My Critique of MMT
…is up at Mises.org. An excerpt:
According to many proponents of MMT, “deficits don’t matter” when a sovereign government can issue its own fiat currency, and all the hand wringing over the government’s solvency is absurd. In fact, the MMTers claim that given the reality of a US trade deficit, a sharp drop in the government’s budget deficit would hamper the private sector’s ability to save. Thus, the Austrians are unwittingly calling for a collapse in private saving when they foolishly demand government austerity.
…
Thus far I have accepted the MMT premises on their own terms, and shown that MMT’s proponents often read more into their neutral accounting relationships than is justified by the relationships per se. However, in this final section I want to point out something even subtler.One way to describe MMT is that is a “nominal” model of the economy, looking at flows of money without inquiring too deeply about the economic significance behind the flows. This article is already lengthy, so let me illustrate the problem with an analogy.
Suppose Tabitha has an income of $100,000, out of which she consumes $90,000. Tabitha takes her savings of $10,000 and lends it at 5 percent interest to Sam, who signs over an IOU promising to pay Tabitha $10,500 in 12 months.
Now let’s stop and ask, did Tabitha save money in this scenario? Yes, of course she did. Another question: did Tabitha accumulate net financial assets? Yes, of course she did: she is holding a legally binding IOU from Sam, which possesses a current market value of $10,000 and will grow in value over time as the payoff date approaches. (Changes in Sam’s solvency and interest rates of course might inflict capital gains or losses along the way.)
Now let’s tweak the scenario. Suppose I tell you that Sam plans to raise the money needed to repay his loan by selling services to Tabitha. For example, suppose Sam used the $10,000 loan to buy equipment that he will then use to perform landscaping work on Tabitha’s property over the course of a year. Every month Tabitha pays Sam a fee for his services, and after the 12th month Sam takes these fees, which are equal to $10,500, and hands them back to Tabitha.
In this revised scenario, is it still true that Tabitha acquired a net financial asset when she bought the $10,000 IOU from Sam in the beginning? Yes, of course it is. Tabitha voluntarily purchases the landscaping services from Sam; the flow of money back and forth is a bookkeeping convenience. Economically, what happened is that Tabitha exchanged a stock of present goods up front for a stream of services over the course of the year.
Now let’s tweak the scenario one last time: Suppose that Tabitha lends $10,000 to Sam, who gives her an IOU promising $10,500 in 12 months. After the year passes, Sam walks up to Tabitha and sticks a gun in her belly, demanding $10,500 in cash. She hands it over to him, and then he gives it right back and tears up his IOU.
In this scenario, did Tabitha acquire a net financial asset when she originally lent the money to Sam? No, not really — especially if she knew how he planned on “repaying” her. In this case, Tabitha’s savings of $10,000 would have simply been confiscated by Sam. He can go through the farce of giving her an IOU and then robbing her in the future to “redeem” it, but economically that is equivalent to him simply robbing her of the $10,000 upfront. From Tabitha’s viewpoint, her $10,000 in savings vanished, while Sam’s consumption can rise by $10,000 without increasing his own indebtedness.
Now let’s expand the groups. Instead of the individual Tabitha, consider the group of all Taxpayers. And instead of the individual thief Sam, consider the institution Uncle Sam. The MMTers correctly tell us that the Taxpayers can’t accumulate “net financial assets” — i.e., drawing on income streams that originate outside the group — unless Uncle Sam runs deficits and issues them bonds.
But what is the point of accumulating bonds that will only be redeemed when Uncle Sam coercively raises the necessary funds from the same group of Taxpayers in the future? Any individual taxpayer can justifiably look at a Treasury bond as a net asset, because his or her own tax contributions will not vary significantly based on his or her investment decisions regarding Treasuries. But the private sector as a whole surely shouldn’t naively assume that if the government runs a $1.6 trillion deficit this year, this foretells of a shower of new income flowing “into the private sector” down the road.
Paging James Galbraith, is your Google Alert activated? I’d be interested in your thoughts…
The critique was very good. I applaud you and challenge MMTers here: http://factsandotherstubbornthings.blogspot.com/2011/05/murphy-on-mmters.html
One question – why do you call neo-Keynesianism a “doctrine” at the beginning? Do you really take it as a doctrine rather than a theory you happen to find lacking?
Oh I guess I wasn’t concerned with that type of distinction.
So we’re all aware there are crude Keynesians and crude Austrians out there who take arguments like this and think they’ve hit on something that nobody can possibly debunk… do you get the impression in your research into them that this is all that MMT amounts too, or do you think there is a more sophisticated argument lurking in there somewhere?
Bob,
You write:
Now Nick Rowe and the MMTers are certainly correct when they observe that “private saving net of private investment” can’t grow without a government budget deficit (again if we disregard foreign trade).
What about Robinson Crusoe saving up coconuts, not to fund any project, but simply to have as a rainy day fund? Wouldn’t that be net saving without investment?
Then the project would be the “rainy day” as a preference for insurance over some other need.
Right Eli, I think RS has it. I would say you just “invested” in the accumulation of an inventory of coconuts. It may sound contrived to you, but I don’t think there’s any way to meaningfully distinguish that action from, say, using your labor to build a pole or a fishing net. Both are cases of you devoted present resources towards higher future consumption, based on your expectations.
Sure, but then aren’t all savings a form of investment?
What is an example of something that would qualify as pure savings and NOT investment?
I personally don’t think there is such a thing. Even if I get paid in cash and put that under my mattress, I would say I invested in cash balances. However I think some other Austrians might not like that way of handling it.
Note that there is definitely a distinction they make between “plain saving” and “capitalist saving.” I think the idea there is the difference between accumulating consumption goods versus non-consumption goods.
I personally don’t think there is such a thing. Even if I get paid in cash and put that under my mattress, I would say I invested in cash balances. However I think some other Austrians might not like that way of handling it.
I have no problem defining investment that way, it just seems that even the original quote of yours I picked out is being too kind to the MMTers.
What about Robinson Crusoe saving up coconuts
FWIW I agree that basic common sense would call that “saving”.
However, in the MMT upside down world, Robinson Crusoe does not exist, the coconuts do not exist and the island does not exist, nor do the fish. None of those things exchange fiat currency you see. Only fiat currency exists.
But that’s not whacked enough… let’s suppose that Robinson Crusoe works a job, and rents his island and buys the coconuts and still (somehow) puts aside some coconuts to go into the stack. Further, lets suppose that Crusoe spends every single dollar that he earns and he never goes into debt (so his budget is exactly balanced). In this case Robinson Crusoe cancels himself out of the MMT system and turns invisible. He might as well not exist.
Bob doesn’t even realize he is proving the MMT position right. The accumulation of coconuts proves that the private sector desires to net save. Since the government is the only entity that can supply US dollars then the government must spend some level of currency to meet this demand.
In Bob’s example, the tree is monopoly issuer or currency. If it doesn’t issue any coconuts then Robinson can’t save. It’s that simple.
Bob’s entire example is dead wrong.
Bob doesn’t even realize he is proving the MMT position right. The accumulation of coconuts proves that the private sector desires to net save. Since the government is the only entity that can supply US dollars then the government must spend some level of currency to meet this demand.
The government doesn’t need to print more dollars for people to save more. People can simply choose to spend less of their income and put more of it under the mattress.
In Bob’s example, the tree is monopoly issuer or currency. If it doesn’t issue any coconuts then Robinson can’t save. It’s that simple.
A tree is not the government. If the tree doesn’t “issue” coconuts then Crusoe can’t consume either, so would MMTers argue that governments need to run deficits for people to consume as well?
When the tree “issues” coconuts, it is increasing society’s wealth because there are more consumption goods available. When the government prints money, it does not increase the amount of consumption goods or capital goods available to society.
That we can increase wealth by acquiring resources from the earth =/= the government needs to run a deficit for people to save more.
Let’s take your example to its logical extreme. Let’s just have the government tax back all of our outstanding dollars.
What do you think would happen to economic growth overnight? Yeah, that’s right. It would collapse because there would be no money in the system for us to use.
There is an inextricable link between taxes and the government. It is always a creature of the state. In your fantasy world where the government doesn’t exist we might be able to have zero taxes or even a common currency. But that’s not the world we live in and that world isn’t ever coming to the USA.
So, back on planet earth, the government, BY NECESSITY, must spend some money into existence if we are going to be able to pay our taxes in the legal currency of the USA.
Way to completely ignore my post.
To reiterate:
MMTers claim that the government needs to increase the deficit for people to save more. I pointed out that people can simply spend less of their income on consumption and put more of it in the bank. Your response?
And to address your red herring, if the government relinquished control of the money supply, the private sector would create its own currency as countless societies have done in the past. Probably a gold-backed or silver-backed currency. And no, private banks don’t need to run a deficit to issue currency.
“What do you think would happen to economic growth overnight? Yeah, that’s right. It would collapse because there would be no money in the system for us to use.”
Holy cow, that sounds awful. Now I see why the world would fall apart without green pieces of paper. Think of the all the computers, cars, homes, Ipads, water, food, etc. that couldn’t be made without green pieces of paper. People are too stupid and it would be too difficult for them to develop their own currency. The morons would probably go back to using gold again like the rest of the rubes throughout history.
@MMTer: What do you think would happen to economic growth overnight? Yeah, that’s right. It would collapse because there would be no money in the system for us to use.
Well, that situation would certainly suck, but it’s not like economic activity would *have to* halt because of the lack of USDs. People could still barter, use foreign currencies, and gravitate to some other medium of exchange.
Eli:The government doesn’t need to print more dollars for people to save more. People can simply choose to spend less of their income and put more of it under the mattress.
You can do that at the individual level, but not at the aggregate level of the whole private sector in a closed economy.
You can decide to save $100 by consuming less. That is $100 less income and savings of the rest of the private sector.
That’s what the sectoral balances mean.
.
You can decide to save $100 by consuming less. That is $100 less income and savings of the rest of the private sector.
Not exactly. $100 less income does not mean $100 less savings. People can save less, more, or the same amount from their reduced income. And although their incomes may be reduced, the withdrawal of cash from circulation (by the saver putting cash under his mattress) puts upward pressure on the purchasing power of the remaining dollars, so people’s real wages will quickly readjust to their previous levels.
Saving more cash does not reduce the amount of goods and services available to society. It is entirely possible for everyone to cut back on consumption. Also, people don’t typically save by putting cash under the mattress, they put it in banks where it gets lent out to entrepreneurs. In that case the saved cash isn’t withdrawn from circulation, rather it is used to purchase capital goods instead of consumer goods.
In terms of net financial assets (govternment IOUs) the private sector cannot increase its savings.
It’s a closed circuit, there is no way around it.
In terms of net financial assets (govternment IOUs) the private sector cannot increase its savings.
It’s a closed circuit, there is no way around it.
The private sector can’t increase its aggregate nominal *income* without the government creating additional money, but it can absolutely change the ratio of how much of that income is spent on consumption vs how much is saved.
And again, people don’t care about their nominal savings per se, they care about their real savings — they care about purchasing power.
Eli wrote:
The private sector can’t increase its aggregate nominal *income* without the government creating additional money, but it can absolutely change the ratio of how much of that income is spent on consumption vs how much is saved.
Let me try to explain the germ of truth in the MMT claim here. You’re right, the private sector can save, even in the aggregate, if saving is defined as “income minus consumption.” However, the MMT guys are saying that the private sector by itself can’t accumulate “net financial assets.” Here’s the kind of thing they mean: Suppose you save and lend $10,000 to Google so it can hire a programmer to write some new code that increases Google’s future revenues. Now your household has a net asset of a $10,000 bond issued by Google, but Google has a net debt of the bond it issued to you. So the private sector as a whole hasn’t seen an increase in net financial assets.
What I was showing in my article is that that this “constraint” doesn’t stop people from living below their means, investing in new factories, increasing the productivity of labor, and having a rising standard of living. But the MMT guys think that there is something really special and economically significant about the ability to accumulate net obligations from a government that will tax you next year in order to pay off its obligations to you.
Sorry you don’t get it.
Any individual can adjust his/her saving/consumption ratio.
But the whole private sector can reduce consumption, which will reduce income but leave savings unchanged.
Income:
Y = C+I+G
Savings
S=Y-C-T
=I+(G-T)
So consumption does not affect aggregate savings.
MamMoTh wrote:
But the whole private sector can reduce consumption, which will reduce income but leave savings unchanged.
Reducing consumption does not reduce aggregate income. It will reduce some people’s income and increase others as the saved money is invested into other avenues. Real aggregate income is a function of production, not consumption.
Bob wrote:
What I was showing in my article is that that this “constraint” doesn’t stop people from living below their means, investing in new factories, increasing the productivity of labor, and having a rising standard of living.
…
You’re right, the private sector can save, even in the aggregate, if saving is defined as “income minus consumption.” However, the MMT guys are saying that the private sector by itself can’t accumulate “net financial assets.”
So to echo your earlier point, if we define “private savings” as “private savings”, the MMTers sound silly. Is there more to MMT than just quibbling over semantics?
Eli:Reducing consumption does not reduce aggregate income.
Yes it does all other things equal.
Income = C+I+G
Mammoth do you object if I take some of these posts and put them on the front page? I think we are getting at the main issue here.
Yes it does all other things equal.
Income = C+I+G
Except all other things are not equal. With a given income, if you reduce C you are increasing I by the same amount. Suppose Y=100, C= 40, I=60, and G=0. The private sector can restrict its consumption by 20 and invest that amount instead such that now C=20 and I=80, with Y being unaffected.
This is the problem with focusing exclusively on accounting identities without understanding the underlying causality.
Actually, in advanced courses, Y, C, and I are treated as endogenous variables; they are functions of each other. The undergraduate treatment of the accounting identity is unfortunately misleading.
if you reduce C you are increasing I by the same amount
Not necessarily. That’s what other things equal means.
If C+I remains constant then income remains constant, and net savings S-I remain constant too.
Mammoth do you object if I take some of these posts and put them on the front page?
Not at all.
MamMoTh:
But the whole private sector can reduce consumption, which will reduce income but leave savings unchanged.
You’re conflating savings with hoarding.
So consumption does not affect aggregate savings.
Imagine every seller and wage earner consuming 100% of their sales revenues and wages, respectively.
Savings will go to zero.
I am using savings in a precisely defined way which is income – expenditure.
So if you spend all your income then your savings are 0 for that period.
Not necessarily. That’s what other things equal means.
Yes, IF all other things were equal, you would be correct, but all other things are NOT equal. Specifically, they can’t be equal, because Y, C, and I are not independent variables. A reduction in C does not cause a reduction in Y.
If C+I remains constant then income remains constant,
You’re confusing cause and effect. If income remains constant, then C+I+G will remain constant.
and net savings S-I remain constant too.
Savings is always an investment. “S-I”, by definition, means government surplus.
If S=Y-C-T, I can reduce C and increase S.
So I say that the MMT system has no mechanism to acknowledge that either the tree exists or that the coconuts exist.
And you say that the tree is not a tree and the nuts are not nuts. There are no trees, no nuts, only government and fiat currency.
I think we might be saying the same thing… I’m going to stare out the window for a while, watch the governments blowing in the breeze and carefully review my own sanity, just as a precaution.
MMTer wrote:
Bob doesn’t even realize he is proving the MMT position right. The accumulation of coconuts proves that the private sector desires to net save. Since the government is the only entity that can supply US dollars then the government must spend some level of currency to meet this demand.
In Bob’s example, the tree is monopoly issuer or currency. If it doesn’t issue any coconuts then Robinson can’t save. It’s that simple.
Bob’s entire example is dead wrong.
If that’s the way you guys are going to handle this, then my work is done here. When you are going around saying, “Don’t you guys get it? If the government runs a balanced budget, and we set aside the trade deficit, then the private sector can’t ‘net save’!” you make it sound as if the private sector can’t achieve their goals of living below their means.
But now it turns out that there is a loophole. If somebody (say) accumulates a bunch of tuna fish, or a bunch of gold, then apparently you will say, “Ah, just as our equations told us. The tuna factory is issuing more cans, and the gold miners are issuing more of their bars. MMT wins again.”
So sure, go ahead and claim victory. We will do the same. If you agree Crusoe can engage in genuine saving and investment without a government running a budget deficit, then I’m happy.
Bob,
Your example is totally unrealistic. You can’t pay your taxes in coconuts. That might be an inconvenience for your whole theory, but it is your reality. So, until you can pay your taxes in coconuts (or have no tax liability at all) then you have to work within the limits of the rules that the US government sets.
Your entire form of thinking might be superior, but it’s not remotely applicable to the US monetary system.
So yes, in your fantasy world without a government, you have “won”. Back here on planet earth you are using a totally delusional economic theory.
Bob, he is saving and investing in coconuts not in net financial assets issued by the government.
If he wants to net save financial assets issued by the government then Robinson must sell his coconuts to the government, which will then run a deficit.
Happy?
Mammoth wrote:
Bob, he is saving and investing in coconuts not in net financial assets issued by the government.
If he wants to net save financial assets issued by the government then Robinson must sell his coconuts to the government, which will then run a deficit.
Happy?
Yes, totally. It’s now clear that when you guys say, “The private sector can’t save on net” all you mean is, “They can’t accumulate financial assets issued by the government.” No Tea Party person would care about that. I’m glad we all agree that people in the private sector can still live below their incomes, and channel the difference into building new factories, tools, machinery, etc., so the productivity of labor goes up over time and total real output increases. That is why Tea Party people would care about saving. They don’t care that they are unable to load up on IOUs issued by Tim Geithner.
Mammoth I am not being sarcastic: I think you and I really resolved the dispute right here. I believe I am conceding the truth in your position, and if you concede what I just said, I can call it a day. So do you endorse what I just wrote?
They don’t care that they are unable to load up on IOUs issued by Tim Geithner.
Good. I hope they know that’s what their dollars are.
If they don’t want them, send them to me! I love Geithner’s IOUs!
I tried to convince Roddis about doing it and lower his real wages, but apparently they are too sticky!
Bob wrote: “[The Tea Party people] don’t care that they are unable to load up on IOUs issued by Tim Geithner.”
Mammoth wrote: Good. I hope they know that’s what their dollars are.
If they don’t want them, send them to me! I love Geithner’s IOUs!
OK, but keep in mind they don’t have to just send them to you for free. They would send them to you for, say, shares of Google, or pieces of real estate. To repeat, you keep acting as if the only useful form of saving is bonds issued by the government. No, there are plenty of ways to accumulate assets, though I agree that in your classification scheme, those other ways don’t count as “assets net of private investment” since they are also forms of private investment.
So you see someone must want those darned IOUs in aggregate.
Morevoer, if they want to make a profit out of their investment in shares or real state, they will need an increase in the supply of those IOUs.
But if they favour a budget surplus they must be willing to give those IOUs for free. In that case they should send them to me.
Well THAT element of MMT isn’t all that upside-down. We do live in monetary economies and have for quite a while. Robinson Crusoe points are limited because they don’t incorporate money – fiat or otherwise.
Anyone get the feeling that Daniel doesn’t exactly know what money is?
I’m with Daniel, this is an excellent critique, but I am not sure Galbraith will understand it, since he will probably find some way to argue that Uncle Sam isn’t really stealing from people.
We can also challenge the very notion that “net financial assets” have to grow at all over time in order for the economy to grow and for individuals to prosper. I remember Galbraith arguing in some article way back when about deficits being required to “inject financial resources into the economy.” He is, of course, confusing wealth with riches. He is treating money as a good that is not used primarily as a medium of exchange.
Net savings only appear to be the primary driver of economic growth because of inflation. Without saving out of the additional net income created by inflation, then at some point consumption spending will be so great relative to capital spending that economic retrogression will occur.
Without inflation, savings can take place out of gross revenues, and the same level of savings relative to aggregate spending can facilitate capital accumulation on a foundation of falling prices of capital goods as more capital goods are produced on a foundation of a prior pool of capital goods. As long as the saving out of gross revenues is high enough relative to consumption spending, then capital accumulation is possible.
The actual significance of savings rests not with net savings, but with gross savings. Gross savings often gets overlooked by New Keynesians like Galbriath because they ignore more of the spending that takes place in a modern economy. There’s profits, wages, and net investment, and that’s about it. They ignore gross investment, which will persist and can facilitate practically infinite economic growth.
The notion that government budgets are necessary to “inject financial resources into the economy” is flawed economics, if you can even call it economics.
There’s now a review by Cullen Roche:
http://pragcap.com/the-austrians-are-intrigued
Everything Roche said refers to plumbing system issues like whether excess reserves lead invariably to general price inflation. That’s a question of fact based upon particular circumstances. I think the dollar is going to collapse because there is not enough stuff to satisfy all of the unpayable debt. The MMTers never explain where all that stuff is going to come from. I understand that the government can create money out of nothing to legally satisfy the debt, but people expect to receive real goods and services at what they perceive as “normal” values.
I see not a word on basic Austrian School concepts like Cantillon Effects, the pricing process and economic calculation problems, distortion of the price, investment and capital structure, and problems of “knowledge in society” which is the essence of the Austrian School, and we never will.
If you think a sovereign government in a floating exchange rate system has a fiscal constraint that can result in insolvency then you have completely missed the entire point being made by MMTers.
There is no such thing as debt being “unpayable”. Austrians have the entire framework of a fiat monetary system entirely wrong.
If you think a sovereign government in a floating exchange rate system has a fiscal constraint that can result in insolvency then you have completely missed the entire point being made by MMTers.
I’m pretty sure Bob understands that’s what MMTers think. He just doesn’t think that they have good reasons for thinking so.
Actually, his comments prove that he has no idea.
Ironic, since Bob’s comments prove that you MMTers have no idea what you’re talking about.
No, he only proved he had no idea what we are talking about.
No, he proved that you MMTers have no idea what you guys are talking about.
No, he really proved he had no idea what we are talking about.
It’s too bad WordPress only allows 7 levels of nesting. I’d be curious to see how many times you guys could repeat your claims. 🙂
it also forces you to change something and not just cut and paste the previous post!
that’s so unproductive…
🙂
No, he really did prove that you MMTers have no idea what you are talking about.
No, no, no…
He proved that he had no idea what we are talking about.
And he had to misquote me out of context in a clear sign of intellectual dishonesty.
Typical Austrian.
You still don’t get it Mammoth.
He proved that you don’t know what you are talking about, and he didn’t quote you out of context. You just goofed.
Read what I wrote again REAL SLOW.
For sake of argument, I conceded that the government could write the checks and were not constrained from writing the checks. However, people expect that those checks will purchase the $100 trillion + of goods and services they think they are entitled to or have been promised. The MMTers cannot comprehend that the stuff isn’t there and won’t be there and that’s a big problem.
Can there be any doubt that other than their primitive view of aggregate demand management (which intends to cure a non-existent problem or else a problem that they create), these guys know no economics at all?
Okay, so what you’re making then is essentially a high inflation or hyperinflation argument.
The money supply as measure by Shadow States is barely positive. M2 is growing at the historical average rate of 6%. The CPI is 2.7%.
Where is all this scary inflation you talk of?
here.
MMTer, Austrians do not assume that a government that can print its own money can ever go insolvent, such that debt becomes “unpayable.” The fact that a government can print its way out of debt obligations is very much a part of Austrian economics, and is one of the Austrian’s main criticisms of fiat money due to the effects of such a policy.
What I don’t get about MMTers is why they think their theory contradicts Austrian theory.
In the article by Roche, he doesn’t even critique Austrian theory at all. The closest he comes to making a positive criticism of Austrian theory is:
“Unfortunately, Austrian economics is dominated by political rhetoric and scare tactics that are utilized to push a political agenda and not a rational view of the world in which we live.”
In other words, “Austrian economics is poo poo.”
The other criticism is:
“This all makes sense in theory. If the government competes with the private sector for borrowings then someone must be getting “crowded out” by all of this, right? But an odd thing has happened in the last 10 years. Taxes have declined, government spending has surged and interest rates have fallen. In essence, the entire premise of the “crowding out” theory has fallen flat on its face. This isn’t the first time history has seen this occurrence. The Japanese economy has been the most notable case. The key here of course, is interest rates. There has been no “crowding out” effect whatsoever.”
The reason there was no “crowding out” was because the Fed has increased bank reserves by substantial quantities in the last 10 years, and those reserves laid the foundation for massive credit expansion from the banking system, which have held interest rates down. This is what has enabled a decline in taxes, an increase in spending, to take place alongside falling interest rates. The Austrian theory is not refuted at all. It is in fact vindicated. It takes Austrian insight to understand why spending can go up, while taxes go down, and yet interest rates fall.
In addition, the very fact of falling interest rates, despite increased spending and lowered taxes, is the primary reason why the economy went into the largest artificial boom in history, and inevitable collapse. MMTers have no explanation for this.
“The only way one can understand such a phenomenon is by understanding MMT. MMT describes how a sovereign nation with monopoly supply of currency in a floating exchange rate system has no need for government bond issuance. Bond issuance is not a financing operation. It is a simple monetary operation utilized to help the Central Bank hit its target interest rate. The bond market is largely a relic of the gold standard. This gold standard thinking is seen most prominently in the work of Austrian economists, who continue to use an entirely defunct gold standard based economic model to promote their work.”
This latter accusation isn’t true. Austrian economics does not presume the gold standard in its framework. Austrian economics is based on acting man, and the praxeological categories of action. Austrian economics is the only economics that can give us knowledge about any economic principles at all. MMTers, when describing the constraints a government with monopoly control over money has in its financing, are attempting to use the same logical deduction that Austrian economics is based on. Sure, some Austrians may make mistakes, but that doesn’t mean the whole Austrian paradigm collapses. It means one’s logic was wrong.
Cullen is using logic to argue that a government with a printing press doesn’t need to issue bonds to finance itself. He is claiming this to be true prior even making a single observation. He’s using Austrian economics!
“QE is not an injection of new money into the economy. It is not money printing. It is not “debt monetization”.
This is just plain wrong. QE is the Fed crediting member bank accounts with funds in exchange for mid to long term US debt securities. The money the Fed uses to buy these assets is money created out of nothing. It is in fact injecting new money into the economy. It is in fact debt monetization. The euphemism for this is money printing, although physically its usually digital.
Much of the Austrian’s work is based on a fundamentally incorrect view of a modern banking system. For instance, Mr. Murphy has been warning about the rise in excess reserves for several years now. He has been one of many Austrians warning us about a “doomsday” scenario which will result in a government bond market collapse, USD collapse and hyperinflation. This has been spectacularly wrong. In a 2010 article he described why “doomsday” was about to play out due to “leaking” excess reserves. This is based on a fundamentally incorrect view of modern banking. There is no such thing as excess reserves “leaking” out. Banks are never reserve constrained. The money multiplier theory that we all learn in economics classes is wrong.
Banks that have excess reserves are legally entitled to grant more loans out of thin air. The fact that the operational order goes capital assets then loans then seek reserves in the overnight market, which the Fed always accommodates after by ensuring there are enough reserves in the system to result in a low enough interest rate, does not mean that the multiplier theory is wrong. If the Fed stopped increasing bank reserves, then at some point, the banking system will hit a maximum in the amount they can loan, and that amount will be such that minimum reserve requirements will determine the overall quantity of loans the banking system can generate. This would be the case even if banks utilized the more conservative capital asset reserve requirement they enforce on themselves voluntarily.
The reason Mr. Murphy’s “doomsday” scenario didn’t play out was because his understanding of a modern banking system is based on an entirely flawed theory.
Murphy didn’t actually predict hyperinflation NOW, or THEN. He said the hyperinflation genie may have been let out of the bottle.
The Austrian school has come to be dominated by politics and rhetoric that is intended to incite fear, emotional response and other populist thinking.
This is just more of the same “Austrian economics is poo poo.”
Boy, there’s a lot wrong in there. I won’t refute your entire comment because I don’t have to. All we need to focus on is your intense focus on bank reserves.
Banks never lend reserves. That is not how a modern banking system works. Loans create deposits. Bank lend first and find reserves later. If you need proof, drive north a few hours and talk to a Canadian banker. They’ll explain to you why their banks have no reserve requirements and why your whole thinking is flawed.
The rest of your comment is pretty much wrong because you have the whole idea of the money multiplier wrong.
You might want to read Cullen’s post with a more open mind again. It’s quite right.
Reserve requirements are a legal requirement and are a “constraint”:
http://www.federalreserve.gov/monetarypolicy/reservereq.htm
As MMT guru Scott Fullwiler explains:
Of course, governments—particularly when they are operating on an outdated understanding of the monetary system—can and do impose constraints upon themselves. In the US case, laws previously written by Congress forbid the Fed from providing direct overdrafts to the Treasury. As such, if the Treasury wants to spend and its balances are dwindling, it must either tax or issue bonds to do so. Unfortunately, this self-imposed political constraint is the starting and ending point for Krugman and most others, even as it has little to no economic significance according to MMT.
http://tinyurl.com/4yuptgh
So even if with the proper legislation this legal constraint could be removed, it now exists.
Oh My Goodness, this is frustrating. And hopeless too, BTW, that’s the one thing we have learned from these guys.
A legal constraint does not mean it is an operational constraint. The banking system in Canada proves you are wrong.
Operational constraint does not mean reserves are an effective constraint.
Should the Fed stop increasing reserves this will become clear.
You misunderstood. I never claimed banks lend reserves. I said they issue loans ex nihilo, and that reserve requirements will become apparent if the Fed stops creating reserves.
Second, the money multiplier is what sets the maximum limit to aggregate bank lending. Banks operationally use capital asset requirements, but effectively it’s reserves. This becomes clear once the Fed stops increasing bank reserves, and yet bank lending keeps expanding. At some point, overnight funds will become scarcer and scarcer, and the interest rate will rise. As it rises, banks will find themselves eventually hitting the reserve requirement.
Cullen’s post is not actually right. It’s not right in its criticism of Austrian economics, and its not right in its understanding of the monetary system.
Cullen claims:
If the monopoly supplier of coconuts stops creating coconuts then Robinson is going to have a hard time finding coconuts.
and
And it leads into an interesting point. Murphy likely hasn’t gotten around to the mind bending concept that spending must come first. So his example ignores the fact that someone must supply the coconuts with which to save. In other words, the spending must come first. That is, the govt is fundamentally different from a household in that it can supply currency at will. It is never revenue constrained. And in fact, in order to tax, it must first spend….
Then MamMoTh chimes in with:
He is actually showing that the deficit spending of coconut trees is determined by Robinson’s desire to net save coconuts. But he didn’t realize it.
Peter D:
MamMoTh, you’re hitting it out of the ballpark with this one. Brilliant.
______________
I thought coconuts grew on trees.
Where is your critique? Rather than make snarky comments like austrians always do, why don’t you try to attack the argument. If the government never spent any USD into existence, how would we obtain it? Think about that one long and hard for a few minutes….
I thought we Austrians have been pretty clear for the last 40 years that we have no interest in there even being USD. You guys come from such a position of total and complete ignorance about Austrian concepts which I find incredible.
As I said, we have put in the effort to understand MMT. There is absolutely no compehension of Austrian concepts at all by MMTers, nor any non-Austrians for that matter.
Also, for the 550th time in recent years, where is all the stuff going to come from to satisfy the unpayable government debt?
It’s clear that you have no idea what you’re even talking about.
How can the debt ever be unpayable? There is no such thing as the US government having a debt that it cannot repay because its debt is denominated entirely in a currency that only it can issue.
If the users of that currency want to reject that currency then fine, but that’s a very different discussion. If you want to talk about hyperinflation then be my guest. But no one will take you seriously until inflation even begins to rise above the average historical rate.
Also, for the 550th time in recent years, where is all the stuff going to come from to satisfy the unpayable government debt?
The fact that you even still ask this question shows that you have not yet come to grips with the most basic of MMT principles:
When people are hungry, the government prints coconuts.
What’s the matter? Why do you hate hungry people?
You’re actually sort of close to understanding it. The government doesn’t create wealth. They merely supply the paper with which we are required to transact.
When they don’t do that the private sector falls into deficit. Look really long and hard at the following chart and ask yourself if it’s a coincidence that the budget surplus of the 90s that drove the private sector into deficit was coincidentally followed by a lost decade?
http://pragcap.com/wp-content/uploads/2010/11/sectoral_balances1.png
MMT involves real math. Accounting indentities and irrefutable facts.
Here’s Steve Keen, debt hawk and deflation hand-wringer:
http://www.incrediblecharts.com/economy/keen_debt_gdp.php
Note the chart of private debt as a ratio of GDP (first chart in the article). Note the steady rise of private debt, also the surprising similarity of the curve when comparing Australian private debt (red) to USA debt (blue).
http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf
Check page 10, chart 6 which is the Australian government debt (total debt, not yearly deficit). Our government ran a surplus from 1995 to about 2007 and they actually paid back the government debt (and had a bit left over when the 2008 crisis struck). Compare that to USA government debt (as ratio of GDP) they are completely different.
And yet, despite the staggering difference between Australian and USA government balance sheets, the private debts of those two countries followed very similar tracks. Do you have an explanation for this?
That was funny. I’m still wiping up the milk that shot out of my nose.
Also, for the 550th time in recent years, where is all the stuff going to come from to satisfy the unpayable government debt?
Certainly not from useless attorneys or financial advisers who are leeches of the capitalistic system.
That’s why we need more scientists and engineers which the free market fails to provide.
If the government never spent any USD into existence, how would we obtain it?
If the government never spent any USD, then the government would collapse.
Thus, we can attain the government’s USD by simply borrowing the government’s former property from the banks and institutions that used to hold the government’s money, or we could sell goods and services, or assets, to the banks and get the money that way.
So you’re proposing that there be no government at all?
Where have you guys been?! Anarcho-capitalism is so 2007.
Bob,
Where do you stand with regards to the military then? How does a country protect itself? Private militia? Do we have to hire armies to protect us?
Thanks.
MMTer, did you click the link? There is a PDF there of two essays talking about all this stuff. (And actually I misspoke–that 2nd edition was 2007, the first one was 2001 or 2002.)
As I constantly repeat, it’s clear that the MMTers have no familiarity whatsoever with basic Austrian School concepts nor with basic free market contractually based voluntary arrangements for roads, police, courts, schools etc…. I read Rothbard’s “For A New Liberty” in 1973.
http://mises.org/rothbard/newlibertywhole.asp
This stuff is just not that complicated.
As I have said, we’ve spent considerable time learning their wacky theories. It’s about time they learn ours.
Oh dear. A free market military. You mean like Somalia. Ha. My work is done here. It’s impossible to take work like this seriously. It is hopelessly unrealistic.
“You mean like Somalia. Ha.”
…..
“No one should probably have to say this out loud; but since many non-libertarians like to invoke Somalia, I guess it warrants saying:
There’s something to be said for transition. Even if we were to assume that Somalia is completely devoid of government (which is a bit of a stretch if you actually know anything about the region) no one is proclaiming that if you move from a strong state to the absence of one in the shadow of the night that it’s going to be all rainbows and unicorns.
Part of a state’s general purpose is to hold monopolies or semi-monopolies on institutions that presuppose the need for it (law, education, defense, etc.). If you take what exists of a free market and quickly strip it of institutions that it was functionally integrated with you can’t exactly expect perfect replacement institutions to organically and immediately take their place.
For instance, if government claimed a monopoly on food production and the government magically dissolved overnight, I would not expect that we would magically have a broad chain of food distribution set up the next day. Couple that with the harassment and tribal rule of warlords who have now partitioned and assumed control of the massive arms that your once revered state had accumulated, and now we have some additional issues.
To put it bluntly, pointing to Somalia as an example of why small-to-no-government can’t work is like pointing to a combustion engine dying on an empty tank of gas and telling me that engines that don’t use gas can’t work.”
Beyond this main point, often overlooked is the fact that Somalia has improved considerably in comparison to it’s formerly and formally “governed” self. And, even then, pointing to one state where you (somewhat erringly) see “laissez-faire” and violence in the 3rd world inexorably linked is like someone pointing at Germany, Italy, or the Soviet Union to decisively strike down the arguments for government.
In short, “Haha Somalia!” isn’t a good argument for or against anything.
Well, that is what I would propose if you asked me yes, but that doesn’t follow from what I said. What I said follows from what you said.
If the US government stopped spending USD, then they would have to fire all employees, and close down all government departments. A stopping of government spending will collapse the government. Thus, we would obtain the money by going to the banks that house government funds and acquiring them through borrowing or selling assets. That’s all I am saying regarding your post.
Uh…yah
Why I’m not going to spend any time “debating” these guys…….
“Hey Cullen:
How much of “Austrian economics” do you feel is debunked by MMT?
A: In my opinion, it almost entirely debunks it. Austrians have this vision of a world where we pay no (or few) taxes and everyone lives happily ever after feeding off the goods and services provided by a perfectly rational and efficient private sector marketplace (ironically, the deregulated and free wielding financial sector is an offshoot of this sort of thinking and helped cause this recent crisis). I just don’t think that’s a rational perspective on the world. There’s a reason why no society like that exists on earth (except maybe in parts of Africa where you’re not likely to live past the age of 30).
More importantly though, we are pack animals. We form groups because we are more likely to ensure our survival through cooperation. We don’t live in solitude. The formation of governments is nothing more than a manifestation of this fact. Now, it’s important to note that govt can and does corrupt. If it is not being used in the best interest of the group then its purpose has failed.
Austrians love to point back to the 1800′s when the world more closely resembled their vision. But look at the disaster that was the 1800′s. SIX depressions. If you want to live in that world then be my guest. I am pretty happy living in a world where people bitch and moan about the fact that they make 10X the amount of the average Chinese citizen (an economy we should supposedly be envious of currently)….
So, in a reality based world (where large group based governments exist) and not this dream world (where the efficient market provides services to people who live in solitude) MMT largely debunks all of the thinking that comprises the foundation of the Austrian beliefs. In short, it makes for great compaign slogans. But as a species, the Austrian ideals contradict our natural animal instincts….
Thanks Bill. I’ve studied them all pretty thoroughly. It has always been my perception that they are largely different shades of the same gray. Some more extreme than others, but all gray…..If I am wrong then I would love for you to correct me.”
Yes, we can tell that Cullen has studied all of the Austrians “pretty thoroughly”. For sure.
But look at the disaster that was the 1800′s. SIX depressions.
As compared with the disaster that was the 20th century — two world wars, Korean War, Vietnam War, and something like half a billion people killed by the OWN government.
If you want to live in that world then be my guest.
Where’s my invite?
Wow. That all happened in America. Thanks for the history lesson. I had no idea the US government killed a billion Americans.
Back on planet earth the 20th century involved the greatest 100 year prosperity that any single nation has ever experienced in the history of man.
When I stare at that photo of the skydivers I feel sick and my stomach churns with feelings of vertigo.
When I read MMT advocates and their “accounting identities” I feel exactly the same way.
Good article and excellent examples.
We know Austrians don’t like accounting identities (it’s easier to prove your point when it’s unprovable), but Bob Murphy does not understand national accounting. See here:
http://traderscrucible.com/2011/02/22/two-minutes-hate-why-not-accept-the-basic-accounting-of-mmt/
And yet they both exist. Which just proves that what makes you sick is irrelevant.
Just as no normal average person believes Keynesiansim, no normal average person is going to believe MMT. Both are based upon the “Emperor’s New Clothes” assertion that the logic of “macro” is different than everyday life and household finance. They cannot begin to prove that because it makes no sense.
Our job is to convince average people that these Keynesians/MMTers REALLY BELIEVE THE NONSENSE THEY SPOUT AND THAT THEY ARE THE PROBLEM. This is merely a problems of having resources for publicity vis-a-vis media and academic hostility which we should be able to overcome.
It’s rather basic really. You keep comparing a household (a currency USER) to a government (a currency ISSUER).
It only takes a tiny bit of common sense to see that there is a huge difference. Once you explore it a bit you recognize that everything you’ve been taught is flat out wrong.
Wait til you get to the idea that bonds finance nothing. Then your mind will really be blown….
No, that’s the nonsense. And no normal average person is going to buy that crap. Economics is economics and morality is morality. The only difference is that the government is able to confuse people in order to get away with its crimes.
I’m not “debating” these MMT guys until they show the slightest awareness of basic Austrian ideas and they never will.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/#comment-778555
Rejecting the fact that a currency issuer is fundamentally different from a currency user is like rejecting 1+1=2.
Good luck with that.
When we take over, the monopolist currency issuer will be in jail or executed.
There. Problem solved. And there is nothing to debate about that statement except to quibble about the appropriate punishment.
That’s interesting Bob, because the spending of our government is based on the desired savings of the private sector. In essence, that money is only issued because you vote to have it issued.
If you don’t wan to save in US dollars then send your dollars to me. I’ll happily take them from you. But I am going to go out on a limb and guess that you have a nice clean stock of paper money sitting around in some bank account somewhere.
Hypocrite.
the spending of our government is based on the desired savings of the private sector
Somebody save me.
That’s interesting Bob, because the spending of our government is based on the desired savings of the private sector. In essence, that money is only issued because you vote to have it issued.
You keep confusing savings that to go towards the purchase of government bonds, with savings in general. The government does not spend according to the desire of the private sector to save.
If the private sector invests in productive capacity, then those are savings that do not go to buying government bonds.
You keep confusing things Major.
Net Government spending = Net Private Sector savings.
There is no way around it.
Good that you show your true psychopathic nature.
Before you MMT rubes go further off the leash, Bob Murphy’s vision of “government” is as a voluntary contractual arrangement. Such relationships are more solid, reliable and efficient than the usual “government” arrangement which, more often than not, leads to Saddam Hussein, Idi Amin or Pol Pot. Before you go off half-cocked, take a deep breath and read about THREE BOOKS on the subject. The most important books have been around for forty years. It’s amazing that you rubes have maintained such a meticulous ignorance of these topics.
I don’t know much about MMT, but my understanding is that MMTers maintain that their conclusions only apply to a fiat currency system. As such, I’m not sure it can be refuted using examples that don’t involve a fiat currency (e.g. where a guy is collecting coconuts on a desert island).
Very true – the basics of MMT are just a description of the plumbing of the fiat currency system. MMT does not apply under a gold standard, and the coconut standard is probably closer to the gold standard than a fiat currency system – unless there were so many coconuts that there was an effectively infinite amount of them, and they were all controlled by the government.
I agree that the entire body of MMT work doesn’t apply under a gold standard. But the “Tea Party protest” sectoral balance equations apply to any economy. They are derived from the national income accounts. Those equations are true for a fiat standard, a gold standard, and Robinson Crusoe. Right?
Bob,
Fair point.
I kinda feel like I’ve wandered onto the set of Who’s Afraid of Virginia Wolfe in this thread. Lots of acrimony between the various commenters, but the references and accusations are so clipped that it’s hard for me to even make sense of them.
Blackadder wrote:
I kinda feel like I’ve wandered onto the set of Who’s Afraid of Virginia Wolfe in this thread.
Shoot. I have always striven to make Free Advice feel like an episode of Reading Rainbow. Just take a look, it’s in a book.
Now I have that ridiculous opening theme in my head. Thanks alot.
I actually did a pilot podcast that the suits told me wouldn’t work, in which I sang that opening theme before reviewing Gene Callahan’s novel. If only Andy Kaufman were here to appreciate me.
No, your Crusoe example has the accounting entirely wrong. I have no idea how you cannot see this. It’s quite embarrassing for someone of your stature.
MMTer wrote:
No, your Crusoe example has the accounting entirely wrong. I have no idea how you cannot see this. It’s quite embarrassing for someone of your stature.
Hang on. There are two different things going on here.
First, forget about my coconut example and its possible relevance or lack of relevance. Let’s get one thing straight: The sectoral balance equation is derived solely from the national income accounting identities. Those identities are not dependent on there being a fiat currency. Do you agree with that?
Second: I was trying to show with the Crusoe example, in as simple a way as possible, that people can save (even in the aggregate) and invest, have increasing standards of living over time, etc., even with no government deficit. The point of that was to get you to realize that your “no net savings” criterion isn’t doing the work that it serves rhetorically. You are trying to scare Tea Party people into thinking that they can’t build new factories, tools, etc. and see rising standards of living over time, unless they tolerate a government budget deficit. But the Crusoe counterexample shows that that is not true.
The problems of economic calculation, Cantillon Effects, the distortion of the price, investment and capital structure, the boom/bust cycle will still all be in full bloom under any MMT regime, norms or no norms.
Further, can they really control price inflation by taxing back all the diluted funny money. Really? What about “the problems of knowledge in society”?
They know nothing of these issues. They are rubes coming to the big city for the first time.
Speaking of MMT norms, remember that MMT says that recessions are CAUSED by budget surpluses and that we need fiat money and government debt (perpetual deficits) to cure unemployment. Thus, one of their BIG IDEAS is a government job guarantee. From “Full employment abandoned: shifting sands and policy failures” by William Mitchell, Joan Muysken:
The final section of the paper outlines an alternative view of macroeconomic theory and policy opportunities. This view flows from a detailed understanding of modern monetary systems in which the use of fiat currency provides the monopoly issuer, the federal government, with opportunities to pursue full employment without compromising price stability. We show that the obsession held by federal governments around the world that budget surpluses demonstrate fiscal prudence is both nonsensical and extremely costly. Once we understand how the surpluses relate to sectoral flows in the economy, it follows that active macroeconomic policy is essential to maintaining full employment. We argue that a central plank in modern macroeconomic policy settings should be the introduction of employment guarantees, which we term the Job Guarantee (JG). We show that the introduction of a JG provides the basis for pursuing full employment and price stability. The JG is also the minimum that a government can do in relation to its obligations under the international human rights treaties discussed earlier.
http://arno.unimaas.nl/show.cgi?fid=14937
This is where they are coming from and where they are going.
Speaking of MMT norms, remember that MMT says that recessions are CAUSED by budget surpluses
Wrong again Roddis. If you don’t know anything about MMT why do you insist you do?
MamMoTh say:
It’s a shame you don’t seem to realize what it means: when government runs a surplus then the private sector runs a deficit, so the private sector stock of net financial assets diminishes, which is also a fact.
So when the government runs a surplus the economy can only grow if the private sector gets increasingly into debt which is unsustainable and will eventually lead to a collapse in aggregate demand in order to repay the debt. This is what happened in the US before the crisis, the private sector got itself into to much debt, and now is slowly deleveraging.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/#comment-778546
Exactly, that is what has happened. The private sector got into too much debt and the whole system collapsed.
You know the difference between a necessary and a sufficient condition?
I thought even attorneys and other leeches could tell the difference.
1. No. What happened was that people borrowed funny money created out of nothing, bid up the prices of houses, (in part as a safeguard against funny money dilution of their money) when, in fact, there were no real savings with which to purchase the homes at such a price. Ultimately, no one really had $800,000 worth of real stuff to trade for a $150,000 house and reality set in. The entire problem was caused by funny money dilution and the distortions of economic calculation it wreaked in the first place. Blame falls completely on the issuers of fiat diluted money.
2. Get rid of the state and taxation and imprison the monopoly issuers of USD and there won’t be any pesky state surplus. Problem solved (again).
So you are saying the private sector got into too much debt and the whole system collapsed.
Glad we agree.
So you are saying the private sector got into too much debt and the whole system collapsed.
That is not what caused the economic collapse. An increase in debt, by itself, is benign.
What matters is HOW the debt entered the market.
A lot of debt entered the market through credit expansion. THAT is what collapsed the economy.
Et tu Blackadder? Here’s what I took to be their argument on this narrow point: “Set aside trade. Now then, if the government runs a balanced budget or even worse, a surplus, like the Austrians want, then by simple accounting the private sector can’t save on net. Did you Austrians realize what you were asking for?”
Their argument has nothing to do with a fiat system. When I specifically asked them for someone to spell it out, they pointed me to Mosler’s “Tea Party protest” sign which was just his sectoral balance equation. That was derived from the national income accounts, and is true under any system.
So then I said, “OK, Robinson Crusoe can clearly engage in saving and investment, economic growth, etc. without a government running a deficit. So therefore I don’t see what the fuss is about. Whatever may be true of your definitional ‘no net saving’ condition, in a world with a government running a balanced budget or surplus, we can still apparently have saving, investment, economic growth, etc. because Crusoe is doing it.”
But if you want Blackadder, we can stipulate that in addition to Crusoe, there is Friday who is king of the island, and the money is US paper dollars that are fiat. Still, Crusoe can stock up on coconuts and then make a stick to increase his productivity next month. I don’t care whether Friday is running a surplus or a deficit.
Bob,
Okay, you’re right. Their accounting identity argument seems to be flawed for precisely the reasons you point out.
I don’t actually have a problem with anything in your article per se. It seemed, though, that in the comments people were taking the desert island example and applying it in ways that didn’t quite fit.
Also, my understanding is that MMT is primarily a descriptive theory, as opposed to a normative one. So it can’t be refuted by saying that the state is illegitimate, or that taxation is theft, ect., any more than you could refute the idea that the minimum wage causes unemployed by saying that it is evil for employers to pay their employees less than a given amount.
Also true.
I found this funny.
MMTer says, “Where is your critique? Rather than make snarky comments like austrians always do, why don’t you try to attack the argument.”
earlier from MMTer, “Boy, there’s a lot wrong in there. I won’t refute your entire comment because I don’t have to.”
And then I proved his entire point on reserves 100% categorically wrong. Unlike the Austrians, MMTers actually have the mathematical meat in their argument.
It’s humorous that there are people naive enough to fall for this political propaganda cloaked as economic theory.
It’s humorous that there are people naive enough to call Austrian economics political propaganda. Have you still not read any of the links in the posts above?
I read them. The Chaos Theory one was so unrealistic and misguided that I almost laughed my way through the whole thing. Only Dr. Seuss could have come up with a more fantastic story!
How can anyone with an ounce of common sense believe such nonsense? If it were possible to have such a great world it would exist. But it doesn’t. Use a tiny bit of common sense…..
“If it were possible to have such a great world it would exist. But it doesn’t. Use a tiny bit of common sense…..”
I think an MMTer should be a little more sympathetic here. The MMT posts I read frequently bemoan the fact that few people (including ‘noteworthy’ economists) understand how the monetary system REALLY works, that talk of government funding through bond issues and taxation is a form of ‘psychological warfare’, etc.
It seems to me that MMTers themselves ain’t exactly happy with the way the world ‘works’ either, and are trying to get people to understand how it could work better.
If I were to say ‘look, this MMT stuff is all nonsense because must people just don’t see it the way MMTers do, and if people thought the MMT view were correct they would” would you buy that?
Of course, peaceful, voluntary arrangements can never work. Only government with its SWAT teams and drone attacks can provide honesty and integrity to the world. Like the War on Terror:
http://www.lewrockwell.com/blog/lewrw/archives/87746.html
WAIT! THERE’S MORE!
There is a basic dishonesty in the presentation of the MMT “program” by its advocates. They don’t mention that it is an attempt to rescue socialism from its pure implementation by Stalin. The Table of Contents to MMT guru Abba Lerner’s book “The Economics of Control” expresses his goal as an attempt to save SOCIALISM:
http://tinyurl.com/3h2qy7q
Recall that MMT claims it can control inflation by taxing back much of the diluted funny money. However, Lerner (1903-1982) was busy as late as 1980 constructing a Rube Goldberg type straightjacket of price controls:
“Lerner was bubbling over in novel policy proposals. For instance, his analysis of inflation led to an early advocacy of incomes policies (1947) and, later, his remarkable “Market Anti-Inflation Plan” (MAP, 1980). Heuristically, MAP proposes to “internalize” the costs of inflation by setting up a type of voucher system whereby a firm obtains a surplus voucher to increase sales if sales in that year fall before a particular aggregate target, while a firm whose sales growth exceeds the target will incur a deficit voucher. The rattlesnake juice comes with the market part of it: if a firm wishes to raise sales above target regardless, then it can buy surplus vouchers on the open market from firms who are selling below target. This extension of the marketplace to the very process of inflation, Lerner argued, would not only internalize the externalities of inflation but also be an effective way of controlling aggregate demand without losing the individual dynamism of entrepreneurial activity.” [@page 12]”
http://tinyurl.com/4rfk3jk
Individuals will have to buy the right to change prices from others who change their price in the opposite direction? Now there’s brilliant insight from a true economist. BTW, if inflation can be easily whipped with taxes assessed by magical, all-knowing bureaucrats, what was the purpose of Lerner’s mad price control scheme?
As we have seen from the last writings of Abba Lerner, total control of all prices by the fascist state is necessary to make the thing work (according to the advocates of the horrible system). MMT sees humans as rats in a maze and wants to control them while leaving them partially free to create stuff to be seized and redistributed. No wonder they hide their basic motives (and deny the law of scarcity).
Bob, the accounting identity is about money flows, not about coconuts stocks.
You can grow your coconut tree in your garden and save as many coconuts as you want. You can even trade them for oranges with your neighbours. As long as you don’t start selling your coconuts it won’t appear on GDP figures. Imagine that! How many coconuts are saved around the world that don’t figure in any statistics!
In terms of financial assets though, Net Private Savings = Government Deficit, then a government surplus means the private sector is in deficit of financial assets.
That’s why MMT stands for Modern Monetary Theory and it’s not called Primitive Coconut Economics.
Mammoth wrote:
Bob, the accounting identity is about money flows, not about coconuts stocks.
You can grow your coconut tree in your garden and save as many coconuts as you want.
Right, just like the people in the private sector in today’s world can channel as much steel and circuitry into the construction of new factories as they want. When you guys say, “The private sector can’t accumulate net financial assets without a government budget deficit,” it carries the impression that this will somehow impact real investment, economic growth, and standards of living. But you’re admitting that it won’t. You are just talking about dollar bills moving around the economy.
In a nutshell yes.
Although I wouldn’t say as much as they want, but as much as they can afford to by moving dollars around the economy.
MMTers : Heres how our floating exchange rate system works. blah blah blah
Austrians : Well what if whats important to me is not the accumulation of rapidly depreciating pieces of paper but what actual value other people place on the goods and services i will ultimately exchange them for? Then everything you said about your needlessly complicated scheme seems entirely irrelevant because im looking for a simple, calculatable, stable medium of exchange not that thing that cooked pee wee hermans breakfast.
MMTers : Oh i know thats why i brought this gun.
aaaaand scene.
lol! is there a version for adults too?
Great critique, Bob. This was the key sentence for me:
“One way to describe MMT is that is a “nominal” model of the economy, looking at flows of money without inquiring too deeply about the economic significance behind the flows”
This is at very heart of the mmters confusion as this comments thread attests to. They cant even seem to grasp why anyone would care about trying to work out what the effects of an mmt monetary policy would be in real terms – it’s as if they regard goods and services as mediums for exchanging money.
+1 Insightful!
“…it’s as if they regard goods and services as mediums for exchanging money.”
Perfect, but I don’t think they can understand why that is such a insult.
No, goods and services are mediums to obtain money in order to obtain other goods and services.
This is what a monetary economy is all about as opposed to a barter economy.
Welcome to the 21th century!
I barter for money every day and sometimes for US dollars.
Money I’ve used so far this year:
Gold jewelry and coins, silver coins & ignots, copper wire, federal reserve pennies, dollars, quarters and nickels, Dave and Buster’s tickets, wooden discs with a printed beer mug, & golf balls.
I know I could be arrested for posting all this here, but I’m willing to risk it.
I’m fairly certain they don’t understand the concept of trade.
Are you paid in kind?
I’m paid with all sorts of media, but I can’t remember getting paid in kind. Is that like some sort of sausage?
I prefer gold or silver, settle for federal reserve notes, have accepted japanese yen, mexican pesos, and brazillian reals. My favorite trading partners, though, compensate with beer and/or unmentionables.
Is that like some sort of sausage?
Indeed. Please, sit down.
I am sitting…and now farting in your general direction.
it’s as if they regard goods and services as mediums for exchanging money.
Deliciously jocular.
Over at the Mises.org comments, Ralph Musgrave claims:
In fact the basic claim of MMT has completely passed him by – he doesn’t even mention it. This is that in a money economy demand will be deficient if the private sector saves too much money per month. Ergo in a recession, government must raise its spending (and/or cut taxes) so as to counteract the above demand destroying factor.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-778857
Actually, Bob Murphy is well aware that MMT is attempting primitive management of “aggregate demand”. Hayek won the Nobel Prize for his work on the Austrian Business Cycle Theory which explains that government management of “aggregate demand” is the cause of business cycles. Been there, done that.
Mr. Musgrave’s blog is dedicated to the above-mentioned Abba Lerner. Once you’ve cut through the maze of MMT flows and stocks and sectors, you get to the meat of the matter:
In a recession, the government / central bank machine should simply create or print more money and spend it (and/or cut taxes). And conversely, if inflation looms, the opposite should be effected: money should be reined in via extra tax (and/or reduced public spending), with such money being “unprinted” or extinguished. Put another way, given a recession, government should “net spend” (i.e. spend more than it collects from tax or borrowing.
This method of adjusting aggregate demand and inflation dispenses with the distinction between monetary policy and fiscal policy. And since under conventional arrangements, governments are responsible for fiscal, while central banks are responsible for monetary policy, adoption of MMT would require a slightly different split of responsibilities as between governments and central banks. So what then is the new split of responsibilities?
The answer is to have central banks (or indeed any committee of independent economists) responsible for deciding whether inflation is sufficiently subdued to warrant more net spending. The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.
http://ralphanomics.blogspot.com/2011/05/modern-monetary-theory-implies-re.html
“The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.” In addition to the ABCT, Mr. Musgrave has apparently missed “The problems of Knowledge in Society”.
But it’s as wrong as everything else Bob said about MMT.
MMT only says you can’t ignore those flows, in particular that when the government runs a surplus then the private sector runs a deficit in terms of net financial assets.
What Bob’s post has made clear is that actually it’s the austrians who who look at the economy without inquiring too deeply about the economic significance of the flows, to the point they don’t even believe in or understand those flows.
…So, just to express a confusion, MMT holds that the government surplus means clearly that T > G, and in reality this demands that I > S by the same dollar amount?
“I”, of course, being private investment. Maybe I am misunderstanding. My money in a savings account, to my knowledge is not saving, because the bank isn’t holding the money. That money is invested in the bank’s promise to pay it back with interest in the future. My silver coins are an investment in a commodity price future. My insurance is an investment in the possibility of my house burning down, or my car getting totalled. My house is an investment in real estate futures. And so on. Is this wrong?
If not, how is it that the private sector can not stockpile financial assets if I > S? It seems the only thing it wouldn’t be able to stockpile is treasury notes. And who does that, anyway?
Treasury notes, bills, bonds, and reserves.
Everybody does stockpile them. As I said to both Bobs (Murphy and Roddis) if you don’t want them send them to me.
I lam a Treasury’s IOUs fetishist!
What have you got for sale? Any gold at pre-QE prices?
But wait!
Where’s the capital theory of MMT?
Totally compatible with austrian theory of capital.
Did you understand the difference between a necessary and a sufficient condition?
Aren’t even attorneys supposed to know a bit of logic?
Economic calculation will be seriously impaired by fiat money expansions and contractions. This will more seriously impact long term projects. Basic ABCT.
My calculations aren’t. If people are too thick and get their calculations wrong so be it.
There it is. ABCT has been refuted and MamMoTh clearly understands it! MamMoTh can do what no other person can!
In the very least, we have drawn these guys out.
Imagine that 100 people are stranded on an island. One of them has a gun and a printing press, and declares himself king. He then prints off 990 certificates with his picture on them, gives ten to each of the other people on the island, and says that every month each of them owes him one certificate in tribute.
In that case, it’s possible that the islanders would start to use the certificates as currency, since they know they can use the certificates to pay the tribute if needed. It’s also the case that for the system to continue, the King needs to replenish the amount of certificates circulating in the island economy to take account of the certificates removed from circulation through tribute, and he can do this either by spending the certificates he gets in tribute, or by printing new certificates and distributing them to others. If he doesn’t do this, then the number of certificates circulating will quickly fall, and soon people will become unwilling to give up their certificates in exchange for goods and services (since if they do they are worried that they won’t be able to pay the tribute) and the monetary system will collapse.
All that I understand. What I don’t understand is, if the King does not fully replace certificates removed from the economy via tribute, why must this necessarily be reflected as a fall in private savings, rather than a fall in private consumption, or in prices, or some combination of the three?
Consumption can fall and probably will. This does not change net savings on the aggregate, it just determines whose net savings will fall.
On aggregate net savings will fall.
How prices change will depend on the inhabitants of the island unless the King is some kind of socialist evil who imposes price controls.
some kind of socialist evil who imposes price controls
Like Abba Lerner?
King Lerner, please.
Consumption can fall and probably will. This does not change net savings on the aggregate, it just determines whose net savings will fall.
On aggregate net savings will fall.
I already know that you think this. What I’m asking for is some explanation of *why* you think this. I’m not even saying you’re wrong. Maybe there is good reason to think that aggregate net savings must fall in this scenario. But just asserting that this must happen is not helpful.
Sorry but it’s hard to tell what has been agreed and what hasn’t…
Just to be clear I am talking of net saving net financial assets, that is government IOUs. Those are what the accounting identities refer to, which is actually writing down the money flows in a closed circuit.
That is where Net Private Savings = Government Deficit comes from. Which should be the answer to your question, although I think it’s not the answer you expect.
MamMoTh,
It sounds like what you’re saying here is that MMT simply defines private saving to mean only holding government bonds. I’ll concede that unless the government issues bonds it is impossible for people to hold government bonds. If that’s all you mean when you say that net private savings is impossible absent a government deficit, then my only objection is to your using the phrase “private savings” in such an idiosyncratic sense.
Suppose, though, that we accept your definition of private savings for purposes of this discussion, such that Net Private Savings = Government Deficit. What are the interesting implications, if any, that you think flow from this fact?
No, bonds, cash, reserve deposits, all liabilities (IOUs) issued by Uncle Sam.
This is what the monetary circuit is all about.
So a government surplus will mean the private sector loses its dollar IOUs holdings by the same amount.
This, in turn, will have consequences in the level of consumption, growth, unemployment, prices, as mentioned before.
No, bonds, cash, reserve deposits, all liabilities (IOUs) issued by Uncle Sam.
This is what the monetary circuit is all about.
So a government surplus will mean the private sector loses its dollar IOUs holdings by the same amount.
Okay, now I see two problems. First, even if the total amount of bonds, cash, reserve deposits, etc. is reduced, that alone won’t tell us whether the reduction will come out of savings as opposed to, say, consumption. Suppose that in my island example during the first month I save one certificate to pay the tribute, and spend the other nine in exchange for goods and services. I also perform goods and services for others and receive nine certificates from others in exchange for goods and services I provide them. The next month, I notice that the King isn’t spending any of his certificates, so I decide to save two of the certificates this time and only spend seven of them. It’s perfectly possible that everyone else also does the same (or at least they do so on average), in which case the total number of certificates would have declined, but the total number saved would have increased.
The second problem is that if we are counting cash, reserve deposits, etc., in addition to government debt, then it is not at all clear that a government surplus will mean the private sector loses its dollar IOUs holdings by the same amount. To get that conclusion you have to assume that government deficits and Fed policy are exogenous, which they clearly aren’t.
Sorry I’m not sure I’m following anymore.
If every month people are taxed $1 and there is no royal spending, then the islanders are dis-saving $100 (1$ x 100) per month regardless of how much they spend.
Savings = Income – Expenditures
9 – (9+1) = -1
7 – (7+1) = -1
After 10 months they will run out of King’s dollars.
In the example as I have described it, the story looks like this:
Savings = Income – Expenditures
10 – 9 = 1
9 – 7 = 2
It’s true that if the King does nothing to replenish the money supply eventually everyone will run out of certificates. But it doesn’t follow from this that any decrease in the money supply must be accompanied by an equal decrease in savings.
No. We start with a stock of savings (SS) of $10 each.
In month 1:
S= 9 – (9+1) = -1
SS = 10 – 1 = 9
In month 2:
S = 7 – (7+1) = -1
SS = 9 – 1 = 8
…
Until SS = 0
Okay, now I’m confused. I start with ten certificates. Of those ten, I save one and spend the other nine. So we get:
10 (my income) – 9 (my expenditures) = 1 (my savings)
To get your numbers, I would have to start with nine certificates and spend ten, which is not my example.
It is confusing. Let’s stay you start with 10 King dollars from King’s spending.
That transaction is your income and saving since you are not spending.
Your stock of savings is then 10.
Then in month 1 your income is 9 from other islander, but you spend also 9 plus 1 to pay your taxes.
So your savings for month 1 will be 9-10=-1, and your stock of savings will be 9, and so on…
Mammoth and Blackadder, you are using an incorrect formula when you write:
Savings = Income – Expenditures
No, Savings = Income – Consumption.
Mammoth, you can claim that the king’s surplus makes it impossible for his subjects to save *more than they spend on investment*. Yes that’s true (but irrelevant I’d argue).
But now with Blackadder, you’ve taken it further and are trying to argue that the king’s surplus will mean his subjects can’t save, period, which is simply wrong, even on MMT terms.
(I didn’t deal with tax payments but you can add those in if you want. But Mammoth, just to show that your suggested formula of “savings = income – expenditures” can’t be right: Suppose a household has $100 in income, and spends all $100 of it buying government bonds. According to your formula, the household’s saving is $0. So your formula clearly isn’t right, unless “expenditures” means “consumption expenditures.”)
Bob! Just when we thought we agreed…
I should have said
Net Savings = Income – Expenditure
But I want to keep things simple. Since there is no investment it’s enough to look at savings. In that case
Savings = Income – Consumption – Taxes
But you are right, income and expenditure are on goods and services, not financial assets.
Let’s stay you start with 10 King dollars from King’s spending.
That transaction is your income and saving since you are not spending.
I agree that my income is ten. I don’t agree that it is also my savings, since in my example I do spend nine. So my savings would be ten minus nine, or if you want to include the tribute, ten minus nine minus one. If I had spent six instead of nine, then my savings would have been ten minus six minus one, or three. And so on.
It depends how you divide the periods which is totally arbitrary.
I said in period 0, your income is 10 and you don’t spend anything nor receive any extra income.
If you prefer we can say that it takes place in month 1.
In that case your income is 9(C) + 10(G)
Your spending is 9(C) + 1(T).
So your savings for this period, and your total savings so far is
19-10=9.=10(G)-1(T)
Blackadder wrote:
What I don’t understand is, if the King does not fully replace certificates removed from the economy via tribute, why must this necessarily be reflected as a fall in private savings, rather than a fall in private consumption, or in prices, or some combination of the three?
Yeah, in the interpretation that the MMT guys in the comments here are giving (which I don’t think actually flows from the equations–those can be couched in real terms), they are saying something like this:
“Every year suppose the government takes in $1 trillion in taxes but only spends $900 billion. That means on net $100 billion falls out of the private sector every year. So the economy must implode over time.”
But of course, if prices fall, then nothing bad need happen. We could still have solid real economic growth in that scenario.
Like I said, I don’t think this is Warren Mosler’s view. But it seems to be the view of Mammoth and MMTer.
Can’t we all just get along? We seem to agree that over-taxation is bad. That’s a start, right?
Pretty close. What happens is that GDP will fall by some combination of increased unemployment and lower prices. More of the former than the latter in practice.
A growing GPD in presence of a budget surplus (in a closed economy) can only come from increased indebtedness which will ultimately be unsustainable and the economy will implode over time.
That’s my take on it. I think it’s pretty standard but I cannot speak for Warren Mosler.
Mammoth wrote:
Pretty close. What happens is that GDP will fall by some combination of increased unemployment and lower prices. More of the former than the latter in practice.
A growing GPD in presence of a budget surplus (in a closed economy) can only come from increased indebtedness which will ultimately be unsustainable and the economy will implode over time.
That’s my take on it. I think it’s pretty standard but I cannot speak for Warren Mosler.
That’s fine, but the central point of my article was that the above doesn’t flow merely from the accounting identities. You also have to couple it with some macroeconomic theory. So you should stop saying to people who support budget surpluses, “You don’t understand accounting.” Rather, you should say, “You don’t understand macroeconomic theory.”
Could be. It’s macroeconomic accounting anyway. Also I think the name accounting identities is misleading because some people think they are tautologies that give no information. That’s not true, so I prefer to see them as flow equations in the monetary circuit.
We now get to the nuts and bolts of MMT via Ralph Musgrave:
Now for your second para – does it matter what govt spends its money on. If the sole objective is to raise employment, then no: it doesn’t matter what govt spends its money on.
****
Re your 4th para, it is crucial here to distinguish between saving money and saving material goods, etc. As regards saving money, the choice by one household to save money, means less demand, i.e. it means unemployment for some other household or person. (Keynes called this “the paradox of thrift”.) And where someone wants work we should try to enable them to obtain work, by raising demand, shouldn’t we?
In contrast, if someone “saves” by spending money on a new kitchen rather than blowing the relevant sum on a holiday, there is no need for government to intervene. $X dollars spent on the kitchen will provide much the same amount of work as $X spent on a holiday.
****
Personally I think that government debt is one huge farce. I.e. I agree with the Abba Lerner (often said to be the founding father of MMT) namely that for demand regulating purposes, governments should simply create new money and spend it when more demand is needed, and if inflation looms, do the opposite, i.e. rein in money via extra and tax and “unprint” it or extinguish it.
http://blog.mises.org/16854/the-upside-down-world-of-mmt/comment-page-1/#comment-778954
So how do they handle stagflation? If we just need to print money to eliminate unemployment and raise taxes to fight inflation, should we just print money and raise taxes to fight both when they happen at the same time. If only the MMTers were in charge in Zimbabwe.
The simple explanation is that MMTers are just primitive Keynesians who think they have discovered a way to repeal the law of scarcity. In their minds, Keynesian management of “aggregate demand” really truly works and it isn’t even constrained by a lack of real goods and services in the real world. The latter idea is what they view as their amazing discovery that we just can’t fathom.
Getting rid of indexed wages and lowering taxes.
Can you explain how that would lower inflation and unemployment at the same time?
I’ll preface this by saying that I find MMT and the Austrian view to both be deeply flawed, although if forced to choose between the two, I’d pick MMT. (Fortunately, we live in more than just a two-choice universe, so I can in good conscience reject both.)
That being said, I think that you’ve allowed the MMT fixation on balance sheets to distract you from the heart of the problem. Forget for a second all of their talk about asset swap this and accounting identities that — the primary agenda of MMT is to use a fiscalist approach in place of a monetarist one.
The chatter about accounting strikes me as a pseudo-intellectual costume for its much more mundane core argument, which is that the money supply is strictly a fiscal phenomenon. In other words, it’s claiming that chartalism can succeed when complimented by a floating exchange rate, i.e. in a post-Bretton Woods environment..
MMT claims to be realistic and a factual description of how economies operate. What MMT misses is that in real-world terms, money in a modern economy is largely a credit-driven phenomenon. MMTers believe that the government, with its monopoly power over money production, can simply flip tax and spending levers at will in order to moderate the money supply, while forgetting that most of the transactions in our economy occur based upon the promise of future payments (debt), not base money. Even if we had no central bank, MMT’s point would be irrelevant — it’s the market that ultimately decides how much consumers and producers want to spend, lend and borrow, not the state.
MMT also doesn’t offer a practical prescription for inflation that isn’t wage based. Because MMT rejects monetary tools ala the interest rate squeeze used by Paul Volcker to fix the late 70s inflation, it presumes that the legislature will promptly slash spending and/or raise taxes when needed. But even if you assume that a fiscal-only remedy would actually work under such circumstances (and I don’t believe that it would), I think that any politician who wants to be reelected understands that it is far more politically expedient to cut taxes than it is to increase them, regardless of what an MMTer would want.
Given all that, coconut trees don’t work as a metaphor because under MMT, the tree in its omniscient wisdom will moderate its production of coconuts based upon the desired savings rate. Would-be coconut hoarders will be faced with a less productive tree, so hoarding should be at most a temporary phenomenon. You’re actually helping them with the tree argument, not hurting them, because you’ve implicitly defined money as some sort of monopoly quantity-based system, when most of our payments have nothing to do with the base money supply (the quantity of coconuts produced by the all-powerful monopoly supplier of coconuts.) Ironically, both camps are burdened by the hangover of the quantity theory of money, you just embrace the headache from different angles.
So says the guy who gets crushed by Cullen Roche in debates on a weekly basis.
Folks, this MBA guy is a Krugmanite. He is the worst kind of virus this planet has yet seen. Do not trust a word he says.
This must be “SS.”
I do appreciate your penchant for name calling. But sadly, you still haven’t really figured out my views, and you surely never will.
You really ought to learn that not everyone who disagrees with this quasi-religion of yours is necessarily an Austrian or a Krugman devotee. It’s makes things more complicated, I know, but it allows you to be more accurate.
I actually agree with a lot of Mr. Roche’s views aside from MMT, but he has gotten upset with me lately and decided to pre-screen my comments, so I’ve not bothered with it as of late. That’s too bad — it would be nice if the MMT crowd were a bit better at coping with disagreement.
Yeah, hello. You must have really pissed him off. Roche is one of the more agreeable people in the econ world. Shows what kind of nuisance you are.
You’ve admitted several times to be a rabid Keynesian. We all know it. So, the same countercyclical policies you love to hate about MMT are the same ones you embrace.
Hypocrite.
I like TPC, but he’s a bit defensive on the subject of MMT. That’s unfortunate, as I agree with the majority of his views outside of MMT.
I have to seriously question your literacy. I’ve never once described myself as a “rabid Keynesian,” in part because that wouldn’t be particularly accurate, although I certainly wouldn’t be embarrassed if I was. I’ve made it quite clear that I agree with aspects of Keynesianism, while rejecting others parts of it. (If you bothered reading and comprehending my comments at TPC, then you’d already know this and feel embarrassed about your misstatements.)
And guess what? So does Mr. Roche. For example, MMTer and neo-Keynesians both want to use stimulus spending and tax cuts to drive AD. Roche and I both agree with that position, we just disagree with the description of the mechanics.
If you’d spent less time typing inaccurate comments and devoted more time to reading economic literature, then you’d know that MMT is closer to Keynesianism than it is to Austrian/ classical economics. Keynes himself had an interest in chartalism, i.e. the forebearer to MMT. MMT and neo-Keynesians both have similar prescriptions for dealing with deflation and similar goals for the economy; the primary difference is their positions on central banking. My apologies that Krugman isn’t a fan of your pet subject or even particularly knowledgeable of it, but he has more in common with you than you’d care to realize.
Illiterate.
>MMT claims to be realistic and a factual description of how economies operate. What MMT misses is that in real-world terms, money in a modern economy is largely a credit-driven phenomenon. MTers believe that the government, with its monopoly power over money production, can simply flip tax and spending levers at will in order to moderate the money supply, while forgetting that most of the transactions in our economy occur based upon the promise of future payments (debt), not base money. Even if we had no central bank, MMT’s point would be irrelevant — it’s the market that ultimately decides how much consumers and producers want to spend, lend and borrow, not the state.
I fail to see how this is inconsistent with MMT. MMT is after all has Post Keynesian and is heavily influenced by Minsky. They accept Minsky’s Financial Instability hypothesis. They accept Schumpeter’s views on the importance of credit. No one in MMT is saying what you think they are saying.
>MMT also doesn’t offer a practical prescription for inflation that isn’t wage based. Because MMT rejects monetary tools ala the interest rate squeeze used by Paul Volcker to fix the late 70s inflation, it presumes that the legislature will promptly slash spending and/or raise taxes when needed. But even if you assume that a fiscal-only remedy would actually work under such circumstances (and I don’t believe that it would), I think that any politician who wants to be reelected understands that it is far more politically expedient to cut taxes than it is to increase them, regardless of what an MMTer would want.
The reason why they reject interest rates as a means to control inflation is because their is a nonlinear relationship between interest rates and the real economy. Factors such as total government debt and the liability structure of economy, are all important factors which alter the outcome. If interest rates do slow an economy they do so through causing a payment crisis, by reaching a certain threshold. Furthermore they argue that interest rates can potentially impact on investment decisions and ultimately harm the productive capacity of the economy.
In saying that I am sympathetic to your views on the difficulty in controlling inflation as MMT suggests.
>Ironically, both camps are burdened by the hangover of the quantity theory of money, you just embrace the headache from different angles.
This is completely wrong. MMT works from an endogenous money framework. There’s absolutely nothing in MMT that could possibly be interpreted as adhering to the QTM.
> I fail to see how this is inconsistent with MMT
In support of their money monopoly argument, MMT proponents argue that credit is not akin to the creation of money but an asset swap (the borrower’s liability is the banker’s asset) as if this distinction is relevant. That is then used to support the position that the legislature can use fiscal policy to manage the economy by adjusting tax rates and/ or spending accordingly. The implication is that the government has full control over these levers — it controls the yield curve, the means of exchange, the tax rate, and the budget, so it controls everything.
In my own heterodox view, this distinction between credit and money printing is meaningless, to the extent that private credit operates somewhat independently of government or central bank policy. Whether the money gets into my hands through an open market operation, government spending program or loan doesn’t mean much, just so long as I can get the money and spend/save/invest it. This latest crisis vividly illustrates what happens when private-label securitization infuses cash into the economy, even while the central bank is increasing the overnight rate in an effort to curtail it.
> The reason why they reject interest rates as a means to control inflation is because their is a nonlinear relationship between interest rates and the real economy.
I don’t disagree with that. But the credit-money economy assures us that there is also a non-linear relationship between the real economy and tax rates, and between the real economy and government spending. MMT seems to be looking for a neat and easy arithmetic solution where none exists — it assumes that its fiscalist approach is better than open market operations without ever proving the case.
> There’s absolutely nothing in MMT that could possibly be interpreted as adhering to the QTM.
I didn’t claim that MMT adhered to QTM. My inference is that MMT shares with the classical view the desire to support money with something tangible. In the Austrian case, it is some sort of asset such as a precious metal, in MMT it is the monopoly authority of the government to print the money. Both pretend that these are relevant and both are wrong.
MMT spends a lot of time confusing governments’ abilities to maintain monopolies on specific currencies with maintaining monopolies on the entire exchange mechanism. MMTers have to do this because the alleged monopoly is central to their argument that a government can control flows to the degree necessary to support its fiscal-based system. This argument appears to be a direct defense against QTM, just replacing quantity with authority.
>In support of their money monopoly argument, MMT proponents argue that credit is not akin to the creation of money
I’ve got no idea where you got this from, but it’s definitely not MMT.
MMT argues that all money is credit, but that not all credit is money. They argue that all money is credit-debt relationship. Any entity can create money, but the key is getting your liabilities accepted. They also argue that there are different degrees of how acceptable different liabilities are (a hierarchy of money). State money is at the top, Bank money below, and then non-bank private sector monies below that.
>but an asset swap (the borrower’s liability is the banker’s asset) as if this distinction is relevant.
There’s no asset swap. It’s just that at the private sector level these transactions net to zero.
>That is then used to support the position that the legislature can use fiscal policy to manage the economy by adjusting tax rates and/ or spending accordingly. The implication is that the government has full control over these levers — it controls the yield curve, the means of exchange, the tax rate, and the budget, so it controls everything.
I haven’t seen this argued anywhere.
Yes, fiscal policy is argued to the most effective policy. But the actual fine precision that you argue is not. This is why they advocate policies such as ELR. It’s essentially another automatic stabiliser.
The control over the yield curve is because the central bank is the sole issuer of reserves.It targets a short-term rate, but it could also possibly control the entire yield curve by (operational twist). But I haven’t seen this discussed much, so I’m not sure what the actual MMT position is.
>In my own heterodox view, this distinction between credit and money printing is meaningless, to the extent that private credit operates somewhat independently of government or central bank policy.
MMT distinguishes between vertical and horizontal transactions. Vertical transactions create NFA and horizontal transactions net to zero. private sector money creations are essential leveraging state money. MMT argues that there is a threshold (coupled with Minsky’s FIH) where it is unsustainable.
I’ll reply to the rest when I get some time.
Well, after 150+ comments, I’m sure I’ll get lost in the woods. But I feel somewhat of an obligation to respond to this since Mr. Murphy dedicated this post to “our frequent guest “AP Lerner” make numerous claims in the comments of this blog “
“Modern Monetary Theory (MMT) is a hip economic/financial paradigm “
You really did not get out much as a kid if this is what you call hip :).
“MMT is not the same thing as neo-Keynesian economics”
Good start. I’m excited. What is very important to keep in mind is, unlike Austrians and Keynsians, MMT is apolitical. It’s the deficit that matters. How it is achieved, and how it is allocated is a political decision. MMT’ers recognize the deficit should be larger, and this can be done via tax cuts or increased spending. I’ll also point out for the children on this blog (ahem, Bob Roddis) that MMT is a free market driven view, and in that regard, shares a lot of similarities with the Austrians. In fact, I would argue MMT’ers are even more free market driven than your typical Austrian who is, generally, more interested in pushing a political ideology than free markets and prosperity. The primary difference is MMT’ers recognize the relationship between the private and public sectors, MMT’ers have a better understanding of monetary operations, and MMT’ers realize the US left the gold standard many, many decades ago.
“the MMTers, the point of taxation isn’t to raise revenue for the government, but rather to regulate aggregate demand.”
Yes! You really have done some homework. Getting even more excited.
“deficits don’t matter” when a sovereign government can issue its own fiat currency”
NO, NO, NO. You started off so well. No MMT’er has ever claimed deficits do not matter. What MMT very clearly recognizes is there is no operational constrain to public sector deficits in the US (and Japan, UK, Canada, etc.). The only constrain to public sector deficits is inflation.
Question: solvency is defined as “the degree to which the current assets of an individual or entity exceed the current liabilities”
http://en.wikipedia.org/wiki/Solvency
Please explain how the US, which is the sole issuer of USD, can ever have liabilities denominated in USD that exceed it’s assets in USD?
The constrain to deficits is the productive capacity of the economy, not some silly fear of insolvency. So deficits very much matter, Mr. Murphy. This is a simple minded claim, and makes me want to stop reading, but I’ll press on 🙂
“And gosh it sure looks like if the government were to reduce its budget deficit, then the private sector’s saving would necessarily go down”
http://blogs.ft.com/gavyndavies/files/2010/12/ftblog52.gif
Notice the destruction of private sector savings during the Clinton years. There is a now famous WSJ cover that cheered the federal government spending less than it takes in, while at the same time asking why savings have moved to zero. One of the (many) reasons for the formation of a private sector credit bubble is the private sector was overtaxed at the end of the 90’s.
“To explain the importance of saving and investment in a barter economy”
Uh, you do realize we longer live in a barter economy, right? Or are you advocating a return to the barter system with this story? Very odd statement. Powering on (but it’s getting harder…)
“Now in this tale, I never had to posit a government running a budget deficit to make the story “work.” “
Well, of course not because a government does not exist in your fairy tale. I know it’s a libertarian dream to live in a taxless and governmentless world, but, I’m sorry to break this news to you: we don’t. We all owe taxes. And we all have tax liabilities denominated in USD. Try paying your taxes in coconuts. Or Euro’s. Or Yuan. I know, I know. Taxes are evil. It’s coercion. It’s anti-liberty. All that may be true, but I’m more interested in describing and investing in the world I live in. And in the world I live in, I owe taxes every year. The ability of the US government to collect taxes is what gives the USD value. And it was Zimbabwe’s inability to collect taxes (a collapse of government – a political decision, not a monetary one) that lead to hyperinflation (I threw that in there since I saw Zimbabwe a few times in the comments when I scanned them).
“I can use it to underscore the familiar “crowding out” critique of government deficit spending”
Oh no!!! The attack of the neo-liberal myths returns! Mr. Murhpy, please provide empirical evidence of crowding out in a monetary system such as the US? You can’t. Why? Because there is none. Crowding out is a relic of the gold standard. Why aren’t rates higher if crowding out is now taking place? How come as the deficit has grown larger, so has the private sector savings rate? How can government borrowing crowd out private investment, when the government spends FIRST, then issues bonds to mop up the excess reserves SECOND?
It’s time to update your analytical framework and recognize that, as much as you disdain fiat currency, the gold standard does not exist in the US anymore. Neo-liberal myths like crowding, the money multiplier, and other gibberish taught in Econ 101 (including your textbook, which, btw, I have read) no longer apply – the gold standard is dead.
“The fans of MMT should therefore stop pointing to those identities as if they prove the futility of government austerity during an economic downturn”
Uh, have you been paying attention to the UK?
“As a final way to illustrate the non sequitur of the equations involving government budget deficits, note that we could do the same thing with, say, Google”
Ugh. Silly. Fyi – Google does not issue own currency. FYI – Google does not collect taxes.
“After the year passes, Sam walks up to Tabitha and sticks a gun in her belly, demanding $10,500 in cash. She hands it over to him, and then he gives it right back and tears up his IOU.”
Ah yes, every good libertarian article needs some reference to government coercion! Is this a requirement for Mises? Anyhow, this silly example kind of proves MMT’s point. When Sam taxes, I mean robs, Tabitha, he is removing not only the original loan from her savings (this gets written down, since it is not paid) plus he removes the amount taxed, I mean stolen. This reduces Tabitha’s net financial assets, and, as MMT’ers describe, higher/lower taxes destroy/add financial assets to the private sector. From Tabitha’s perspective, this is highly deflationary. This little tale is almost as intellectually dishonest as your ‘Fed is a counterfeiter tale’. I get it, you need to play to your base, but it’s just bad analysis.
Many other critiques I could have hit on, but this is already way longer than it should be, and I’m sure the only responses I’ll get are ‘you do not understand Austrian economics’ or ‘Abba Lerner studied socialism so that makes him a socialist’ kind of gibberish.
Kudo’s to the effort Mr. Murphy, but you still have a lot of work to do. I’ll give you credit for opening up your mind, even it was just a smidge :). Time will determine the winner of this debate….my money is on MMT (and for UST’s to remain money good)
MMTers have abolished crowding out.
http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157623413687847/
And they have taught us how government spending helps the economy.
http://www.flickr.com/photos/bob_roddis/4426636401/in/set-72157623413687847/
AP Lerner, well thanks for the gracious words, but unfortunately it seems you missed the whole point of my article. I was saying that all the things you guys think flow from those equations, in fact flow from your macroeconomic theory as to how the variables in those equations interact with each other. The sectoral balance equation itself is totally consistent with “crowing out” and so forth. So if you think crowding out doesn’t happen in the real world, that’s fine, but it’s not the sectoral balance equation giving it to you.
Also, the way you handled my Google example doesn’t work either. You said that Google doesn’t issue its own currency–right, it doesn’t, but those sectoral balance equations don’t depend on fiat money. Whether we have fiat, gold standard, or barter, it’s still true that Y = C + I +G +Nx and so on.
Last point: I am actually amazed that one of the replies to the Robinson Crusoe thing is to say, “You can’t pay your taxes in coconuts.” Everybody knows you have to pay taxes in USD. But you guys weren’t saying, “The private sector needs dollars to pay taxes.” No, you have been saying, “The private sector needs a government deficit in order to accumulate net savings.” So my Crusoe example underscored what an idiosyncratic usage of “net private savings” you are employing; that constraint doesn’t affect real GDP growth at all.
“But you guys weren’t saying, ‘The private sector needs dollars to pay taxes.’ ”
Actually, that is one of their core arguments. Mosler in particular argues that the (alleged) monopoly power of the currency comes from the government’s enforcement power. By being forced to pay taxes in US dollars, an American is obliged to demand dollars. Taxes are not used to pay for obligations per se, but as both a monetary management tool and as a means of upholding this supposed monopoly value of the dollar.
(This position seems intended to counter the goldbug notion that a currency must have a precious metal to support it; MMTer’s depend upon enforcement power in lieu of a hard asset. Again, MMT presumes that the currency in use is a fiat currency.)
Could you clarify something for me? Under your basic sector balance framework G-T = S -T, are the limitations on G exactly the same under a gold standard and fiat? You are absolutely correct to point out that the sector balance equation is the same under gold or fiat, but doesn’t G have more flexibility under fiat? Doesn’t The UK have more fiscal flexibility than Ireland?
You’re point on the carusoe example is fair. I, as well as other MMT’ers probably are not clear on this. Let me frame it this way. Let’s say there was government in that example, and they tried to tax Crusoe and the government only excepted USD. Well all the cocanuts in the world won’t satisfy the demands of the evil government, so Crusoe must provide a service to the government to earn USD to settle his liability. The evil government must spend FIRST in order to issue currency to later tax Crusue. In order for Crusue to accumulate additional USD to either save or put to other productive uses (like hire me to help) the evil government must go into deficit. The deficit creates additional, new reserves (no crowding out) and if the evil government feels like giving out a subsidy, it can swap those reserves for interest bearing obligations. As my example shows, taxes nor borrowing are required to spend since the evil government is not constrained by some peg (gold)
So yes, the sector balance framework is applicable under all monetary regimes, but clearly a pegged currency has constraints
AP, aren’t you a little too bright to argue along these lines? Are you just trying to dumb things down for the Austrian crowd?
@AP
AP, not sure if would go as far as to say MMT is more “free market” than the Austrian School. Advocating government spending in order to stimulate aggregate demand in a recession is a concept that Austrians have addressed thoroughly and debunked for decades now.
Plus, the notion that the economy is a homogenous blog of mass that can be minupluated into propserity by superior MMT beings is certainley not free market. See knowledge problem.
Government spending is not free market in any sense because spending is not what creates economic growth, its savings and capital. People spend because the economy is growing, but the spending in and of itself does not create economic growth.
Most Austrians would also likely retort by suggesting that government cannot engage in economic calculation and suffers from the knowledge problem. This means that because it is not subject to market forces and does not possess the relevant information, there is no way to determine if the governments expenditures are actually consistent with consumer preferences.
Government spending money on random things like sex toys and stripper poles does not “stimulate the economy” no matter how much it is. Government cannot create wealth, nor do we need “net financial assets” to create wealth. Wealth was being created well before any of this mumbo jumbo you talk of existed.
Infrastructure is no better because again, no market forces means no economic calculation and ultimately government spending is no better than a blind man throwing darts at a dart board.
Savings rates have only climbed slightly because of the recession like you would expect, but not nearly enough. People are still highly leveraged. Interest rates are only low because the FED is buying over 75% US treasuries right now with QE2.
So if the fed, an illegitimate buyer in my opinion, is the primary buyer, to say “hey rates are low” is quite foolish. Take the FED out and rates will likely go higher. We had huge deficits preceding the latest financial crisis under Bush; you can’t attribute the same “surplus” to the recession in the early 2000’s and to the current one at the same time.
I mean really, AP, don’t we have a huge deficit right now? 1.6 trillion? How much bigger do you think it has to be before we reach prosperity? If large government deficits are a good thing, right?
>the economy is a homogenous blog of mass that can be minupluated into propserity by superior MMT beings is certainley not free market. See knowledge problem.
MMTers being Post Keynesians accept that the capital is heterogenous, and agents are heterogenous. Honeslty what do you think the point of the Cambridge Capital Controversies was?
Any clue what happened to the other 163 comments?
Murphy taxed them away.
I can’t access the older comments anymore. Probably the government’s fault. But which government?
Did I fix it? No idea what happened. WordPress decided to change my comment settings unilaterally again.
it seems ok now
The foundation of MMT is an aggregate statistic: GDP. Therefore, the “correctness” of MMT, hinges on the “correctness” of GDP as a metric for an economy.
Austrians know all too well of the mischievious nature of aggregate statistics, which is why we have distinguished ourselves from the likes of Milton Friedman (Read: http://mises.org/daily/4067). Some Austrian aligned thinkers have pointed out the wrongs of GDP and suggest an alternative metric, read: http://www.cobdencentre.org/2011/01/gross-domestic-expenditures/ My point is, is that MMT, a theory based on the GDP accounting identity, is flawed because GDP is flawed.
While MMT’ers largely concern themselves with nominal values and flows, by contrast, Austrians, largely concern themselves with the stock of REAL and AVAILABLE capital (or equity) within a geographic boundary. Effectively, Austrians understand that the stock of capital = the economy, no matter what political-economic system is in existence. So through the Austrian Lens, an “island” without a stock of tangible capital from which to draw in order to produce more capital or consume capital is an “island” without an economy, that is, there is no equity so there can not, by definition, be any capital using the basic accounting identity: Assets = Liabilities + Equity (Capital). While that is all academic, in the real world there is some modicum of capital from which to draw, namely, natural capital (resources). When human capital interacts with existing and natural capital to produce more capital the stock of capital grows, which is to say the economy grows. When human capital interacts with existing and natural capital which consumes capital, the stock of capital decreases, which is to say the economy contracts.
MMT’ers fail to even make the distinction between the two ways human capital interact with existing and natural capital: activity that increases (produces) the stock of capital vs. activity that decreases (consumes) the stock of capital. I’ll concede “flows” do matter – at least in terms of capital. However, “money” (especially of the fiat nature), does not necessarily, nor accurately “represent” the capital at all times. I think this is the insidious phenomena that puzzles and/or is “over-the-head” of most people… The question that needs answering is: Why doesn’t capital; otherwise known as equity; otherwise known as wealth; otherwise known as savings, constrain itself to only one medium?
To MMT’ers and Keynesians I say: paper money does not necessarily represent capital. To commodity money bugs I say: commodities do not necessarily represent capital. So where does that leave us? K = f (H, E), where K = Capital, H = Human Capital, and E = Existing (Man Made or Natural) Capital. Capital chooses a medium to represent itself based on its “trust” in that particular medium. So to answer the above question, capital does not constrain itself to one medium because the “trustworthiness” of one medium may not last. For example, witness the ongoing capital flight away from fiat paper money and into precious metals and other commodities. Where “capitalization” (capital gains) is taking place is where capital is choosing to have itself represented.
To close, I offer a quote packed with a tremendous amount of wisdom from Benjamin Graham, the predecessor to Warren Buffet on value investing:
“In the short run the market is a voting machine. In the long run it is a weighing machine.”
The difference between MMT and Austrian economics appears to be …that Austrians hold free exchange between individuals as axiomatic. While, MMT holds force and coercion as axiomatic.
I find the theory interesting intellectually, but frightening morally. It presumes govt planners to be the potters, and society the clay. Instead of enslaving people directly, govt controls society by forcing people to pay taxes with worthless trinkets that only the govt can provide.
I suspect that this does accurately portray the end game of a fiat monetary system. As soon as the wrong politicians understand that this theory is correct, everyone can kiss their freedom goodbye.
Something got cleared up here for me.
I think what most of you are not seeing is that the government via bond sales and Fed purchases (we all know that’s how it is working in QE-whatever), is that the government is adding IOUs to the system. They aren’t adding silver, coconuts, whatchamacallits. No, just IOUs. It is up to the economy to figure out what the IOUs are worth when you and I go out and price silver, coconuts, and whatchamacallits with IOUs.
Finally, that makes sense. In trying understanding MMT, I used confuse IOUs with cars, gold, pencils, roofing nails, etc. It isn’t. It is just IOUs.
As for MMT being an alternative monetary policy plan for the government it is not. It is the plan and way our system works now.
Think what happens when the government/Fed issue too much currency. What happens? Our deficit goes up. What happens to the economy? It heats up and we head into inflationary times. How do we fix it? We default (private sector/banks, etc.) or we tax someone and pay off (destroy money) to reduce the debt. See? MMT isn’t a crazy idea. It’s being practiced now.
This isn’t to say Austrians aren’t correct in their human events sort of teachings. They’re correct too. I just wish they’d throw away the fractional reserve, money multiplier, gold backing mentality when it deals with our current monetary policy.
> As for MMT being an alternative monetary policy plan for the government it is not. It is the plan and way our system works now.
You should inform Ben Bernanke of your findings. because he apparently thinks otherwise.
If you don’t realize that MMT is a fiscalist ideology that seeks to eliminate the current monetarist regime of monetary policy, then you don’t understand either MMT or how the system works today.
>MMT isn’t a crazy idea. It’s being practiced now.
As I just noted, MMT isn’t practiced now. MMT calls for eliminating the interest rate setting practices used by central banks, the exact opposite of what is done today.
If you’d like to learn about MMT, then start by learning about monetarism. MMT is, in essence, a repudiation of monetarism. If you don’t understand what monetarism is, then you won’t know what you’re trying to repudiate.