt to fine-tune the economy through central bank interest rate policy. We prefer a permanently fixed rate. Many MMTers prefer permanent ZIRP. I’m a bit of a fence-sitter. I’d like ZIRP but I’d also accept a policy of paying a higher rate on retirement savings—but that is easily handled through US savings bonds, with personal limits on accumulations receiving the favorable rates. This rate should not be discretionary and should not be used as an inflation-fighting tool, rather as a supplement to Social Security until we can reform that system to provide a decent retirement for all. For me it is the permanent fixing that really matters, and I like a low rate but do not insist on zero.
So there you go, Brad, the ball’s in your court. We seem to be on the same page.
And by the way, I like Brad’s recent call for all the neoliberal Democrats to step aside and let the progressives following MMT take over. See Bill Black’s analysis here
[1] Blanchard announced he’s writing a piece(here ); McCulley’s supportive article is here, and he argues MMT provides a “robust architecture for a fiat currency world”; Fink called MMT “garbage”.
[2] Mitchell, W.F. and Wray, L. R. 2005 “In defense of employer of last resort: a response to Malcolm Sawyer” Journal of Economic Issues.
[3] Wray, L.R. and Linwood Tauheed) Chapter 3: “System dynamics of interest rate effects on aggregate demand”, pp. 37 in edited volume (Wray with Mathew Forstater), Money, Financial Instability and Stabilization Policy, Edward Elgar Publishing, 2006.
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