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In the above video, Nick, otherwise known as The Modern Mystic, has raised an important question about applying Modern Money Theory (MMT) -based economics. He asks whether if all nations used MMT-based economics to achieve full employment, truly universal health care, and free public education for everyone, whether the world wouldn’t run up against resource limits, and whether these limits along with competition for resources from everyone wouldn’t cause resource price inflation?
Put another way, he is asking whether even if MMT-based, or as he calls it, “chartalist” economics, is rational at the “micro” level of the nation, it is also rational at the “sub-macro” level of a world system made up of interacting economies, national governments and interacting sovereign currencies, but no world fiscal authority? Or put still another way, is MMT-based economics, which may be fiscally sustainable in the short run in a single nation, both fiscally sustainable and socially sustainable in the longer-run in an international system of interacting, nations, currencies, and economies?
L. Randall Wray, Professor of Economics at University of Missouri, Kansas City kindly called my attention to Nick’s youtube in an e-mail, and had this to say in answer to his question.
”. . . . Yes, every sovereign currency country in the world can use its monetary system to achieve full employment of all resources domestically, most importantly labor. Yes, if it tries to go beyond full employment it will drive up domestic resource prices; hence the Job Guarantee is the best way to get to full employment because it cannot go beyond.”
That is, as I interpret it, the Federal Job Guarantee (FJG) proposal of MMT thinkers contains a built-in normative constraint on government spending at the full employment level. In addition, since the movement to full employment will increase aggregate demand in the non-Government sector, jobs created there will move people out of FJG jobs and into those jobs, since they will need to offer better compensation than FJG jobs. As non-government sector employment increases and FJG jobs decrease in number, Government spending will also decline, making room for increased non-government sector spending without causing inflation. Randy Wray continues about Nick and his views:
“His question about exceeding resource constraints globally is legitimate but what he forgets is that we all have different currencies and we have to go across exchanges. Hence, Zimbabwe cannot pump up its domestic demand so high that it absorbs the globe’s resources. It can buy anything for sale in its own currency, but that does not mean it can buy anything for sale somewhere on earth for some currency or other because Zimbabwe’s access to other currencies is limited and there is not much around the world for sale for Zimbabwe’s currency directly.
“Very large nations like the US and China can indeed run up global commodities prices and he is right to be concerned about equity issues. However, I am sure he will agree we are a very long way from global full employment of resources, and rising resource prices will increase flows, anyway.“
So, Zimbabwe, or any nation, may create aggregate demand sufficient to fully employ its own population and facilitate its people maximizing their creation of their own real wealth, but generating demand that goes beyond a nation’s real wealth and potential to produce further wealth, will only result in higher domestic prices including higher prices in Zimbabwean currency for the resources it must import from others. So, there is a self-correcting factor in the system that would make it impossible for any nation to just create enough of its currency to corner all the globe’s resources.
Also, Randy’s reply about the legitimacy of equity issues and the ability of large nations to run up commodity prices, though qualified correctly by the point that we are very far way from global full employment, leaves open Nick, the Modern Mystic’s, question about whether MMT would be sustainable in the long run, if every nation did MMT successfully. So, I’ll address that now.
All of the world’s economies and humankind generally, faces the problem of scarce, non-renewable, natural resources “running out” in finite time. The problem is there for MMT, and it is there for any of the competing schools of economics. Joebhed, another blogger, who attended the recent Fiscal Sustainability Teach-In Counter-Conference, emphasizes the point that Nick, in raising the resource and social sustainability questions isn’t pointing to a problem that would be unique to MMT-based economies, if these existed. But rather is pointing to a problem that all schools of economics face.
Nick might reply to this point, by saying yes, but MMT-based economics makes this problem more acute, because its high aggregate demand approach, if followed all over the globe, would result in more and faster consumption of goods using scarce natural resources, than would a world where there were many more poor nations and people. This is a serious question, but I think MMT provides a ready answer to it. That answer goes back to one of its central ideas, which is that Government spending ought to be in the service of public purposes. Government spending, in other words, is for realizing certain valued outcomes, like full employment, truly universal health care, and public no-cost education for all. But that’s not all. In a world where natural resources are scarce, running out, and inequitably distributed, it can’t be part of the public purpose to get into increasingly serious conflicts with other nations over natural resources. Instead, the economy will have to be re-invented, so that its valued outcomes are socially sustainable, both domestically and internationally, and Government spending will have to be oriented as much toward realizing resource and social sustainability, as it is toward other outcomes.
And, if all the world’s economies implemented MMT principles, all of the world’s economies would also calculate the worth of the economy, it’s value for society, in terms of its success in achieving sustainability, as well its success in realizing other valued outcomes. Nick, the Modern Mystic, in his assumption, that competition among MMT-based economies would necessarily grow competition for scarce resources is making the assumption that MMT-based economies would necessarily involve the production of valued outcomes that used more and more of these scarce resources. However, if MMT-based economies are successful, part of the wealth they will produce will be the capability to produce energy from virtually limitless rather than scarce resources, the ability to clean the environment and limit any future environmental damage, the ability to produce goods from re-cycled materials, and most generally the ability to produce wealth using fewer and renewable natural resources.
Whether this will happen or not is problematic. But MMT-based economies can make the choice to use Government spending to facilitate a transformation to that kind of society, rather than to facilitate the kind of growth that is unsustainable. Just a little while ago, my friend and co-author, Henk Hadders, writes from a Conference in Paris he’s attending on sustainability and sustainable heath care systems, and he asks whether I or my MMT economist friends might react to the issue of the relationship between money and sustainability. I think I’ve already done a little bit of that here. But I’d like to do more by reacting to two questions of his, that perhaps Nick and Randy will be very interested in too. Henk asks (via e-mail):
”1. Under which conditions can decreasing economic growth in the richer parts of the world be made acceptable? How can well-being still increase while economic growth decreases. How to manage the distribution of income and capital (in the broadest sense as man-made, built, human and social capital) in a society that moves from growth to a "Steady State"?
”2. Under which conditions is a society under "Steady State" conditions able to "survive" without producing even more unemployment, economic crisis and poverty, than under the conditions of economic growth ?”
I think the concern about limits expressed in these questions is very important. But I also think that the assumption that the need to achieve a “steady state” in the use, consumption, and renewal of natural resources doesn’t necessarily imply declining economic growth. Or to put this another way, economic growth does not equate to growth in the consumption of non-renewable natural resources, or in the too rapid consumption of natural resources. Since, I think both questions are ultimately based on that assumed equating, or at least on a close association between the two, they both beg the question of whether economic well-being and sustainability can increase together. I think that is the question we must answer, and also that the right answer is that it is possible for MMT-based economics to provide both of these valued outcomes.
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).
19 Comments
Thanks Joe. So right that the issue of resources cuts across ALL monetary systems.
From the FJG working paper: “Under the Job Guarantee scheme, people of working age who are not in full time education and have less than 35 hours per week of paid employment would be entitled to the balance of 35 hours paid employment, undertaking work of public benefit at the minimum wage.”
Now THAT is a problem in that the minimum wage is not a ‘living wage’. Other than that I have no problem with the proposal.
What people seem to forget is Friedman’s writings about a ‘guaranteed income’ proposed back in the 60′s, passed by the House,and defeated in the Senate (what’s new,huh?).
And Friedman is the demi-god of Chicago economics.
BUT i truly would like to hear/read or be pointed to info about what Nick seems to think Canada was doing monetarily during the ’30′s,40,s,50′s’; sounds like they had at least a variant of MMT and outside forces brought that variant down.
Rec’d.
Thanks, ubetchaiaam. I’m not sure Nick had that right. For one thing, Canada was still on the modified gold standard in this years and didn’t have a fiat monetary system. So whatever they did then it doesn’t replicate the conditions we have now.
Too low an FJG program wage is very much a problem. Warren Mosler has proposed $8.00 and $10.00 FJG wages at various times, and also fringe benefits such as vacation and Medicare-like health insurance. A $10.00 wage would be OK, in many sections of the country. If each member of a couple were on the program it would produce a family income of roughly $40K per year which is certainly above poverty level. If the FJG had cost of living adjustments for metropolitan regions, I think it would get around the poverty objection.
“If the FJG had cost of living adjustments for metropolitan regions, I think it would get around the poverty objection.” ;yes it would. I once applied for a TSA job (I know, what WAS I THINKING?) and TSA employees do get cola’s for the area they live in.
BUT , for some reason, that same logic doesn’t apply to ‘minimum wage’ or any other broad based gummint program.
Seen the latest bankers game plan for the EU?
yes. It will eventually fail. Until the EU decides not to act as if it’s on the gold standard, it will have more and more serious trouble until the dream of European Union is an acknowledged fantasy.
x2
The point of economics in this era is not to promote the public interest. The point of economics, today, is to rip off the public interest so that one’s wealthy corporate sponsors can make enough of a profit to sponsor one’s salary as an economist.
Thus nobody is going to try to solve any “economic problem” (as currently defined) by trying to “achieve full employment, truly universal health care, and free public education for everyone.” They’re just not interested.
Now, the people themselves might be interested in such an outcome, but the problem then becomes one of how do the people themselves seize control over the economic mechanisms which today are used mostly to keep Goldman Sachs and other corporate parasites happy and the US military in permanent expansion while supplying the world’s economic advisers from the graduating classes of Harvard and Yale Universities.
But if that’s our game, we’re probably talking about something more radical than MMT, or for that matter than the capitalist system itself.
Hi cassiodorus, I don’t know whether we need something more radical than MMT as economics. But what we do need is political activism sufficient to overturn the corporate-dominated political regime we have now. We’re not there yet, but activism is growing and anger and resentment against the elites is rife. We have to support it and see where it leads in the next few years.
Yes, that’s what we need. My point is that we are in a class struggle here. The investor class knows this, and have been winning this class struggle for the past thirty years by capitalizing on the ignorance of the vast majority. Saint-Simonian schemes to harmonize class interests will not save us.
cassiodorus, Sometimes I write metaphorically myself about “class warfare.” However, I am not at all persuaded that “classes” do exist in anything like the classical sense of the term of cohesive broad-based social strata with common interests. I do think that group warfare certainly exists and that “Wall Street people” have certainly been at war with the rest of us, as have people in the health insurance and pharmaceutical industries, as have those in the energy industry. I think the rest of us have had the short end of the stick in conflicts with these industries as we well as others and that we do need to fight and win “wars” against their activities.
I agree with you that the economic theory that prevails all over the world doesn’t have any moral basis. That is why the students in Paris rebelled against their economics department. They wanted to solve problems in their communities but were being taught that their true nature was selfishness and anti-social. They created a ruckus as they had in Seattle in 1999. It got some attention for awhile but faded after 9/11.
The whole meme that humans are by nature selfish is a crock. Matt Ridley wrote about how it is the opposite in his book “The Origins of Virtue: Human Instincts and the Evolution of Cooperation”. The silliness of Ayn Rand libertarianism must be exposed. And her predecessor Adam Smith is impossible to read without chortling. He makes no sense. It’s like listening to Greenspan’s gobblygook.
Wise up America. Most of what poses as economic thought is just some sort of snake oil salesmanship gussied up with fancy models. We do need something more radical. We need a return to our real roots as cooperators not cannibals.
Actually, Smith makes a lot more sense than many of these libertarian folks. If he were alive today, I doubt that he’d be neo-liberal. His The Theory of moral Sentiments is a lot closer to us that Rand or Greenspan.
Of course, I agree with everything else you’ve written.
MMT is not the answer. Besides the obvious fact that sooner or later the end result is always going to be that a government employs everyone (or nearly so), the other shortcoming I see is that deficit spending to achieve full employment is not workable or sustainable without an entirely socialist system of economics. Any attempt to introduce this sort of system in the US would result in rebellion.
The foundational thrust of MMT, though not spoken aloud, is of a system that purchases away the volatility of the free market. But it is that volatility which creates vast opportunities for even the average citizen, so long as regulation of those markets does not promote the perpetuation of an unfair advantage for its larger players. In simpler terms, proponents of MMT want to level the playing field while removing the risk that a free market economy can, at times, be forced to face. But what they refuse to face themselves is that by leveling the playing field to the extents that they propose, you also greatly reduce the opportunities that an average citizen has to improve his own circumstances.
It’s the ages – old argument; who can provide better for the individual, government or the individual? If you like a system which creates and perpetuates a wage-controlled, and thus price controlled economy, but that does not offer the average citizen opportunity for personal wealth, then you like MMT.
If you follow the theory to its conclusion, what you end up with is a permanent Great Depression Era economy. While that system is fine for emergencies, it had no effects whatsoever on lifting the US out of the depression. We had to wait for a World War to become the arms supplier to the world in order to renew our stagnant economy.
A guarantee of a job sounds nice, but not at the cost of opportunity for the average citizen. No one in America was getting rich working for the Feds in the 30′s. No one was earning enough to improve their personal circumstances. They were merely surviving.
MMT fails because it cannot allow volatility and the opportunity that goes with it. If you want to create a permanent system of minimum wage citizens who are reliant on government for a cost of living wage increase every year, you also want to create a system that removes opportunity from the hands of the average citizen and places it in the hands of a few “experts”.
Your idea of wealth sounds rather reactionary.
True wealth is found in things such as education, a sanitary living environment, economic security, clean water, safe food, dependable healthcare.
Economics is not a zero sum game. If implemented correctly, everyone can win. And equally, if handled poorly (like now in real life) everyone can indeed lose.
Getting a good education does not require that others remain ignorant.
Receiving decent healthcare does not require that others receive no healthcare.
Teachers, doctors, nurses… these are not even limited resources. We can train and employ as many as we need.
And a good example of everyone losing… that is happening right now off the coast of Louisiana.
Well put capt, especially:
And there’s no evidence at all that if everyone has this kind of wealth that great “opportunity” won’t be there for those who value wealth of other kinds.
You’re certainly well-named aren’t you. Sorry, I couldn’t resist.
Look, you’re reply is just a series of assertions. It is no more than a series of conjecture with no facts or logic to persuade anyone that your view of what would happen if we adopted MMT-based policies would happen. On the other hand we know what happens if we continue to manage the economy based on neo-liberal principles. We’ve seen and it sucks for most of us. We want to try something else. Then we’ll see how that works and go from there.
About “limited resources”. Sure, except for the Sun radiating energy onto the earth, the planets resources are static. But our use of these resources is not static.
And once used, these resources are still here… they do not float off into space… they can be recycled, reclaimed.
Of course this all depends on scientific advance, advance which is not much helped by Wallstreet sucking up PHD Scientists to construct mathematical models for Wallstreet Billionares.
We do need to get rid of Wall Street’s financial games. They are doing nothing for most of us, and they often place all we’ve worked for at risk. Wall Street people have no right at all to do this to us. There economic freedom can’t be more important than ours is. Time to constrain it, so that it no longer threatens our own well-being.
I want a pony, too.
So, go buy one.