The New York Times and Dave Leonhardt’s Upshot section made a big splash a few days ago by reporting on a study showing that the Canadian middle class had caught the US middle class in median income and likely surpassed it since. The study is based on an effort to measure median income per capita after taxes, and its results are presented as something truly significant.
However, I think the study is biased in that in median income per capita after taxes, it selected the wrong measure. What is needed is a measure of income or affluence that takes account of the value of cross-national variations in Government benefits delivered to the middle classes. Since the United States has lower taxes than most comparable nations, but delivers much less in safety net and entitlement benefits, it’s pretty clear that the measure used in the study reported on by The Times overestimates the real median income of the US middle class in comparison with the middle classes of other comparable nations and provides a misleading impression of the relative affluence of the American middle class. Read the rest of this entry →
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The New York Times and Dave Leonhardt’s Upshot section made a big splash a few days ago by reporting on a study showing that the Canadian middle class had caught the US middle class in median income and likely surpassed it since. The study is based on an effort to measure median income per capita after taxes, and its results are presented as something truly significant.
We keep hearing bad news about where the US stands on various social and economic indicators. The US’s ranking in math capability is 27th in the world. Our health care system is ranked 37th. Our 2011 life expectancy is 51st in the world. Our estimated 2012 infant mortality rate is 49th in the world. So we’re pretty far down in a number of international statistical comparisons of performance. Some here point to better performance on economic indicators. For example, GDP per capita is often cited as an area where the US performs much better. But even here the latest CIA world handbook estimate shows the US ranked 19th on this measure at $48,400.
It gets even worse if you take a look at the recent Credit Suisse Global Wealth Databook 2011. Dylan Matthews, writing on Ezra Klein’s Wonkblog, did that on July 18th in a blog entitled “Are Canadians Richer Than Americans?” Matthews says yes, based on the Credit Suisse data on 2011 Median Wealth per Adult, and he goes on to also point out that:
”So not only does Canada beat the United States on median net worth. Just about every developed country save Sweden and Denmark does. The UK, Japan, Italy (!) and Australia more than double the U.S. Median.”
This important conclusion of Matthews gets a bit lost in the post’s central focus on a US/Canada comparison and his attempt to answer his lede question. A few days later, wigwam posted at MyFDL blogging on the Matthews piece, and presenting a table wigwam developed from the graphic used in the Matthews piece.
Wigwam’s numbers are approximate because he developed his table, from Matthews’s graphic, but his emphasis on the context of where the US stands relative to other nations is much greater than in Matthews’s post, and he also ties it into other issues such as foreign aid to Israel, the 99% vs. the 1%, and rising poverty in the United States. Wigwam’s money lines are:
“This is a chart that I’m going to show when Mitt Romney fans talk about “what makes American exceptional.” It vividly documents how badly America’s 99% are being screwed by its 1%. We’re a wealthy nation only when you count the trillions controlled by the 1% but not so wealthy when you look at the net worth of the median household.”
So, that’s what got me looking at the Credit Suisse Report. When I did, I found that Matthews had truncated the Credit Suisse data, and that in doing so he had missed some important aspects of US economic performance compared to other nations when viewed from the perspective of a “middle” US economic position. Wigwam, as well, in basing his post on Matthews’s, also reflects the same problems.
Specifically, Matthews and wigwam both included only 19 nations in their analyses, and ranked the US 17th out of 19th. In addition, in approximating the numbers in his table he departed a good bit from the actual median wealth per adult numbers in a number of cases. Here’s a chart that includes the first 36 ranks in the Credit Suisse data.
I’ve included more than Rank, Nation, and 2011 Median Wealth per Adult in the chart. There’s also, Credit Suisse’s data on 2011 Mean Wealth per Adult and values I’ve computed giving the ratio of the mean to the median. I’ve included the last measure because I think the ratio is revealing as a measure of inequality in each of the nations. The Credit Suisse Databook does give the GINI index which is a better measure of inequality than the ratio I’ve used here, from a strict social science point of view; but I don’t think it’s as intuitive as the ratio of the mean to the median.
Looking at the results, you can see that the United States isn’t 17th on Median Wealth per Adult, it’s 24th. Now Luxembourg, Belgium, Iceland, Singapore, Austria, Qatar, and Kuwait, are all also ahead of the US in median Wealth. The “median person” is more than three times as wealthy in Luxembourg, more than two-and-a-half times as wealthy in Belgium, and more than twice as wealthy in Iceland and Singapore than in the US. Among nations that were included in the original WaPo and MyFDL comparisons, the “median Australian” is nearly 4.5 times as wealthy as the “median American; the “median Italian” is three times as wealthy. Japan and the UK have medians in the neighborhood of 2.5 times the US median, while Switzerland and Ireland have medians in the range of double the US number.
In short, the comparison with 36 nations included, shows that the US stands even worse, relatively speaking, than in the 19 nation comparison. The numbers show that many nations with recent and current severe banking/financial problems still have median wealth numbers that greatly exceed ours.
These include: Italy, Belgium, Iceland, Ireland, and Spain. The first four show more than double the median wealth of US adults and the last has a 40% greater median wealth figure. The US Fed is being called upon to use US nominal financial resources “created out of thin air” to bail out the financial systems of these nations, and will probably continue to provide such backing to “save the financial system.” The irony of our doing that when we refuse to use vigorous fiscal policy to help our own middle and working class people to remain employed, get new jobs, and work for a living wage, is another of those outrages to our democracy we experience every day.
The mean-to-median ratio numbers are also interesting to say the least. Nations with a ratio under 2.00 include Australia, Luxembourg, Italy, Japan, Ireland, Spain, Malta, Slovenia, Brunei, and the Bahamas. A majority of nations have ratios between 2.00 and 3.00. Nations over 3.00 include: Switzerland (5.35), France (3.25), Norway (4.07), Israel (3.25), Germany (3.49), the US (4.71), Sweden (6.56), China (4.88), and Denmark (9.30). So, the US is among the most unequal nations in the world on this measure. Among the nations that exceed it in inequality, the numbers for Sweden and Denmark may be statistical artifacts. The World Bank Gini number for Denmark is 24.9 and for Sweden is right behind at 25 with Norway coming in at 26, while the Gini is 41 for both the US and China, and 34 for Switzerland. This suggests that there may be something about the way welfare state transfer payments are accounted for that doesn’t get into the Credit Suisse Median Wealth per Adult statistics. Wigwam suggests:
“One of the anomalies in this data is that personal retirement plans (e.g., IRAs) usually count toward “net worth,” while general retirement plans (e.g., a public employee’s defined-benefit plan and/or Social Security) don’t. I’m told that Sweden and Denmark have excellent plans that take care of the elderly. Not only don’t those plans count toward their citizens’ “net worth,” but the excellent quality of those plans encourage their citizens not to save. If you had super-excellent government coverage to care for you in your elder years, would you set aside as much as the typical American? My point is that the median American is really at the bottom of this graph.”
Finally, I think the Credit Suisse Report gives the best picture yet of the failure of the US political/economic system to progress as rapidly as the systems in other modern nations. The jingoistic beating of our chests, insisting that the US is “the richest nation in the world”, with an unequaled political/economic system, just doesn’t square with reality. It may make a great many Americans feel good. But it’s not true and it doesn’t help us to face and adapt to our circumstances. In the end “all life is problem solving;” and you can’t keep on living well if you won’t recognize and then solve your problems.
Our system hasn’t produced the advantages for most Americans that other systems have produced for the citizens of their nations. How long will we continue to deny this in the face of mountains of cross-national data, and instead insist that our way is best? It may be best for 1% of us, but for the overwhelming majority, it is close to the worst among advanced modern industrial nations. Other nations produce better health for their citizens, healthier children and seniors, better education for their citizens, better work lives, less stress, more happiness, low cost universities. You name it; they’ve got it!
What we’ve got, instead, is an ideology about the free market that works for very few of us and makes the rest us less free, less wealthy, less secure, and less happy, as time goes on. Our economic system isn’t delivering for us. Our political system isn’t delivering for us either, it’s corrupt through and through, and our leaders won’t prosecute the rampant control fraud in the financial sector. And, finally, all we get from our representatives is excuses and rationalizations about why we can’t adapt to the changes, we, ourselves, had a great part in bringing to the world.
So, what can we do about it? I’m afraid this post isn’t about that. But, I think what we have to do is to create a new web-based Information Technology platform we can use to create a meta-layer of political activity that will take control of the major parties and either make our representatives accountable to the 99%, or replace them with new people who will be responsive to them. I’ve written about this a number of times previously. See here, here, and here, for example; and yes, it can’t be done in time for the 2012 election. Sorry about that, but what we have to do can’t be done in three months, and we should have started doing it three years ago if we wanted to be ready now.
(Cross-posted from Correntewire.com)
This is the third and last installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first two installments starting with this one, discussed Dean’s views on using the monetary channel to boost aggregate demand, devaluing the currency and increasing exports, and work sharing. In this final installment I’ll evaluate Dean Baker’s view of the problems associated with relying primarily on the fiscal channel,
Pitfalls of the Fiscal Policy Channel
”One of the problems is the potential for creating large structural imbalances that could be difficult to correct, as noted in the case of large trade deficits. But there are other reasons why exclusive reliance on the government channel may not be the best route.”
As I said above, I don’t think that Dean Baker makes a convincing case for the claim that the trade deficit is a structural balance that will be difficult to correct, or for that matter that its costs necessarily outweigh its benefits. Above all, I don’t think that Dean has made the case that we need to do something about the trade deficit rather than just letting it change as other nations decide that they’d rather consume more of their own output. So, here is a disagreement between myself and, I think, the MMT economists, and Dean and (I suspect) other Keynesians as well.
Next, Dean says:
“First, if we go the spending route, there is a risk that some of the spending will be wasteful. This is both an economic concern and a political one. From an economic standpoint, we should always want our spending to be done in the most useful possible way. In the context where the alternative is just wasting resources by having workers and capital sit idle, then paying workers to dig holes and fill them up again would be an improvement, but we should hope to do better. Rushing huge amounts of spending into ill-conceived projects is not likely to be the best use of funds.
“This also raises the obvious political issue that bungled projects make great stories for the political opponents of economic stimulus. We will be hearing much about Solyndra in the months and years ahead. It is worth taking political risks when there are clear policy gains from going a specific route, but if it is not necessary, why do it?”
I don’t think Dean is directly addressing MMT proposals in this area. MMT doesn’t advocate wasteful spending, or digging holes for the sake of the activity, or spending money on projects and programs that will waste real resources or people’s lives. There is a risk that any spending, private or public, will be wasteful or involve an excess of real costs over real benefits. But that’s no excuse for avoiding private sector spending, so why should it be one for avoiding public sector spending when that’s called for?
The events of the last ten years show that both Federal spending on Wars, and private spending on financial adventures can be disastrous, but it was wasteful investments on fantasy sand castles that crashed much of the world economy; not deficit spending in the United States intended to achieve public purpose. In fact, that kind of spending has been starved for the past 35 years at least. And right now, there is no record of wasteful public spending that remotely compares with the record of wasteful private spending over that same period.
By the way, it really hurts me when I see an acknowledged progressive give voice to the conservative narrative that public spending is somehow excessively wasteful or subject to greater corruption than private sector spending is. That is not a narrative that has an empirical foundation. It is false. And it is not a framing that we ought ever to strengthen in the way Dean Baker does here.
Moving on to MMT, itself, it favors spending that can be justified based on projections of its real benefits and costs, not projections of its nominal benefits and costs to a Federal Government that can never have any solvency problem. MMT is against crony capitalism, and for prosecutions of banksters and fraudsters. MMT proposals in the health care area would not only improve health care outcomes and reduce private sector expenditures on health care but would also produce millions of new jobs in the health care sector, while putting the health insurance barons out of business. MMT stimulus proposals for ending the recession, include Revenue Sharing grants to States on a per person basis, so that States could re-hire staff laid off in response to the recession’s impact on tax revenues. It’s very doubtful that hiring back Police, Firefighters, Teachers, and other State Civil Servants would be viewed as wasteful to most people.
The MMT JG program would have its projects planned and implemented locally with the participation of workers in the program, as well as local Government and non-profit stake holders. Only projects whose positive value could be projected by these stakeholders would be approved. Of course, some of them would be wasteful. There’s no way to avoid that. But there’s no reason to believe that many, many worthwhile projects producing valuable and durable results would not occur. That’s what happened during the New Deal, and that’s what would happen here.
On the subject of political risks, the fact that Dean even raises the question of whether there are clear benefits shows that he still doesn’t know the MMT literature. The Job Guarantee proposal envisions a permanent program, that in the context of other stimulus measures would create Full employment WITH Price Stability. Dean may doubt this claim of MMT, but before saying that he can’t see the difference between Keynes and MMT, he has to address and dismiss this claim, because neoliberal Keynesians think there’s a trade-off between Full Employment and Price Stability at some level of Unemployment.
But MMT economists firmly reject that assumption and offer a policy that, in theory, at least destroys this historic trade-off by ending the unemployed buffer stock and replacing it with an employed buffer stock. If MMT is right and this goal can be achieved, then it is certainly worth taking a political risk to try to accomplish it, and show that Government can help the economy to create both Full Employment and Price Stability in both good times and bad ones.
Next, Dean addresses tax cuts as a way to deficit spend:
Alternatively, we can go the tax cut route. There is little doubt that if we have big enough tax cuts that we will eventually prompt enough consumption to bring the economy back to something resembling full employment. However, this does raise the risk that at some point when housing has recovered, the additional consumption from the tax cut will lead to a real problem of excess demand leading to inflation. I know the MMT answer is then to raise taxes, but I am not confident that this can always be done so easily.
Politicians are not generally eager to raise taxes. If we create a situation in which we are counting on big tax increases to prevent inflation, then we run a real risk that inflation could become a big problem, especially if we have been very loose with our monetary policy.
MMT policy proposals for both spending and tax cuts occur in the context of creating a strengthened safety net with automatic stabilizers that would not require frequent positive action by Congress to maintain. The JG program is one of these. Since the JG hourly rate would be the de facto minimum wage rate and once implemented, would not be raised to compete with the private sector even in good times, so when private employers require all available labor, JG program spending would fall to close to zero, and would make close to no contribution to Government deficit spending. On the other hand, when deficit spending is needed because private sector employers had laid people off, the JG program would rapidly ramp up deficit spending to directly create effective demand.
In the revenue sharing program the program would be triggered during each cyclical downturn when unemployment reaches a particular level. The Federal grants would be implemented through a single countercyclical infusion for each cyclical downturn.
On the tax cut side, one of the major MMT legislative proposals is to cut all payroll taxes on both the employer and employee sides during a recession, when a particular level of unemployment is reached, then payroll taxes would be automatically re-imposed based on reaching a preset level of unemployment. Neither the cuts, nor the re-imposition of taxes would require Congressional intervention once the MMT program was passed.
There are variations of the above proposals, of course, and debates about which variation is best. But the main point here is that whatever tax cut programs would be implemented by MMT would be based on the idea of automatic indexing to real economic conditions. The legislation would provide for both automatic tax cuts and tax increases indexed to cyclical conditions measured by specific economic indicators.
Dean’s Conclusion and Mine
Dean next discusses the political difficulty of resolving tax and spending trade-offs in Washington, DC at this point. And he concludes by talking about his reluctance to embrace MMT because:
– He has “. . . long realized that in Washington policy debates who says something is far more important than what is being said.” And “. . . that anyone challenging the status quo is almost completely excluded from public debate.”
– And that if one can’t even “. . . win a debate on arithmetic, how can we think we will get people in policy positions to accept that their conceptual framework is wrong?”
– And that he thinks the best course is to challenge people on their arithmetic and their inconsistency if you want change, rather than to change people’s minds about the “. . . sort of monetary theory the Fed should be applying.”
I think this is a reasonable position for a person to take; but I also think that it makes the common mistake of denizens of Washington, which assumes that the politics of the past will, more or less, be the politics of the future. Politics in Washington is frequently linear and stable in its patterns over a period of years. One comes to understand those patterns and to believe that there will never be more than incremental pattern change.
However, my view is that Washington in its current state doesn’t care about logical inconsistency, or rationality, or arithmetic. At this point it is a closed “village” of opinion. As Dean implies, points of view that have no currency in the village don’t get discussed, or ridiculed when they are. The question however, is how does a closed system like this change, since it is fairly closed to changes in viewpoint that may be necessary to use to solve its problems?
I think the answer to that question is raw failure that destroys confidence in the governing world view which is neoliberalism. The highly visible failure of neoliberalism in 2008 wasn’t capitalized on by this Administration. It was loyal to the neoliberal point of vew and followed the prescriptions of neoliberals for fixing the problems it created.
However, the failures of neoliberalism continue. We see the disaster in Europe now taking shape, we see the extreme discontent among so many in American society, including most importantly the young who cannot see any acceptable future. The stresses grow with each passing year of injustice and maintenance of levels of real unemployment that haven’t been seen in this country since the 1930s.
Washington is still the old Washington, and it is terribly resistant to changes in thinking. But OWS is a movement that will come back with renewed vigor this Spring, and related movements will grow more and more intense in Europe, and the Administration’s latest attempt to bail out the big banks with the mortgage settlement will be undermined by those very banks themselves as they accelerate their immoral and illegal seizures of properties and evictions of the homeowners whose homes they have literally “stolen” through forged documents that they continue to forge.
The worst of the anger is yet to sweep this country. When it does, when the banking system falls either in Europe or here, when the big banks are taken into resolution and the serious investigations start under a new Attorney General, the changing of the guard in Washington will come; and the old regime, along with their neoliberal paradigm, will be swept away. And it is then that MMT will be accepted in Congress and the Executive Branch sufficiently, so that its policies will get a chance. If those policies succeed, then neoiberalism will be gone, hopefully for good.
(Cross-posted from Correntewire.com
This is the second installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first installment discussed Dean’s views on using the monetary channel to boost aggregate demand, and began criticism on his views on devaluing the currency and increasing exports. This post continues that critique, and later takes up his views on work sharing.
Expanding US Exports at the Expense of Decreasing Real Wealth? (continued)
Dean goes on:
”To see this point, imagine a more extreme case. Suppose that we had a trade deficit equal to 50 percent of GDP. If the countries who were buying up dollar assets then decided that they had enough, so we could no longer rely on imports to meet half of our domestic demand, does anyone believe that the U.S. economy could quickly and painlessly replace our imports with domestic production?”
No, of course not! But, why do economists like Dean and Paul Krugman insist on relying on far-fetched scenarios to try to argue against simple truths that may apply today? The current account balance will probably be around 4-5% of GDP this year. As the economy recovers it will probably rise to 6% of GDP again, which represents a very real benefit to the United States. But there’s no reason to expect that this growth would continue indefinitely or ever reach 50% of GDP. Why should it? What are the dynamics that would drive things this way, and make other nations value the dollar so much, that they will keep their own populations barefoot?
China, India, and Japan are all under pressure domestically to change their policies and make more of their production available to their own people. Europe may also abandon austerity soon, as they experience its ravages.
The long-term trend in the current account balance won’t be up, It will be down, gradually down, for reasons I mentioned above. It just doesn’t make sense for foreign nations to continue giving more than they’re getting from the US. So, the 50% GDP scenario is just ridiculous. Why even bother suggesting it? What does the thought experiment prove, except that Dean Baker isn’t thinking through a realistic model of the forces accounting for the international trade patterns we see?
In fact, Dean isn’t even really serious about suggesting that this scenario somehow corresponds to a result of MMT economics. He says:
”I would not attribute this view to the MMTers, but then the question becomes one of a degree. Perhaps a trade deficit of 6 percent of GDP is okay, but presumably somewhere between 6 percent and 50 percent we get into a problem. It seems the question then has to be how quickly the U.S. economy could adjust to a much lower trade deficit and what is the risk that foreign countries will slow or stop their purchases of U.S. assets? We may differ on the answer to these questions, but they are the questions that must be asked.”
I think these are important questions. We should ask them. But, has Dean answered them? And do his answers indicate any serious problems for the United States economy? And if so, how does that relate to MMT? If these changes could possibly produce cost-push inflation in the United States, then MMT has some answers for that kind of problem. On the other hand, if other nations stop exporting so much to the US, then that may create less demand leakage for our economy. In which case, MMT predicts that we will get closer to full employment and also that we will have to moderate deficit spending as full employment is approached.
Dean continues with more scenarios about what would happen if foreign nations began to charge us more from imports. I won’t reproduce each of these here or critique them. But, invariably, there is a general pattern to them.
It is: suppose “A” happens involving a decrease in US imports, and a rise in the price of those imports, then that would reduce real living standards in the US. But the impact on Americans wouldn’t be uniform. Specifically those who compete with foreign workers would find their wages increasing much faster than the decline in standard of living for the general population.
In presenting examples of this pattern, Dean doesn’t discuss any possible feedback effects of the assumed changes. For example, if US imports rose in price by 20%, what would be the feedback effect of such a price rise on US exports? Maybe nothing, but maybe, also, the net effect on changes in living standards would be much reduced.
Also, what is the effect on productivity? Dean points out that the decline in living standards could wipe out 40% of productivity gains, but what if the rise in prices stimulates unexpected productivity gains in the areas where imports are an important part of the economy?
Ultimately the details in discussions like this are very important. But we need to remember that scenarios of the kind posed by Dean make certain detailed assumptions about what might happen, but invariably ignore the possibility of the full range of side effects that may also occur. Without having good models that can predict both direct impacts of changes in import/export posture of trading partners of the US and the short-term feedback effects of these impacts, we really can’t say what the final outcome would be in lowering living standards. But Dean Baker doesn’t have such models.
Dean goes on by pointing out that critics of his position who claim that if we implemented it we would have to lower our standards of living to the Chinese level are just wrong about this because there is no mechanism that would cause this to happen given our higher levels of productivity. He is right about this, in my view. But MMT economists wouldn’t make such a claim. They’d just claim, instead, that his proposed currency de-evaluation posture would cause us to send more real wealth to other nations and receive less real wealth from them, long before we would have experienced that if we did not follow his suggested policy. So, they would ask how this effect benefits us in the short run?
Dean would probably reply by saying that it would strengthen our industries and create higher paying manufacturing jobs. And then MMT economists would respond by saying: that’s true, but we can also create good jobs, even manufacturing jobs, and strengthen our industries if the Government uses the right combination of stimulus measures and a Federal Job Guarantee (JG) implemented at a living wage with a full fringe benefits program to create effective demand.
They’d add that this kind of stimulus would bring back private sector expansion here, and eventually would result in very few workers in the JG program within a year of its implementation. So, they’d argue: why not do full employment here first. Then other nations would either like the return of prosperity to the US and continue to export to us as they have been doing; or they will become alarmed at the size of the initial Government deficit. In which case, they’ll de-value our currency themselves by raising their prices. In this way they’ll implement Dean’s proposal for us, but at a later date than otherwise. So the question becomes, why preempt their devaluation of the dollar with our own devaluation at a much earlier date at the cost of free space for the Government to help employ people on projects that will create goods and services that may serve public purposes?
Dean then continues with other arguments about re-balancing trade and its effects which are largely correct. But his remarks on the devaluation strategy not being “a beggar thy neighbor” strategy are only correct if we assume that such a strategy would not lead to negative compositional effects at the higher level of the international economic system.
If US attempts to devalue were followed by other nations responding in kind, then a race-to-the-bottom could result which would harm workers in all the major nations of the world. In this context MMT would probably say, don’t devalue. Instead use fiscal policy to fully employ all of your working people, and then let other nations devalue your currency as they please. There will be far less danger of a race to the bottom in this scenario, since your attempt to employ all of your own people to domestic tasks producing valued outcomes, can hardly be viewed as an attack on the desires of other nations to continue to export to you.
Is Work Sharing a Separate Channel for Raising Aggregate Demand?
”In my original comments I did not mention work sharing, but it really should be included in any discussion of full employment policies. There is nothing natural about the current length of work weeks and work years. They are the result of a set of historical processes and policy decisions which could well have been otherwise. In Western Europe, the standard work year for full time workers is around 20 percent shorter than in the United States. . . .
“In this context, it is difficult to see why we should not look to meet a shortfall in demand in part by encouraging employers to reduce work hours. The government already subsidizes layoffs through unemployment insurance. What can be the logic in saying that the government will pay half wages for workers who have lost their jobs, but not compensate for lower pay due to a reduction in work hours?
“There are strong arguments that it is better for workers, employers and the economy as a whole to keep a worker on the job where they can be continually upgrading their skills rather than risk the possibility that they endure a long period of unemployment. This is a well-researched topic. The long-term unemployed have great difficulty finding new jobs and many will never be re-employed. If we have a route to avoid this risk, why would we not take it?
“If it ends up being the case that increased use of work sharing leads to changes in the standard work week or work year, that would be great in my view. This would lead to more family friendly work places and likely better lives. The basic point would be that workers would be getting the benefits of increased productivity growth partly in the form of more leisure, not just higher income. (This assumes that we can restructure the economy so that workers do get the benefits of productivity growth.) Also, this should be great news for the environment. There is a very solid correlation between income and greenhouse gas emissions. If people can get more time off in lieu of higher take home pay, it would be a relatively painless way to reduce greenhouse gas emissions.
I find myself in complete agreement with the proposals in the past few paragraphs and the arguments for the benefits of work sharing. I have only one problem with it, and that is why Dean classifies this proposal as a separate channel from the Government deficit spending channel?
From my point of view, making the standard work week 35 hours and mandating the kinds of fringe benefits they have in Europe and compensating workers directly with Government subsidies for the reduction of 5 hours of work per week they receive, is definitely using the Government channel to raise aggregate demand, since the increased demand comes from the Government subsidy assumed by the proposal. It’s not a proposal the economists developing MMT have put forward. But I’ve put forward a similar proposal, and I see nothing in it that is in conflict with MMT.
So, I think we’re back to three channels, not four, and given the objections I’ve recorded above to the first two channels, I think it’s time to move to Dean’s problems with “exclusive” reliance by MMT on the fiscal policy channel.
(Cross-posted from Correntewire.com
He begins by implying that the comments didn’t persuade him that MMT is any different than the Keynesian Theory he learned 30 years ago, There were, however, many good comments from people who are fairly knowledgeable about MMT, and pointed to many distinctions between MMT and Keynesianism. Since he says he wasn’t persuaded by them, but doesn’t engage them directly in this second post, my first reaction to itt is to conjecture that he’s not open to recognizing that MMT is different, but has a vested interest in saying that there is nothing new there. If he were really open to changing his view, then I think he would have directly exchanged with the MMT commenters to see if they had answers to his specific criticisms of their replies. Instead he just went on to provide a discussion of MMT vs. his own views in a framework of his own choosing that doesn’t engage MMT basics.
In his first post he recognizes that in Keynes:
“. . . . there were three channels to raise the economy back towards its potential:
1.Government spending and tax cuts;
2.Expansionary monetary policy; and
3.Devaluing the dollar to increase net exports.
and then adds:
”. . . a fourth channel that can move the economy to full employment by reducing the average workweek or work year: work sharing.”
Dean says that MMT economists advocate focusing on the first channel and “disparage” using the other two, while not recognizing the fourth at all. Dean goes on to discuss his views compared to what he thinks is the MMT position on the “four” channels beginning with the monetary channel.
Like MMT Says: Monetary Policy Would Be Ineffective
He replies to criticisms saying that the monetary policy channel would be ineffective in creating recovery by saying that he was only claiming that the Fed can do more than it has so far done, and not that monetary policy could produce full employment. He offers a number of arguments and measures the Fed could take. I won’t go into the details here, but the bottom line seems to be that he thinks the Fed could add $20 Billion to aggregate demand mostly through mortgage refinancing arrangements.
My own bottom line is that what he outlines might work, but only proves the MMT point that monetary policy can do very little to help solve our present economic problems. We have about a 28 million person U6 employment problem, which could take as much as $1.2 Trillion in carefully formulated deficit spending. So, adding $20 Billion in aggregate demand to the economy makes very little contribution compared to the scale of the problem. It’s the proverbial drop in the bucket and justifies the lack of emphasis MMT places on this channel. In short, just as MMT says, Monetary Policy would be ineffective, taking into account the scale of the problem. Using it should at best be an afterthought.
Dean says further:
”I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit.”
From the MMT point of view, there is a downside to emphasizing monetary policy. That is, it’s a blunt instrument, with a very small impact, which isn’t targeted on effective demand, and one result of it is to pay much more in interest to bond holders than would otherwise be the case. Many MMT writers believe that such interest is unnecessary and represents risk-free welfare to wealthy investors and foreign nations. The interest paid doesn’t deprive the Government of money, because there is no solvency consideration, given MMT assumptions. However, the distribution of wealth is more unequal than it’s been in a very long time, and since there’s no need to issue bonds and pay interest, and exacerbate this inequality, why continue the practice of welfare for the rich?
Expanding US Exports at the Expense of Decreasing Real Wealth?
Dean next goes back to the idea that a more expansionary (higher interest) monetary policy would lead to a decline in the value of the dollar and that would carry the further benefit of expanding US exports. But I think this chain of causation is very questionable. Why would the Chinese, Japanese, Eurozone and Oil trading partners allow us to depreciate the dollar so we could import relatively less from them. and export more of our own products? For years, their policies have been diametrically opposed to this. So why would they back off in the face of a more expansionary monetary policy by the Fed?
Dean says he doesn’t understand the MMT objections to devaluing the dollar in order to balance trade better and says specifically:
”Certainly the United States can run large trade deficits for periods of time, but this does have real consequences. If we assume that other countries will not subsidize our consumption indefinitely, then we will at some point have to adjust to a world in which we have some semblance of balanced trade.
I don’t see how we can think that going from large deficits (e.g. the 6 percent of GDP we ran in 2006) to balanced trade can be painless. Industries do not just spring up overnight. The process of adjustment will inevitably mean some inflation and reduction in living standards, as the goods that we used to get cheaply from abroad will be replaced by higher priced domestically produced goods.”
Well, try this Dean. The MMT argument is that as long as other nations are willing to send us more real wealth in return for dollars, than we send them, then that is a net benefit for American consumers. Certainly, our willingness to accommodate their desire to exchange exports for dollars has caused real damage to US industries, and the erosion of skills and capabilities among workers and has also cost the jobs of Americans.
All these are big negatives. But they exist, in large part because our self-destructive theories about our economy and the role of fiscal policy stand in the way of using the Government’s fiscal power to enable full employment on all manner of projects that would help us rebuild our nation, its skills, its educational system, its energy foundations, its environment, its infrastructure, its health care system, and also to help us act collectively solve the other problems that beset us.
In other words, the big negatives that are related to our positive current account balance with the rest of the world (colloquially known as our trade deficit) are costs that we don’t have to bear, according to MMT, to get the benefits of imports. We could employ Americans fully, our people could be developing new skills and experiences, our wealth in facilities and social conditions we all share could be vastly increased, if the Government used its capability to help us fulfill the opportunities the current account balances give us to turn to other things that badly need doing, rather than making televisions, toys, clothes, and all the other things we no longer make. MMT says that the Government’s deficit will equal private sector savings plus the current account balance. So, if both are high that makes room for large Government deficits, and, in fact, actually demands them, since if we try to reduce them the end result will be less real wealth coming from imports and less nominal wealth accumulated from savings.
As for the idea that the current situation is temporary and that the day will come when the current account balance is smaller or even negative so that we export more than we import, MMT certainly recognizes that sooner or later that will happen. But MMT economists don’t think that kind of change will happen overnight or will necessarily be a really painful adjustment. Why should it be?
Our trading partners have vested interests in exporting to us. They also have large holdings of nominal wealth denominated in USD. They won’t want to see that wealth devalued suddenly. They will continue to prop up the dollar, and will gradually adjust the trade balance situation.
That adjustment will involve their consuming more of their own real wealth. It will result in our own businesses becoming more competitive with their goods and services on offer here, and abroad, so it will drive up production here and create more private sector jobs here, which is what would happen anyway if we followed deliberate policies at this point to devalue our currency to decrease imports and make our exports more attractive.
Summing up, there are advantages in our having a positive account balance that’s very large and there are other advantages in having one that’s smaller or negative. I think the position of MMT is let’s enjoy other nations sending us real wealth in return for electronic credits for as long as this situation lasts, and let’s make good use of the opportunities it gives up to do all the things we need to do to solve problems here at home. And when the world turns and other nations want to consume more of their real wealth and send less to us, then let us vigorously respond by shifting our capabilities to producing real goods and services that we need and want to have available to us domestically. Everything should all work out well in the end, as long as don’t, in either trade situation, waste the lives of our own human beings who want to live rewarding lives through work and attachments to their families, communities, and America itself, by keeping them unemployed, barefoot, anxious, and servile so that a very few people can continue to enjoy domination over the economic and political system we share.
I’ll continue my critical review of Dean’e second post in twi more upcoming installments.
(Cross-posted from Correntewire.com
”Is the inflation of the 1970s a myth? I don’t think it was, but something Dylan Matthews’ excellent overview of Modern Monetary Theory illustrates is that some people think it was. That to me is a mistake, and people should try to separate the merits of heterodox macroeconomic theory (which I think are considerable) from a handful of incidental political commitments that its adherents have. The core point of MMT is that if you have a freely floating fiat currency then the sovereign can’t “run out of money” and the point of taxes is to regulate demand not to finance government activities. But even though this is a “heterodox” view, I think few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation. I think that fear is overblown, but not as overblown as Jamie Galbraith thinks it is.”
The 1970s Inflation
Reading this, I had the definite feeling that the old aphorism about people who fight new paradigms and ridicule/marginalize their adherents, and often opine later that there is nothing new there, is all too true. Matty ought to give everyone a break and admit that the mainstream has been beating the drums of insolvency terrorism since shortly after the Obama Administration began and still is. So, mainstream people have been saying that there can be an insolvency problem in very large numbers, and if they are doing so less now, it’s only because any fool can plainly see that austerity is failing all over the world, as MMT predicted when the austerity craze started, and also because many more people are reading MMT blogs than was the case two years ago, and they are beginning to pick up some of the core insights.
To say that “. . . few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation” is to to imply that most mainstream people are elitist liars who have been engaged in deficit terrorism because they thought it was a more effective political tactic than using the inflation bogeyman.
That may, in fact, be true. But I wonder what the mainstream would have to say about Matty’s implication, that its economists haven’t really been being ignorant and dumb; just elitist, dishonest, and manipulative.
I lived through the inflation of the 70s, and I can attest to its reality, and severity for some people, but relatively mild impact for others. I also think that the causes of that inflation were not simply increases in nominal unit labor costs, but increases in interest costs caused by the Federal Reserve’s policies, the actions of the oil cartel, and particularly the Saudis, the activity of speculators, the constraining regulations on Natural Gas production, and the failure of the Carter Administration to employ price controls and rationing due to its neoliberal biases.
The other factors I’ve mentioned were much more important in causing the inflation than rising nominal labor costs, which were primarily reactive to the cost-push inflation caused by the other factors. Government deficit spending had almost no role in the 1970s inflation, which was due much more to cost-push than to demand-pull factors.
Types of Inflation
Matty next quotes Galbraith from Matthews’s article pointing out that we haven’t seen a serious demand-driven inflation since WWI and that one occurred under very unique circumstances unlikely to happen again.
”I think this contains some insight. Unfortunately the standard concept of “inflation” runs together two very different scenarios. In one kind of “inflation”, China abandons Maoist economic policies, its population gets richer, as it gets richer they start eating more meat, and this pushes the worldwide price of meat, dairy, and grains upward. That’s a real thing and it hurts real people in their pocket books, but these kind of global commodity price fluctuations aren’t effectively addressed by demand regulators. And one story some people have about the seventies is that it was just a global commodities issue. OPEC pushed up the price of oil, so we got “inflation” but this is nothing like the World War One case where dodgy government financial practices eroded the value of money.”
To me, this was really an “off the wall” response to Galbraith’s view, since Galbraith was clearly talking about the likelihood of demand-pull inflation inflation occurring in the United States, and was also implying that the Weimar and other WWI aftermath inflations had nothing to do with that policy. Also, in referring to “dodgy government financial practices” in the last sentence, Matty seems to be saying that the Weimar Government was guilty of such practices, but given the size of their Versailles-imposed reparations to be repaid only in goldmarks or foreign exchange, what could the German Government have done to recover from the War, except try the money-printing strategy to try to get the foreign exchange needed? If anybody was guilty of “dodgy financial practices” it was the Versailles peacemakers who, in imposing a Roman peace on Germany, insisted on payment conditions that the Germans could not possibly meet, especially since the French and Belgians seized control of the Ruhr and with it much of Germany’s industrial capacity in 1923.
But, that aside, Matty glosses over the fact that demand regulators can’t very well control worldwide demand-pull inflation in the international economic system from a legislative foundation in a single country, as long as they’re committed to maintaining a free market in the commodities that are the object of such inflation. That is, the China example basically says that when people in many nations other than the US and the previously developed nations get wealthy enough to create greater effective demand on certain commodities in a relatively free market, and that demand outruns supply, then price increases that hurt people will result.
But why is this a criticism or reflection on the MMT view, or what Galbraith had to say? Galbraith and the MMTers have clearly been talking about regulating demand-pull inflation in the United States caused by excessive deficit spending.
Moving to Matty’s example, MMT would certainly predict that when an economic system has no common currency, but a relatively free market in certain commodities, and also limited supply, then increasing demand might well result in inflation. As for the ’70s oil inflation, that wasn’t the result of either a free market or increasing worldwide demand for oil, but rather of the factors I called out above being called into play by the Oil Cartel’s control of the world supply of oil. So, that inflation was an instance of cost-push, not demand-pull inflation, and requires different measures to control.
I hesitate to say what MMT might recommend in the two cases of increasing world-wide demand, highlighted by Matty, because I’m not sure that all of us would say the same thing, nor am I one of the economists developing the MMT approach. But, speaking as someone who’s been researching MMT for some time, in the ’70s case, I would have placed domestic price and wage controls on commodities except on foreign sales to oil exporting countries, where prices of exports would have been pegged to increases in the prices of their oil exports. I would have also recommended de-regulating natural gas, and oil rationing to cut demand for the cartel-restricted supply. I would not have implemented higher interest rates as the Fed did. Until the very end, when the economic system was driven into recession, that only “fed” the inflation fire, while creating “stagflation.” I think such measures, consistent with MMT as I understand it, would have “choked off” the ’70s inflation in a much shorter time than the policies followed in the 1970s and the early 1980s.
As for the present increasing demand on the world’s food supply, that’s certainly not being caused by deficit spending by an International currency issuer, since there is none. And the only remotely similar entity to that is the ECB which is gradually choking off economic activity in the Eurozone to save its financial elites. I think commodity inflation must be fought by Governments legislating and enforcing existing laws against speculation, preventing cost-push inflation of the kind we saw in the 70s using the measures outlined, and by allowing commodity markets to adjust to the need for more supply, or producers to create substitutes for commodities in short supply. I also think control of speculation and market forces will probably suffice to relieve the pressure we’ve been seeing in commodities.
If that fails, however, then Governments whose economies can produce abundant supplies will have to place export controls on commodities necessary for their own populations in order to contain domestic inflation. That will not be popular. But we do still live in a nation state system, and the first responsibility of national governments still is to the general welfare of their own populations. Of course, such measures will result in other nations placing their own export controls on abundant commodities, and nations will have to negotiate bilateral agreements to serve their respective populations.
Unit Labor Costs
Matty Yglesias continues with his remarks about inflation:
”That’s why my favorite indicator of inflation is “unit labor costs”:
“Unit labor costs are basically wages divided by productivity. It’s not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising, unit labor costs are falling. Conversely, if wages rise faster than productivity than unit labor costs are going up. Clearly there’s nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it’s not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it’s what led to the regime change that’s governed for the past thirty years.”
Now that way of putting things is strange. Not that the general point is wrong, but if real unit labor costs exceed real labor productivity over the long term, that would create survival pressures for business. But, if there was an anomalous rise in labor costs in the 1970s, there was also an initial anomalous rise in the cost of oil before that rise, and later there was an anomalous pattern of interest increases implemented by the Fed that hasn’t been seen before or since, as well as anomalous rises in commodity prices. To read the quote above, one would think that the rise in unit labor costs was itself inflation, rather than just an adjustment of the cost of labor to all the price increases going on around it.
The truth, again, is that the inflation of the ’70s was caused by a complex of inter-related phenomena and the rise in unit labor costs was only one of these. It may have been the one that neoliberals focused on in the ’80s to avoid pinning the blame for what happened on the Cartel, the failures of the Carter Administration and the Fed’s policies, and to claim that the inflation was due to demand-pull factors, but that doesn’t mean that their analysis was correct.
Today, we know that Paul Volcker and Jimmy Carter handled the 1970s inflation incompetently, and we also recognize that the behavior of the Cartel, and the excessive regulations on natural gas made this a cost-push and not a demand-pull inflation, and that the Fed policy of targeting the unit cost of labor as a trigger for raising interest rates for the next 30 years or so was part of its low inflation at the cost of high unemployment policy that it illegally engaged in, in violation of the Humphrey-Hawkins Act. In his post, critiquing Matty’s missive, Steve Randy Waldman (SRW), had the following to say:
“. . . Yglesias has fallen into a trap. Unit labor costs are not “basically wages divided [by] productivity”. That’s not the right definition at all. [See update.] Unit labor costs are nominal wages per unit of output. With a little bit of math , it’s easy to show that
UNIT_LABOR_COSTS = PRICE_LEVEL × LABOR_SHARE_OF_OUTPUT
An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.
Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline. (More recently, the Great Recession has been accompanied by a stunning collapse in labor share. Record corporate profits!)”
SRW continues his discussion in this vein pointing out the Fed’s hawkishness on unit labor costs has had a heavy constraining influence on the presidency because Presidents have wanted to be very careful about economic policies that might increase unit labor costs and cause the Fed to activate contractionary reactions. He says further:
“. . . . In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable. If workers won on wages, they would lose when the recession put them out of work. As long as wages were contained, monetary policy was “accommodative”, and workers could supplement their purchasing power with borrowings and asset appreciation. During the Great Moderation, wage growth was rendered obsolete. A superior means of middle class prosperity had been invented. Or so it seemed, until we experienced the toxic after-effects in 2008. Now we have grown skeptical of debt-fueled pseudoprosperity. But the covert hostility to wage growth that underpinned Great Moderation monetary policy remains unchallenged.
“I imagine some readers saying to themselves, “But still. If the labor cost of ’stuff’ is allowed to grow, how can that not be inflationary? It’s common sense.” And that’s true, as far as it goes. But if the capital cost of stuff grows, that must also be inflationary. Suppose we define the complement to unit labor costs, unit capital costs. Unit capital costs might be defined as “business profits per unit of output”. Would it be politically tolerable in the United States to have a central bank that prevented expansions of business profit per unit sold? Is restraining profitability of investment a proper role for a central bank? If suppressing returns to capital would be improper, why on Earth do we tolerate a central bank that opposes returns to labor?”
Very good questions. Why have we allowed the Fed aided by presidents to implement policies that increase returns to capital, but suppress returns to labor? Is this what Americans think has been going on and what they approve, or has this been made possible only because of “the independence” of the Fed, its systematic lack of transparency to the public, and the unwillingness of Presidents to contest the power and “independence” of the Fed either legally or informally?
Time for a Change in Regimes?
Even though Matty Yglesias seems convinced of the importance of increases in nominal unit labor costs as a primary cause of inflation needing to be constrained in the long run, he, nevertheless agrees with SRW and I that the approach to constraining such costs that the US has followed for the past 30 years and more cannot be continued. He says:
”In the wake of the Great Recession, I think we need another change in regime. We can’t continue with an approach that always delivers on price stability but frequently leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won’t happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.”
I agree that the approach we’ve been following won’t do, and with SRW’s notion that Fed policy should not be biased in favor of returns to capital and against returns to labor. It is very plain to me that the severe economic inequality that has developed in the United States, and that now threatens our democracy, is in great part due to the Fed’s policies in past decades and to its fixation on inflation control. But I also think that changing these policies to ones that would be more neutral won’t work to redress the inequality that has already been created. What needs to be done instead, is to positively bias Fed policy toward returns to labor for some time to come, as part of a more comprehensive policy to lessen the levels of economic inequality that beset the American social, economic and political systems.
I also agree with Matty Yglesias’s call for people to acknowledge what went wrong in the past and to explain why it won’t happen again. But as I said earlier, my thinking about what went wrong in the ’70s, and also MMT thinking about it are both very different from his. As a result, I think corresponding explanations of why it won’t happen again are likely to be very different also. Again, I don’t think what we have to acknowledge is that increases in unit labor costs caused the ’70s inflation.
In fact, I think that is a very partial, and therefore false narrative of what happened then. And I’m afraid I also think that Matty ought to take his own advice and acknowledge the roles of 1) the Cartel, 2) the Federal Reserve, and 3) the Carter Administration as all being much more important in the severity of that cost-push inflation then the rise in unit labor costs was.
And, I think an explanation of why that is unlikely to happen again, will have to be conditional on the wisdom of future Federal Reserve Governors and Presidents in providing the right responses to any reconstitution of the Cartel, or aggressive moves by the Saudis and oil speculators to drive prices up. If the ’70s are not to happen again, it will not be enough to rely on the more globalized economy of 2012, with its cross-border competition among workers, creating a race to the bottom in wages, and untoward returns to capital.
The Federal Government will have to be much more aggressive in implementing a response, recognizing that an inflation like that in the 70s would be cost-push and not demand-pull. And that to manage it, policies that choke off government deficit spending, and tighten credit, will be much more costly than policies involving trade retaliation, price controls, rationing, substitution of commodities subject to cost-push, and above all continuous and very substantial investments in government programs developing alternative energy sources.
(Cross-posted from Correntewire.com
Kevin Drum, posting in Mother Jones, also threw his hat into the ring of discussion about Dylan Matthews’s post about Modern Monetary Theory (MMT). Kevin begins by characterizing MMT as “. . . . an economic model that, roughly speaking, says government deficits are always good unless there’s a risk of runaway inflation.” He then favorably quotes Jared Bernstein’s post, which I recently evaluated, coming out against the idea that deficit reduction is “pure virtue,” and also coming out for the view we need to use Government’s ability “. . . to run large deficits in times of market failure” to replace lost aggregate demand. But Kevin doesn’t get why Jared says this is MMT’s greatest contribution. Kevin wonders why this is any different from what “ Old Keynesianism. And post-Keynesianism. And New Keynesianism” say, and he asks: “If that’s really MMT’s most important contribution, who needs it?” And then replies:
The more important side of MMT is its insistence that we should run substantial deficits even when the economy is in good shape. Only when inflation appears ready to run out of control should we use budget surpluses to rein things in.
And then through quoting Matthews and Jamie Galbraith as quoted by Matthews, Kevin makes the point that we haven’t seen a serious case of demand-driven inflation since World War I and that involved, as Jamie said: “. . . conditions that will never be repeated.” And then Kevin goes on:
In some sense, this all comes down to a question of how scared we should be of inflation. Mainstream economic opinion says that a strong focus on full employment will inevitably risk high inflation, just as our current obsession with low inflation produces generally high unemployment. If we were focused on, say, a target unemployment rate of 4%, we’d see some periods where unemployment fell below that rate and some where it rose above it. But as the chart on the right shows, that’s not what we’ve had over the past few decades. Instead, because our economic policy has been focused strongly on low inflation, we see only a couple of brief periods in which unemployment barely got close to 4%, followed immediately by a recession that kicked it back above 6%.
So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that’s the right estimate, then you could argue that we’ve been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we’ve been wasting an awful lot of productive capacity for nothing.
It is about our fear of inflation and our assessment of the risk of it. But it’s also about how we prioritize the risk of inflation against the reality of unemployment other than a “frictional” rate due to job transitions of 1 – 2%. Even 4% Unemployment measured by the U6 would still leave about 7.2 million Americans unemployed after a vigorous post-Keynesian expansion.
Those people would pay the price for the rest of us who are more concerned with containing inflation than with employing them. How serious is this price? Martin Watts and Bill Mitchell (one of the earliest and still leading developers of MMT) offer us a very good idea of how high this price is for those selected to pay the price of a 4% U6 target, much less a 4% U3 target which is what I suspect Kevin is referring to.
Kevin Drum refers to the NAIRU, as if he and all economists agree that there must be a trade-off between inflation and unemployment at a to be determined NAIRU level. But, I wonder if he knows that MMT economists view the Non-Accelerating Inflation Rate of Unemployment, as both “a crock” and as closely tied to the neoliberal economic paradigm that MMT opposes, and specifically to its acceptance of the idea that there must be an unemployed “buffer stock” of people who want to work, but must stay unemployed, in order to contain inflation?
Bill Mitchell points out that MMT argues against such a buffer stock and the NAIRU by:
“. . . proposing a way to achieve full employment with price stability. As Randy Wray noted in the speech referred to earlier MMT, in part, “turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand”. . . . .
“And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. . . . the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation. . . .
“ . . . the theoretical offering that MMT provides . . . is that if we are concerned about efficiency and price stability then there is a superior buffer stock available to a public currency issuing monopoly.
“That is, if we really understand the way the currency works and the way the labour market works then we can have both full employment and price stability by using an employment buffer stock rather than an unemployed buffer stock.
“Then you have a direct route into the current policy debate. The governments think that large deficits are bad so they spend on a quantity rule – that is, allocate $x billiion – which they think is politically acceptable. It may not bear any relation to what is required to address the existing spending gap.”
It may help to note at this point that this is exactly what President Obama did in passing the ARA in 2009. He received advice providing stimulus estimates as high as $1.8 Trillion in deficit spending achieved through either tax cuts or government spending for ending the recession, but he evidently wanted that bill to come in at around $900 Billion and to have some bipartisan support. So, he did the thing that seemed politically expedient using an arbitrary quantity rule, even though he knew, based on the advice he received, that it was unlikely to end the recession and bring the economy to full employment.
Bill goes on analyzing the MMT proposal to offer a Job Guarantee (JG) to any unemployed person who wants a job, and Full Employment with Price Stability:
“MMT shows you how it is far better to conduct fiscal policy by spending on a price rule. That is, the government just has to fix the price and “buy” whatever is available at that price to ensure price stability. But what is the price the government would be fixing?
“Answer: the price it offers labour to enter the employment buffer stock – that is, the JG wage. . . .
“In the face of wage-price pressures, the JG approach maintains inflation control by choking aggregate demand and inducing slack in the non-buffer stock sector. The slack does not reveal itself as unemployment, and in that sense the JG may be referred to as a “loose” full employment. . . .
“So in a fiat monetary system, price stability is maximised using employment buffers rather than unemployment buffers.
“There are those who might consider that the MMT proposal that national governments should first bolt down the nominal anchor via an employment buffer stock amounts to a disagreement with Post Keynesian policies of public infrastructure investment . . .
“Some might even think that the proposal to introduce an employment buffer stock amounts to a preference for “small government” in the Hayekian tradition.
“None of these views would be correct.
“What we argue is that to turn the Phillips curve on its head – and thus thwart the use of unemployment to control inflation – you need a different nominal anchor. Generalised expansion does not provide that.
“Once you have that anchor in place then your ideological preferences will determine what other public spending you might entertain within the capacity of the economy to embrace further nominal demand expansion.
“As I have said in the past I favour strong public sectors with lots of investment in first-class infrastructure to advance the prosperity and well-being of the citizens. Others, who consider MMT to be a valuable contribution (that is, get it) may have different preferences.
“My JG pool would be small (but sufficient for the purpose as a nominal anchor) others might have a larger JG pool and less public sector spending elsewhere.
But the essential point is that independent of our preferences with respect to the size of government we would maintain an effective and highly liquid employment buffer.”
In short, if MMT policies are adopted, including the JG proposal, then there would be no unemployment buffer stock, no one paying the price for one, and no estimates at all of the fictional NAIRU suggesting targets of 4% UE. But there would be Full Employment WITH Price Stability. So, Kevin, and other newly interested writers who are writing about MMT after the WaPo article; please note that the basics include no UE targets, just Full Employment. And no deficits and surplus targets either, just responses to demand-pull and cost-push inflation, and private sector cutbacks in employment, through automatic safety net and taxation stabilizers, and other responses to such effects.
MMT is always about policy, mostly fiscal, not monetary, that will enable certain economic, social, cultural, environmental, and political outcomes, and disable other outcomes in each of these categories. It is never about running deficits or surpluses as targets for their own sakes. Whether deficits, or surpluses occur are byproducts of MMT policy impacts, and are largely endogenous to the economy. In themselves they mean nothing. Only the economic policies and outcomes that drive them are important.
(Cross-posted from Correntewire.com
I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
As it happens I did an analysis of the distinction between MMT deficit doves and Keynesian deficit owls last June. So here it is again, an explanation which I hope will clear things up for Dean.
Here are some differences that are very significant for policy activism between a Keynesian deficit dove approach employed by people like Paul Krugman, Brad DeLong, Robert Reich, and Dean Baker, and a Modern Monetary Theory (MMT) approach employed by people like Warren Mosler, L. Randall Wray, Bill Mitchell, Jamie Galbraith, Stephanie Kelton, Marshall Auerback, Scott Fullwiler, and Pavlina Tcherneva. So, here are some contrasts between the two approaches on seven important issues.
1. Government deficit spending for recovery — Keynesian deficit dove position: provide high fiscal multiplier Government deficit spending or tax cuts to stimulate aggregate demand.
MMT position: provide high multiplier Government deficit spending: targeted on payroll tax cuts that will get more money into the hands of working people quickly; providing revenue sharing grants to States for maintaining existing State-level jobs; and direct job creation (job guarantee for anyone who want to work)
Significance: MMT says it’s not just about increasing aggregate demand and GDP. It’s about targeting and getting rid of unemployment!
2. Government fiscal policy over the business cycle — Keynesian deficit dove position: deficit spend in bad (less than full employment) times; have government surpluses in good (full employment) times.
MMT position: Government surpluses withdraw net financial assets from the private sector. Therefore, they should only be run when the private sector is over-heated and demand-pull inflation exists. Since the size of the Government deficit, without explicit Government attempts to raise taxes, is determined by 1) the level of savings of the private sector; and 2) the level of the trade deficit (surplus), it is perfectly possible that the Government may have to run deficits continuously to maintain full employment, if there is demand leakage from a trade deficit and/or private savings that the Government must make up for by deficit spending.
Significance: MMT says: ”Don’t worry about this simple fiscal rule.” Whether deficits are needed depends on the situation and specifically on our trade balance and our desires to save in the private sector.
3. Long Term Deficit Reduction Planning — Keynesian deficit dove position: We can and should engage in long-term deficit reduction planning since the fiscal policy can control the deficit, and since there is a long-term Inter-temporal Governmental Budgetary Constraint (IGBC) on deficit spending due to the potential of the bond markets to impose an insupportable interest burden on the budget when continuous deficits, increasing national debts, and increasing debt-to-GDP ratios accelerate too fast and/or get too high.
MMT position: We cannot and should not formulate or implement plans for long-term deficit reduction. First, because such plans assume that Government fiscal policy can accurately predict the effect on deficits of its attempts to close deficits by austerity measures. In fact, however, raising taxes or cutting programs always reduces net financial assets in the private sector, which in turn reduces aggregate demand and the level of economic activity, which, in its turn, drives up Government expenditures and, inadvertently increases its deficits. We already see this in the UK. the austerity measures of the Conservative/Liberal coalition government aren’t decreasing its deficits, but are increasing them, and driving the UK closer to a double-dip recession.
Second, because we should not be distorting fiscal policy by targeting it at deficits and surpluses, national debts, or debt-to-GDP ratios at all. Fiscal policy should, instead, be targeted on fulfilling public purposes including full employment, price stability, the elimination of poverty, providing universal health care as a right, maintaining public safety, creating an excellent educational system for all of our children, strengthening the social safety net, re-inventing the energy foundations of the economy, and so on. These, and not deficit reduction or debt-to-GDP ratio stabilization should be our real goals, because for fiat currency systems with floating exchange rates, non-convertibility of currency, and no external debts in any other currency or pegs to any external currency or basket of such currencies, there is no IGBC on deficit spending imposed by previous deficit spending.
That is, it doesn’t matter what such a Government’s national debt is, or what it’s debt-to-GDP ratio is. It still has the same capacity it has always had to buy anything it wants to buy for sale in its own currency, since it can always spend/create what its legislature appropriates.
Third, unlike Keynesian deficit doves, who evidently think that without long-term deficit planning and control of deficits, interest rates will rise catastrophically, and eventually consume the Federal budget; MMT deficit owls, point to the capability of the Government to spend without issuing further debt, use coin seigniorage, or issue only short-term (3 months or less) debt as measures the Government can take to either eliminate Treasury bond interest costs altogether, or to lower them to a level arbitrarily close to zero. MMT deficit owls say: Governments sovereign in their own currency are “in charge” in the bond markets, not bond market vigilantes, whose very existence depends on the sufferance of the Government.
Significance: MMT says: long-term deficit reduction plans are a no-no and should be opposed! They’re based on false theories and put constraints on Federal deficit spending that are sure to damage the economy. Most importantly, they hinder progressives in solving real problems
4. Long Term Deficit Reduction Projections — Keynesian deficit dove position: Organizations like the CBO can produce useful long-term projections of deficits and debts that can be used as the basis for long-term deficit reduction plans
MMT position: Organizations like the CBO can produce long-term projections based on certain assumptions; but they aren’t and can’t be useful because the assumptions are always unrealistic, often self-contradictory, and always fail to take into account the emergent character of political and economic reality.
This is apparent when we look back at CBO, OMB, and other fiscal projections in the past. In 2002 and after, where were the surpluses as far as the eye can see being projected by CBO at the end of the Clinton Administration? Where were the projections of the housing bust of 2007 and thereafter and its effects back in 2006? Where were the projections in 2007 of the great crash of 2008? Where are the projections right now of what happens if the United States suddenly decides to stop issuing debt instruments while doubling its deficit spending? The answer is that projections like these could not be made by CBO because their projections are always based on assumptions that cease to hold because of their sensitivity to unanticipated political occurrences.
Significance: MMT says: Since long-term deficit projections are invalid, and since they don’t affect the Government’s fiscal capacity. Stop doing them! And stop worrying about them! Worry about jobs, poverty, education, energy foundations, health care, global warming, the environment, the rise of global plutocracy, etc. These are the real problems!
5. Funding Government spending — Keynesian deficit dove position: Government spending must, over the long-term, be funded by some combination of taxing and borrowing.
MMT position: Government spending isn’t “funded.” It occurs under the authority of the Government to issue currency, which authority is unlimited by any constitutional requirement for “funding.” There is therefore no intrinsic Government Budgetary Constraint, (GBC) either static or inter-temporal. This means that we never need to ask the question, “how will we pay for it?” when considering Government deficit spending. There are many things we do need to consider: the likely results of such spending, how it’s targeted, its implications for full employment; its impact on inflation. However, we never have to ask “how will we pay for it?” or worry that “the Government is broke and can’t afford it,” because the Government of the United States is the currency issuer, not the currency user and it always spends and simultaneously issues “currency” when it does so.
Significance: MMT says: We never have to worry about the Government finding financial resources or “how are we gonna pay for it!” So, we can just do what’s right when it comes to balancing off the real resources being used to create real wealth!
6. Social Security Solvency — Keynesian deficit dove position: The Keynesians accept the Government’s projections that Social Security will become insolvent and unable to pay full benefits by 2037. So they advocate doing something about that by raising the current salary cap on FICA taxes, and sometimes even raising the retirement age, though not by as much as deficit hawks want to see it raised. Even if a Keynesian deficit dove opposes all changes except for raising the FICA salary cap, they still acknowledge that there is a long-term SS FICA revenue shortfall that must be met either with increased taxes, or by cutting Social Security benefits, and which ought not to be handled through deficit spending.
MMT position: In contrast, MMT says that since Government spending isn’t and need not be “funded,” there is no Social Security revenue shortfall problem. The only problem is Congress and whether it is willing to guarantee Social Security at present or increased levels for retirees. Stephanie Kelton has put this very well:
”Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.
In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”
It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”
Significance: MMT says: There is no revenue shortfall problem for Social Security because SS payments need not be funded, only appropriated, by Congress. The real problem is a Congressional and presidential guts problem; not a Social Security revenue problem!
7. Proposed progressive reform programs — Keynesian deficit dove position: Whatever programs are proposed must fit within “progressive” deficit reduction plans and their projected glide path toward a declining public debt-to-GDP ratio. However, important the programs, the problems they address, and the expected benefits from them, the overall deficit reduction plan with its various targets must have priority and provides spending constraints for the various progressive reform programs.
MMT position: Progressive reform programs must always be evaluated in the specific economic and social context of the proposed legislation and the key issue is always the assessment of their likely impact and the real benefits and costs (including side effects) of this legislation. Considerations of the size of deficits, debt-to-GDP ratios, or trends in such statistics are not among the impacts that are relevant. Impacts on employment, inflation, and a whole host of social, economic, and political factors are all relevant. And whether or not there is deficit spending, is certainly important because Government deficit spending adds to private sector net financial assets. However, prioritizing a long-term deficit reduction plan over progressive measures that will result in greater benefits for Americans is fiscally irresponsible because it sacrifices real increases in well-being to an erroneous theory about non-existent Governmental Budgetary Constraints.
Since Keynesian deficit doves as well as deficit hawks are doing just that with their long-term deficit reduction plans, they too are committed to fiscal irresponsibility over the long term. And in their willingness to compromise with deficit hawks out of a shared belief that their really is a long-term deficit problem, they also are willing to allow a certain amount of deficit reduction activity in the short and medium term, even though they know this is likely to be damaging to our already suffering economy.
Significance: MMT says: Escape from real fiscal irresponsibility (trying to target abstract fiscal indicators of budget performance rather than real outcomes of spending) and fiscal unsustainability (pursuing fiscal policy that reduces real economic capacity by destroying industry, manufacturing, and people skills) to true fiscal responsibility (targeting government spending at full employment, price stability, and other real public purposes) and true fiscal sustainability (Government spending that at least maintains and generally increases the real, rather than nominal capacity of the economy to produce the goods, services, and conditions that people value and fulfill public purposes).
So, those are the differences I see between the MMT position and the deficit dove position most often expressed by Dean Baker. Now, let’s move on to some of Dean’s other points.
Expansionary Policy Will Often be In Order?
”My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.”
Well, first, if monetary policy involving manipulation of interest rates alone is used then MMT’s position is that any expansion toward full employment that’s achieved that way will be at the expense of increased private sector debt, because the money created through increased bank loans won’t expand net financial assets in the private sector. So, if we rely solely on monetary policy, then even if there’s success, there will also be a debt bubble somewhere in the system that will need to be dealt with. So, second, fiscal expansion becomes critical in reaching full employment, if we want to achieve it without increasing the private sector debt-to-GDP ratio, which is not a good thing for future private sector stability.
Also, third, according to MMT, there’s more to this story than just “. . . expansionary fiscal and/or monetary policy will often be in order . . . “ Specifically, Government deficits, will have to occur, year after year if the private sector always wants to save and to import more than it exports. That follows from the Sectoral Financial Balances (SFB) Model:
Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0.
There’s no escaping such a deficit, if the private sector is to be a net saver, even if the foreign sector balance becomes zero. That is, the foreign sector balance, must become negative (the US has to have a trade surplus), if the private sector is going to save, and the Government sector is not to run a deficit. Further, the deficit in the foreign sector will have to be greater than the surplus in the Government sector, for the private sector balance to net save. Given the present terms of trade, and the private sector’s desire to de-leverage, it’s pretty plain that it will be some years before an expansionary fiscal policy won’t be necessary, if we are to have full employment in the United States. So, the more accurate way to say the above is: “. . . expansionary fiscal and/or monetary policy will be in order for the foreseeable future . . .“
Keynes’s Three Channels
Dean next points to:
”I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.
I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.”
Dan Kervick did a good job of explaining why MMT generally prefers the first channel rather than the second and third. To be brief, when interest rates are near zero as they are now, the second channel can’t be used any more. Also, even if it could be used, for reasons I’ve already stated the cost would be increasing private sector debt during a time when people want to save. Not good.
As for the third channel, as Dan Kervick points out, why would we want to create full employment at the price of lower wages for people here, when we can use the first channel and avoid that consequence.
But moving back to the first channel, Dean Baker envisions it as involving tax cuts and government spending to create deficits. But, from the MMT point of view there are other alternatives.
The first is placing the Fed under Treasury and enabling Treasury to create money through the Fed without needing to issue debt. So, if this is done, even though Government spending would exceed tax revenues, there would be no technical “deficit” of funds available to the Treasury without borrowing.
MMT also recognizes another variation on that theme that is in the Executive’s present authority to fill the public purse beyond what has been appropriated by Congress by using Proof Platinum Coin Seigniorage (PPCS). I’ve explained that in a number of places, but this post will do so well enough.
Most MMT writers don’t favor using this option in the expansive way I do, but that doesn’t affect my point, which is that PPCS created by depositing platinum coins with arbitarily high face values at the Fed will produce enough revenue credited to the Treasury General Account (TGA) to close any future gaps between tax revenues and Government spending that occur, while still adding net financial assets (in this case, reserves) to private sector accounts.
I hope these considerations explain why MMT writers prefer fiscal policy to the other channels.
”I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.”
I think you agree with MMT that the deficit is not an end in itself. In fact, many of the considerations above should make clear that neither the deficit, nor a balanced budget is an end in itself for MMT.
The end for MMT is achieving public purpose including full employment with price stability as one aspect of it. Since the MMT view is that fiscal policy is much more useful for doing this than monetary policy MMT focuses on how fiscal policy should be set.
Its general view is that alternative budgetary plans have to be assessed from the viewpoint of their anticipated outcomes, without regard to deficits or surpluses as outcomes valued in themselves. Of course, full employment is positively valued and unemployment negatively valued, but a whole range of valued outcomes is relevant for such assessments. Those are the ends, and fiscal policy is the means. Monetary policy and trade policy are also means, but are not nearly as important as fiscal policy in their effective short-term impact.
While it was good to find out that most of the leading MMT economists are Dean Baker’s friends and that they’re mostly on his side in political debates, I think it’s fair to conjecture that in spite of these relationships Dean’s post suggests that he knows very little about what MMT economists think in any specific terms. I hope this post succeeds in making this lack of knowledge clear and in suggesting that a very worthwhile thing to do would be to remedy that and find out about the MMT view of the world, since, in my view, it builds way beyond Keynes to a new synthesis of post-keynesian macroeconomic thought.
(Cross-posted from Correntewire.com
After stating his general approval for Dylan Matthews’s, MMT post on Ezra Klein’s blog, and his agreement with MMT on the issue of solvency, a big point that MMT’s been trying to get across to the mainstream for years, Jared brought forth a number of points of disagreement, which I’ll reply to based on my interpretation of the MMT perspective.
Tax Cuts Hard to Unwind? Not If You Legislate Properly!
”. . . awfully hard to unwind (this is a political flaw to MMT, btw…they seem to believe they can reverse the potential inflationary impacts of printing money by raising taxes on a dime).”
Hey Jared, not fair!
MMT can tell politicians what good Macroeconomic policy is. If the politicians won’t enact the necessary legislation, then why is this an MMT problem? MMT tells us that when we’re getting close to full employment, deficit spending ought to decrease, but not through explicit targeting. That will happen under MMT policies through the effects of the MMT-strengthened automatic stabilizers in the safety net; since when we get close to full employment, Government spending on safety net items will fall precipitously, and income and other tax revenues will increase substantially even under current tax structures.
Also, the MMT Job Guarantee (JG) proposal provides full employment within 6 months of initiation of the program, but is structured in such a way that as the economy recovers and the private sector gains ground JG expenditures automatically decrease because the private sector will higher back the JG workers by paying higher compensation than offered by the JG.
In addition, the legislation implementing MMT’s full payroll tax cut program can be structured so that payroll tax cuts are automatically indexed to the U3 or U6 unemployment rate. For example, full FICA credits would be in place until U6 unemployment reaches 8% then there would be gradual re-imposition of FICA until U6 unemployment of 3% is reached. Also, income tax legislation could be regulated the same way with tax increases on the wealthy indexed to increases in the monthly rate of inflation. Since both these measures would be built into MMT-based stimulus legislation and viewed as a permanent reform. Congress would not have to re-open the indexed tax increases to further legislation, and the President would be in a position to veto any changes to this automatic stabilizer.
Default vs. Hyperinflation? A False Choice for the US?
Even though nations with their own fiat currencies can’t default, default is preferable to hyper-inflation.
This is a view of Greg Mankiw’s that Jared mentions as a point of criticism of MMT without registering his own disagreement. The wording above is a paraphrase of Mankiw.
This conjecture suggests that there’s a relationship in fact between repaying debts incurred in one’s own fiat currency and hyperinflation. Of course, there’s no evidence that such a relationship exists where the nation involved is a fiat currency sovereign.
The historical evidence suggests that if fiat money is “printed” to secure foreign exchange needed to repay debts incurred in a foreign currency, then default may be preferable to hyperinflation. But the US doesn’t and won’t face this situation. So, why should anyone believe that this false choice posed by Mankiw and Jared is a real one?
Debt Should Grow More Slowly Than GDP? Why?
“When the economy is improving in earnest, we need our debt to grow more slowly than our GDP.”
As long as the debt is in one’s fiat currency, and one is sovereign in that currency, then why is it a problem if Government debt grows faster than GDP? If we agree that there is no solvency problem then either creditors will still buy newly issued bonds at low interest rates or they won’t. If they don’t, then the Government, with the cooperation of Congress, can always stop issuing debt instruments and create reserves instead to mark up private sector accounts. Here’s a scenario explaining how the US Government can do that.
The idea is based on Beowulf’s proposal, though I hasten to add that he doesn’t favor this particular proposal, nor do most of the MMT economists, though I believe that their disagreement is based on political judgments rather than on MMT-based economic analysis. The possible inflationary effects of Proof Platinum Coin Seigniorage (PPCS) are discussed and dismissed by Scott Fullwiler. PPCS is a legal alternative under present law, even when it involves filling the public purse to the extent I propose here.
Btw, Jared’s mentioning this “need” is a signal that he doesn’t understand MMT, since MMT economists don’t believe there’s any relationship between an increasing debt-to-GDP ratio and fiscal sustainability.
Deficits Must Respond Dynamically To Growth? They Will If They’re the Right Deficits
“That doesn’t imply zero budget deficits, but it does imply that deficits must respond dynamically to growth, growing in busts, coming down as a share of the economy in booms.”
The MMT point related to this is that if Government fiscal policy is fiscally responsible so that deficit spending is designed to support private sector savings, import desires, and employment in a way that adds value to the economy, then because deficits are endogenous, they will reach a level that is appropriate to an economy with full employment and price stability.
So, the Sectoral Financial Balances model is Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0, and the Government Balance will respond dynamically to those private sector desires if Government doesn’t target it with policy, but just allows it to float in accordance with savings and import desires and also provides properly designed automatic stabilizer policies and programs that create real value in the economy.
For example, if savings desires are at +6% of GDP and the Foreign Sector Balance is at +4% of GDP, then the model says that fiscal policies and programs should produce full employment at a Domestic Government Balance of -10% of GDP, so long as we do a good job designing the stabilizer programs. As long as savings and the Foreign Sector Balance remain constant, then the result will be the same, and a Government deficit of 10% will be sustainable in perpetuity for a currency issuer, so long as savings remain at the 6% level and imports continue to exceed exports by 4%.
Of course, this assumes that we are talking about a currency sovereign Government that can pay whatever debts in its own currency it chooses to create. Or if it chooses, decides to pay off all public debts as they come due and continues to “deficit spend” without incurring any new debt. Change can occur, in that the 10% deficit can go either up or down in response to changes in private sector savings or the foreign balance. But, according to MMT, it shouldn’t arise from simplistic efforts by Government to spend less and tax more to target the deficit for its own sake, because all that will do is to decrease private savings and imports too, reducing both nominal and real private sector wealth.
Instead, the private sector must decide to import less and/or save less on its own, if the Government deficit is to decrease. But why would anyone want to do that when private sector savings contribute to nominal private wealth, and imports from countries willing to accumulate nominal wealth in US Dollars, are real benefits to US consumers? The only reason why people might decide to decrease imports is because other nations stop wanting to sell things to the US in return for USD credits in their Federal Reserve accounts. In that case, we’d have to start making the goods and services we want ourselves, or develop appropriate substitutes for foreign sector products and services.
MMT Not Effective in Deficit Reduction Mode; or Congress Ineffective In Its Legislation?
“I can see MMT working effectively in deficit-increasing mode; less so in deficit-reduction mode.”
Well first, I think Jared’s comment here, implies a view that MMT automatic stabilization policies won’t be legislated by an ineffective Congress. But, of course, MMT economists would say that if their policies are passed, then they will work, and will be just as effective in deficit reduction mode as in deficit increasing mode.
MMT economists would also say that even if they’re not, then the correct thing to do would be to refine the automatic stabilization safety net, so that it will work without continuous or frequent Congressional intervention to destroy excess private sector Net Financial Assets (NFA) when that’s needed to contain demand-pull inflation. Of course, that kind of success depends much more on Congress than it does on MMT. MMT can propose effective policies to Congress. But, if it’s unwilling to pass them, then that’s on Congress. It’s not due to MMT’s lack of effectiveness “in deficit reduction mode.”
Having said the above, I also don’t think that MMT policies will get a chance to work until legislators and the President change their economic thinking and are ready to try them. As things stand now, Congress will never legislate the MMT program, unless it’s desperate for alternative fiscal and economic policies that might work to create full employment. If at that point, MMT policies are presented and formulated with the hedges necessary to ensure that they’ll work in both modes, then the chances are very good that they will. On the other hand, if legislators insist on passing bills that ensure price instability as full employment approaches, then, of course, inflation will result from their insistence on poor policy.
But, even if that happens, it won’t be credible to say that this was a failure of MMT as an economic theory, since there’s little doubt that if legislation passes without the necessary automatic fiscal stabilizers to produce both full employment and price stability, then economists like Jamie Galbraith, Randy Wray, Warren Mosler, Bill Mitchell, Stephanie Kelton, Pavlina Tcherneva, Marshall Auerback, and Mat Forstater, would loudly predict the likely failure of such legislation, while pointing out that this failure will be due to legislation that MMT says will fail, because it doesn’t have the necessary automatic revenue increasing stabilizers to create price stability.
Fiscal Sustainability and the Health Care Issue or Mis-allocation of Net Financial Assets to the Health Care Industry at the Cost of Weakening Our Democracy?
“There is no path to a sustainable long-term fiscal outlook that doesn’t reduce health spending, a problem not restricted to the public sector, btw—if anything, it’s worse in the private sector, where costs are rising even faster. Printing money doesn’t help you here—you need to reform the delivery system to take advantage of pooling and to emphasize cost effectiveness, i.e., the quality of treatment over the quantity.”
The effect of “printing money” to pay for increasing health care costs in this situation would be to create more and more nominal financial wealth for the health insurance and health care provider sectors of the economy, making them wealthier and wealthier relative to the other sectors, and giving them more political power. However, I don’t think “printing money” to maintain the present level of Government social safety net, or provide Medicare for All, poses any fiscal sustainability problem for the public sector, at least not for the reasons of solvency and hyperinflation normally brought forward.
Rather, the fiscal sustainability problem presented by the increase in health care costs is for the middle class and the private sector economy as a whole, not for a fiat currency sovereign Government. And there is another, political, sustainability problem for Democracy in the United States, since with each new Government “gift” of more net financial assets to that sector, the more powerful it becomes relative to other sectors. That is the greatest real problem with the health insurance/care sector, not Government fiscal sustainability.
In any event, the solution to our health insurance/health care problem isn’t rocket science. We know from looking at health care arrangements around the world that we can get better outcomes at a cost of no more than 12% of GDP. What we need to do is to pass a bill like HR 676 Medicare for All, taking the insurance companies out of the health care business, limiting the provider cost increases to the general rate of inflation, and applying modern quality management methodologies to the health care industry.
This has nothing to with MMT, except insofar as it tells us that we will experience neither governmental solvency nor inflation problems from taking that kind of action, as long as we wrap it into our general MMT program of automatic stabilizers. The rest is political and relies on our ability to break the thralldom of our Representatives and Senators to the oligarchy, and force them to begin again to represent the heavy majority of the people in our democracy.
Does Jared Bernstein Really Understand MMT, Yet?
It’s clear that he thinks he does and that he asserts that he accepts the central proposition that there is no solvency problem. However, all the criticisms he mentions suggest that he really hasn’t thought through what it means to say that the US Government is a sovereign fiat currency issuer and has no solvency problem.
So, If the Government has no monetary limits then how can rising health care costs present a fiscal sustainability problem for it? If there are no limits, then why must deficits or the debt-to-GDP ratio ever decline? If there are no limits, then why must we use debt instruments at all? If there are no limits for a currency sovereign, then why should default ever involve a choice between it and hyperinflation?
Finally, I also think that Jared doesn’t fully understand that MMT is not just an approach to economic policy and analysis, but primarily embodies certain Macroeconomic propositions and propositions about how modern money works, and what policies could be followed to achieve public purpose. If he did, then why would he keep making objections to MMT policy proposals based on his ideas about how Congress will act in reply to them?
In the end, it’s not MMT’s responsibility to propose policies that Congress will legislate. It is, instead, up to MMT to propose policies that will achieve full employment with price stability and other favorable social, cultural and political impacts for our democracy.
From that point on, it is up to political advocates to make these policies popular enough to get Congress and the President to pass them. And any failings in passing these policies are not failings of MMT economics, but faiings of the oligarchy which will not pass the policies it recommends.
(Cross-posted from Correntewire.com
This post concludes my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”
Dylan’s post is in some ways typical of what one finds in WaPo these days. What was once a proud example of journalism has descended into a “he said/she said” format with only two sides to every question and a kind of parroting back of talking points the journalist or columnist constructs which she/he believes are associated with the two sides. Dylan’s article addresses the question of what we ought to do about the deficit by viewing it from the perspective of the deficit hawks vs. the deficit owls. However, there aren’t just deficit hawks and deficit owls in the economic aviary. There are also deficit doves as well.
Matthews ignores that position as a distinct one, even though he cites a deficit dove like Paul Krugman when it suits his purpose. So what is the deficit dove position? How does it differ from the other two? We don’t know based on his post. But there are MMT posts on this subject that Dylan might have and I think should have, researched.
In addition, the ping-pong talking point format of the post leaves one with a very superficial analysis of what hawks and owls and different people believe. The excuse for this, of course, will be lack of space in a short blog form. But that doesn’t change the fact that even though the journalist or writer involved makes an attempt to be neutral toward the contending parties, no real objectivity involving a deep understanding of the contending positions is presented. Only caricatures on the incomplete fair critical comparison set of positions survive the journalistic malpractice of faux objectivity.
Reading the post, you get the impression that MMT questions the mainstream with very distinct and opposed policy positions, and that the mainstream has counter-arguments to MMT. But you really can’t get any sense of the underlying deficit hawk, deficit dove, deficit owl reasoning behind their policy positions.
You don’t learn that the hawks are viewing the Government from the viewpoint that it is like a giant household, and that some of the doves share that perspective.
You don’t learn that the hawks often claim that the Government can run out of money.
You don’t learn that the hawks accept the Quantity Theory of Money, or that both hawks and doves, but not the owls believe in the existence of an Inter-temporal Governmental Budgetary Constraint (IGBC) on spending.
And most important of all you don’t learn about the Sectoral Financial Balances (SFB) Model, and how it works from the hawk, dove, and owl points of view.
In other words, from reading the Matthews piece you don’t learn anything about the depth of the owl position, relative to the others, and you also don’t get an impression that Dylan really understands the deficit owl position, and that he is capable of assessing with reasonable fairness how well it stands up to the criticism from the hawk or mainstream approaches.
So, in the end, even though people who like MMT were very happy to have the coverage from WaPo, and very happy that the post was relatively friendly as these things go, I think we have to conclude that Dylan’s wasn’t a good post, but another indication of WaPo’s decline as a paper of record. Nor am I alone in having a negative view of this post. Michael Hudson has recorded a strong reaction to it, as well, in a note to Stephanie Kelton which was blogged at Mike Norman Economics by Tom Hickey.
So, I call for WaPo to try again. People need an MMT post from WaPo written by one of the MMT leaders, alongside parallel posts from leading deficit hawks like David Walker and deficit doves like Paul Krugman, Jared Bernstein, or Dean Baker, with a concluding post recording extensive debates among the representatives of the major approaches. If we had that then all of the readers of The Post would be better able to judge for themselves which approach has the most to offer in the way of policies for setting our economy on a course that doesn’t waste people and that is culturally, socially, politically, economically, and environmentally sustainable in the foreseeable future. I’m sure that’s what we all want, but I’m afraid that this opening bid on MMT by WaPo didn’t get us very far down the road toward that result.
Having said all this about what was wrong with Dylan’s post, however, I will now end on a positive note, which perhaps explains why so many MMT supporters have a positive view of the post. There’s one very important and very beneficial thing that Dylan Matthews did that deserves a real shout-out!
For many years now, MMT economists and others who write in support of them have been trying to make a very important point to the mainstream. And that is that the claim:
is a myth, a fairy tale, or a deadly innocent fraud.
Dylan doesn’t say that in so many words. But he and the economists he cites, even Greg Mankiw grant this very important MMT/deficit owl point in passing.
If this post is any indication, mainstream economics, and certainly deficit doves, and hawks like Mankiw, now acknowledge that a nation like the US which is sovereign in its own fiat currency can never run out of money, or be prevented by the pure fiscal aspects of any situation from paying its debts or buying whatever goods and/or services it needs that are available for sale in its own sovereign currency.
So, that part of the great debate is now over. It will be very hard from here on, for the deficit hawks to maintain their deficit/insolvency terrorism in the face of the general recognition in economics that the Federal Government is not like a household, because it can never run out of the currency that it has the sole legitimate power to issue.
If they try, they will now be the ones facing ridicule and marginalization. And, increasingly, those politicians who try to claim we are running out of money, will also face ridicule and be viewed as ignoramuses by others.
That may not bother many of the Republicans coming from districts resistant to the realities of modern life. But, increasingly, “serious people” in Washington will stop repeating the myth about coming insolvency and move on.
Dylan’s post already does that by assuming that the real issue about MMT vs. the mainstream isn’t about solvency, but about excessive deficit spending causing either inflation or hyperinflation. Every critic of MMT cited in the post raises the objection either implicitly or explicitly that MMT policy proposals will lead to worrisome inflation, or hyperinflation. Now, that’s progress, because unlike the level of one’s national debt, or the size of one’s deficit in the abstract, or the nonsense debt-to-GDP ratio, which means nothing in itself, inflation is a real issue, not an artifact of some economist’s fevered theories.
More generally, the real issue is the generalized consequences of Federal fiscal policies and the programs associated with them. They have employment consequences, inflation/deflation consequences, environmental consequences, safety net consequences, medical consequences, educational consequences, inequality consequences, climatological consequences and all the rest. The position of MMT is that alternative fiscal policies need to be evaluated in terms of our best estimation of their impacts on our societies, cultures, polities, environments, and futures, and not in terms of their narrow, purely fiscal impacts on present and future Federal budgets.
Changes in unemployment and in inflation are two such real impacts, but we need to go beyond them to other real impacts. We need to evaluate the whole thing. Let the hawks put forward their budgets, and the doves theirs, and we owls will put forward ours, and then let everyone evaluate what consequences are likely for all of the alternatives, and which alternative is best overall in terms of real consequences and in terms of public purpose and not in terms of arbitrary debt, deficit, and debt-to-GDP ratio targets, that, in themselves have no meaning for people.
In other words, let’s get real. Let’s talk about real problems of real people that can be alleviated through fiscal policy and Government programs. Let’s stop taking about fairy tales, myths, and bogeymen. And let’s get on with the job of rebuilding the United States for our children and grandchildren and using every tool we have, including our fiat currency system, to realize the blessings of liberty and equality of opportunity for everyone.
(Cross-posted from Correntewire.com