DEAR PAUL KRUGMAN, YOU DO NOT UNDERSTAND MMT
Paul Krugman is out with another misrepresentation of MMT. For some reason, he has come to the false conclusion that MMTers believe deficits don’t matter. He says:
“Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.
I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.”
This is an absurd misrepresentation of the MMT position and proves that he has not taken the time to fully understand MMT. In my treatise on the subject I specifically say this is not the case:
“Some people claim that MMTers say deficits don’t matter. That is a vast misrepresentation of MMT. No MMTer would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower. Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation and with record low inflation rates there is no fear of the deficit resulting in hyperinflation which would be a pseudo form of default.”
I have maintained that the size of the deficit matters greatly in the current environment because of the uniqueness of this recession. It matters because we are in a balance sheet recession (a description that Mr. Krugman has himself written about). Because the United States is running a current account deficit and the private sector is paying down debt (as opposed to borrowing and spending as they might do in a healthy economic environment) the government sector MUST maintain a higher than normal deficit. This is best understood by visualizing the sectoral balances approach. Currently, the Federal government is running a 10% budget deficit so the private sector is able to save in excess of 7% of GDP (we are running a -3% Current Account (CA) deficit so the math can be no other way).
As time goes on and labor markets improve and the US economy reaches something resembling full employment we will require a much smaller deficit and in fact the automatic stabilizers will do much in resolving this on their own. So, my position on the current environment is really no different than Mr. Krugman’s prescription although he appears intent on misrepresenting this position. Deficits most certainly do matter. I don’t know if I can make that much clearer.
As for the whole “funding” idea, well, perhaps Mr. Krugman would like to explain how a sovereign issuer of currency just “runs out” of money. There is simply no such thing as the USA not being able to “fund” itself in the currency that it alone can create. He appears to be stuck in his gold standard world where currency issuers are always constrained in their ability to spend. Funding is never an issue for the USA, which is the supplier of currency in a floating exchange rate system. The issue is maintaining a level of inflation that does not devolve into a hyperinflationary environment and thus maintaining the right size deficit given the economic environment is vital to ensuring that demand for the sovereign currency does not collapse. Mr. Krugman appears to agree with much of this, but has clearly not taken the time to appreciate even the most basic premise of MMT.
Krugman seems to be pretty late to the game in understanding MMT, especially for a phd economist with a nobel award under his belt. This straw man argument he presents is a feeble attempt to make himself look smart, and relevant to the discussion.
Where does he get this notion from? MMTers are making almost the exact same argument he is (except he is still stuck in the 70′s world – 1870′s that is).
Just submitted this comment there–we’ll see if it gets posted:
Complete straw man. Modern monetary theory DOES NOT SAY THAT DEFICITS NEVER MATTER. Given that we all explained this in the comments to Krugman’s posts on this last year, it’s disappointing that he would continue to put out this complete misrepresentation of our views. Clearly winning a Nobel Prize doesn’t necessarily mean you know what you’re talking about.
It’s clear that he just doesn’t understand it. It’s the sort of comment I expect from people who are just reading MMT for the first time….
If it was the first time I could forgive him. But he had 2 posts on MMT last summer and it was clearly explained to him there in the comments by dozens of MMT’ers and supporters that he had built a straw man.
Didn’t Galbraith get in on that conversation? I don’t expect him to take an economics lesson from some schmuck like me, but you’d think that his ears would perk up when you and Galbraith step in….
Well, I highly doubt my voice would matter. Further, it’s not surprising, as Krugman’s demonstrated that he’s basically an ass and a political hack, and that goes for when I agree with him, too, which I do frequently.
That was precious!
Now we’re in Journalism, Something I know about…Krugman is indeed an ass and a political hack even if I agree with him from time to time. Not often, but if we allow for a level of thought above a college sophomore we can usually get some degree of reality.
The part that boils me is that he’s spent the last week or so lambasting neo-liberal “fresh water” economists for not attempting to understand the “salt water” economists. The man obviously hasn’t spent any real time trying to understand MMT before he tries to take it apart, but maybe because the empirical are on our side.
He doesn’t understand MMT like most people. He is so heavily invested in his former way of thought that the concept of a government that doesn’t fund itself it beyond his realm of understanding. He probably applauded the Clinton surpluses in the 90′s.
Also, MMT allows for significant tax reduction (especially in a B.S. recession), and from what I can tell he’s much more of an advocate of public investment/infrastructure spending, probably on the grounds of the higher multiplier effect. As if the two were mutually exclusive!
Ooooh. This is good. Nothing like a heavyweight economics battle.
Is it really a “Nobel” Prize?
According to wikipedia: http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences
“those who … shall have conferred the greatest benefit on mankind”
What has Krugman ever done anyway?
I don’t agree with all of his work, but let’s be honest – few modern economists have been more influential. I am not saying that’s necessarily a great thing, but it should be respected. I mean, I despise most of the work of Milton Friedman, but the old saying goes: “in order to make an omelette you’ve gotta break some eggs”.
His body of work is not the issue..his creature of the NYTimes status is. One sided journalism is deadly. Deliberatly choosing weak opponents on subjects of major importance and lionizing the party line will kill them yet. It has inflated his ego so it restricts the flow of blood to his brain.
Mr Roche, I love Uncle Friedman, so perhaps one maybe you could do a piece on him….
As for Mr Krugman, he continues on a daily base to advance Leftwing dogma, which for the enlighten is a complete fail….
On the street of Conservativeville, it is known as Pothole Economics…
I think this is good – as they say, any publicity is a good publicity. The more people hear about MMT the better. Let’s all go and leave our comments there.
Here he is with Mosler’s book by the way
He clearly didn’t read it – that’s his loss.
It must be time to send Krugman the next valuable MMT Resource, L. Randall Wray’s Understanding Modern Money
glad to know that I’m ahead on MMT than Krugman!
just to rehash the importance of deficits; if you spend on the wrong things, then you have a serious political problem when the shit hits the fan, like things are now.
What I mean is that there is no reason for the people today to believe that the govt can or will spend on the right things when they (govt) had all the time, support and resources to do so during the good times.
As mentioned by Randall Wray elsewhere (i can’t remember where), it really is a political issue right now and I’ll add that at the heart of it, it’s a matter of trust in govt.
the issue of trust stems from the general perception of fairness- one of outcome; how can the people that caused this not be in trouble? the people who bought the homes and drew equity from it are suffering for their lack of due diligence, but not the people that peddled the stuff for the same lack of due diligence?
politics aside, remember the 5 stages of grief; denial, anger, bargaining, depression, acceptance; i’ll apply this to the population’s feeling that their good faith in govt is not reciprocated.
i think the denial stage is over; the population is in between anger and bargaining right now… imho, there has to be some accountability somewhere from Washington and Wall Street; some heads rolling and some strong legislation, if you like.
If not, the population slips into a “depression” of trust in their govt and ultimately acceptance of the state of matters; which arguably, will lead to even more bubbles, busts, crony capitalism and lack of respect from other countries.
oh well, just my 2 cents.
I’ve got a question though; since the Fed started QE2, which is an asset swap- toxic assets or t-notes/bonds for cash/reserves, what would happen if the Fed started losing money on those toxic assets/treasuries?
I mean, are they going to crank the printing presses to support those writedowns on the balance sheet? and if they do, it creates reserves, which can only be eliminated (i think) by buying up treasuries from the private sector, which stokes inflation, right?
i mean, its not impossible for the Fed to be losing money, right? After all, they bought treasuries when the yields were low (price high), which means that if those idiots (sorry, but i had to) succeed in their objective of creating inflation, they’ll have to sell those treasuries at a loss (yields high, price low), right? and given the amount they bought in QE and QE2, it’s not impossible that they lose ALOT too yeah?
i understand how inflation is the only real economic concern when it comes to deficit spending/monetization… but i have a real problem when the Fed becomes a trader, who facing losses, can essentially print money to recover those losses and create accounting rules that allows them NOT to recognize those losses.
The first step is for the bottom 90% to stop voting for people bought and paid for by the top 2% (democrat or republican; and the other 8% are just lackey wannabees of the top 2%) who don’t have their interests in mind.
The fed cannot and will not lose any money. I am not saying they are any good at investing, but that they increased the size of their BS four times and can double it again with treasuries supporting election year spending. If you can do math, you have figured that has covered 20% principal loss on their swaps and then some more. How was it covered? By printing their own ‘profits’. Very disingenuous for a(nother) princeton trained academic.
Good write up, Prag!
I just posted under ‘comments’ pending approval.
Good that he keeps mentioning MMT.
The more we can get out front the better.
And not to change the subject, but what do you thing about buying the dollar index???
Hi Warren. Hard to have conviction about the USD with the ECB’s persistent warnings about rate increases, no? I have been thinking about a flight to safety trade, but that doesn’t look realistic until QE ends (or maybe May as traders anticipate end of QE?)….you know more about all of this than I do!
Dr. Krugman has a better understanding of all of this than most people, but he just won’t allow his politics to get out of the way. He views this as some sort of political argument instead of a sound economic argument. It clouds his thinking and detracts from his argument.
Actually, the little bit of academic research he’s done on monetary operations is of rather poor quality. I don’t think he understands much of it.
Scott, tell us how you really feel about PK!
As an aside to all this, I’m sitting here w/ Glenn Beck hyperventilating in the background doing a special about the Fed. It seems to me that if prominent MMTers were to produce a blueprint to abolish the Fed (and fold it into the Trsy Dpt), they might be able to pitch that to even him as a topic for a show. Talk about a platform for getting some of the monetary ops basics out to a wide audience!
Just an idea.
after reading my own stuff, i realize that i need to go and find out how the Fed, or any central bank for that matter, deals with losses when they start raising rates or when inflation kicks in…
something tells me it has something to do with the treasury and it involves more spending though..
anyone has any good links?
Hey, guys, just a thought – maybe the MMT crowd “doth protest too much”? Krugman never said that the school of thought was MMT,d id he? Maybe he meant, I don’t know, Dick Cheney or something.
He sure did.
Oops, how did I miss that!?
I’ve proposed to set rates at 0 permanently and send everyone at the fed home and let tsy take over the clearing operation and let the fdic do all the regulation.
direct savings- about $5 billion a year, so taxes can be that much lower!
cullen- buying euro for rate hike reasons is buying for the wrong reason as rates don’t support the currency. they only make deficits larger. ???
Right, but do mkts think that?
Permanent ZIRP introduces too much moral hazard for my liking.
With ZIRP (+PDCF), the whole point of reserves is negated (as an externally imposed buffer). Banks will lend up to and over prudent levels, knowing they can run screaming to the Fed if there’s any trouble, with no consequence. They will neglect robust internal risk modeling in favor of short-term profits under a competitive environment.
Prudent lending is the key factor. Reserve policy can assist but is largely irrelevant (consider Australia with a 0% reserve requirement). What matters is ensuring that banks maintain an internal culture of caution and ZIRP does not promote this.
If banks are going to be stupid enough to extend credit to high probability defaulters in an economy with a decay vector then there should be consequences when they hit liquidity problems. I don’t think ZIRP + PDCF was a “consequence”, it wasn’t even a slap on the wrist; it did nothing to prevent future bad behavior getting us into another crisis.
A better solution would be a two-tiered rate system. Borrow at low% for normal operations (increasing reserves following credit expansion). Borrow at high% for emergency operations (coping with defaults/runs). So there’s minimal obstruction to normal operation but a penalty for screwing up.
Interest rate is still too blunt of a tool, though. It can always be hedged away etc. You need a robust regulatory structure and adequate capital requirements.
Agreed. This entire crisis is due to a lack of adequately enforced regulation.
The problem with reserve requirements and capital adequacy requirements is that they also too blunt / low resolution. (Of the two, I prefer the latter).
An ideal regulatory solution involved dynamism to match the reality of the current (and projected near-term) economy. We have all the mechanisms already in place, they just aren’t used properly.
this is tedious. when’s the nytimes moderator going to let these comments post?
OK – not to rehash old arguments but MMT is correct for a non-convertible fiat currency such as the USD. Unfortunately congress still operates under laws that were enacted (Second Liberty Bond Act of 1917) prior to Bretton Woods falling apart with the closing of the Gold window in 1971. So even thought MMT is technically correct it is not logistically how this country operates and therefore it is an academic argument. Until we remove the laws surrounding debt issuance this is all moot.
that doesn’t make it moot, or ‘academic.’ the operational reality of monetary and fiscal policy is described well by mmt. just because there are some strange vestiges from gold standard operations doesn’t mean that the descriptions offered by mmt don’t matter
it does suggest we get rid of those vestiges…
We’ve already covered this hundreds of times. It would be nice to change the self-imposed constraints so the system was perfectly consistent with the general case MMT explains (particularly in terms of everyone’s understanding of how it works), but in terms of actual functionality it really doesn’t matter if the system is changed or not; what appear to be constraints really aren’t.
issuing government debt is not that big of a deal, it can continue as a welfare payment to the bond market (or perhaps to “pay” for the white collar prisons we need to build). It doesn’t have any significant effect , as the government can always meet their interest payment obligations.
His body of work is not the issue..his creature of the NYTimes status is. One sided journalism is deadly. Deliberately choosing weak opponents on subjects of major importance and lionizing the party line will kill them yet. It has inflated his ego so it restricts the flow of blood to his brain
I wouldn’t say he always lionizes the party line, if by party you mean the Dems. He is a big critic of Obama and the current Democrats.
PK lionizes the far left.
Krugman’s talk about base money and bond “financing” shows he doesn’t understand the basic mechanics of the system. If there are excess reserves (the current situation), the interest on base money sets the Fed interest rate. Very simple. If the Fed wants to set the interest rate higher than the rate on reserves (no good reason to do that), then it has to drain the excess reserves.
Somehow this reminds me of the Intelligent Design vs. Evolution discussion. If you can’t win on facts you can always misrepresent the facts and disprove the misrepresentation. That doesn’t discredit the theory though.
I like the fact that MMT explains how the monetary system functions, but I disagree that it or any other fiat money philosophy is prescriptive for policy. The crux of both (?or more) sides is how do you measure what is a productive amount of money that does the greatest good (e.g. allow plenty of money supply when there are great strides in productivity/new technology; less when it is wasted via hoarding assets). When Krugman says “funding” I think he means, let the private sector have some say in defining what is productive. All these wasted arguments over how many fairies and the color of their dresses dance on a pinhead do not answer the fundamental social political question: how do we define productive use of money? Taylor’s rule? Asset prices? Non-farm productivity? Is the army and geo-political preemption a productive investment?
They key to MMT is that you can accept that deficits will exist and that they are generally good for the nation (within the sector balances framework). Once you get beyond that it’s just a political discussion of what those deficits should and need to be made of. What does this country want the government to spend our resources on? No worries about funding those desires. Yes we may have to argue over who’s income may need to be cut to allow the government to spend (reduce aggregate demand of the private sector), but that argument doesn’t even kick in until the economy is at full speed!
Regardless of MMT, it would be interesting if there is any quantitative proof that running deficits is correlated with productivity (quantity and quality).
Also, I don’t see any situation now where there is lack of private sector investment holding us back from the future (e.g. VC, apartment construction, natural resource output). Is there anything, other than the debt from residential and automotive malnvestment that is holding back the private sector (is there a lack of quality housing, food, education, that a deficit could vastly improve)? Deficit spending is absolutely required to kickstart the economy after a major destruction of productive capacity, or to enable a major shift (in energy efficiency, new technology), but we don’t have that situation.
Insufficient aggregate demand.
What business is willing to expand their business if they know there is no additional demand to buy up the expanded supply?
Remember, Spending = Income. If there is insufficient spending then their is insufficient income to support future growth.
I’m talking about quality, rather than quantity.
The fundamental question is quality vs. quantity … who decides in fiscal/monetary policy?
Most people would argue that lending someone $1M to buy Barry Bonds’ rookie card (bad example!) is bad from a societal/fiscal POV. It’s no different if government spending leads to the same result. It’s quite possible, that the money will subsequently be invested in a biotech startup that cures cancer, but not likely.
If society believes in supply/demand and market-based prices, then one can’t overlook the quality/quantity question.
Jt26: Quantity and quality are two entirely separate questions. All deficits do (ideally) is ensure full employment. As to the QUALITY of that employment, that is determined by factors like quality of education in the country concerned, the extent to which it is free of corruption, etc.
As to the correlation between deficits and productivity (output per head), I would expect the relationship to be an inverse one in that the higher employment levels are, the lower quality labour that employers take on. On the other hand that could be more than compensated for by the fact that on coming out of a recession, capital equipment is worked harder.
The full employment question is one of the political questions we have to ask ourselves (my original post). You can have full employment without running deficits. You can have full employment with terrible living conditions (low quality economic output).
Weird how this post of his looks like a draft to the original from back in July. Even this paragraph:
The July post looks like a more elaborate version of this one, with the little mathematical model worked out.
Is it possible that he posted by mistake an old draft of his?
Hear, hear! Excellent response, Cullen. I can’t help but feel encouraged that MMT, or a bastardized version of it, is reaching PK’s sizable audience.
MMT “works” from an operational perspective and an accounting perspective; it is undeniable. However, it “feels” like the ultimate free lunch, which is why so many struggle to accept it. Also, to quote Jason above, “[u]nfortunately congress still operates under laws that were enacted…prior to Bretton Woods falling apart with the closing of the gold window in 1971.” Our legal infrastructure for financing of federal operations is also undeniable, and it is providing feedback that is on its face alarming, even though the Fed can always “fund” by keystrokes and the PDs whatever Congress wants to spend and thus circumvent the legal infrastructure, which then requires Congress to raise the debt ceiling under the legal infrastructure, etc.
Professor Krugman doesn’t want to acknowledge MMT as valid because it exposes the man behind the curtain of the money illusion. As Dorothy said to Toto, “We’re not in Kansas anymore.”
No, I think Prof Krugman just flat out doesn’t get it.
As for the “free lunch” – this country has been running debts and deficits for 200+ years. There has never been anything free about it. It took us $15T worth of output, several wars and a hell of a lot of hard work to get here. Just because people can’t understand the idea behind the govt not being revenue constrained like a household does not mean there is anything free about it. Behind all that govt issued paper there still has to be hard work and productivity. Once you wrap your head around that you recognize that there is nothing free about it and that the operational reality of our currency system is perfectly sensible.
And trust me, I know that feeling that it seems like a free lunch. When i first learned MMT it threw my world out of sync for several months. That “free lunch” phase is right inbetween getting it and not getting it….
“That “free lunch” phase is right in-between getting it and not getting it….”
Having been there myself that is a very real truth.
Cullen,
Don’t you get it: we are on a path of gradual and increasingly faster impoverishment. The alchmy of debt has helped pull forward trillions (or generations) worth of demand. 100 years ago you could build your own house while working something else full time before you turn 30, 50 years ago you could support 5 member family with one working parent… now you need 2 working people to support 2 kids and pay off a house in 30 years. We are supposedly much more productive and educated, i beg to differ. Debt makes only slaves.
You’re confusing private debt and public (govt) debt, I think. And to suggest that our standard of living is worse than a 100 years ago – I don’t know how to even respond to it, it is so divorced from reality.
i am saying that debt if anything, makes improving everyone’s standard of living harder to achieve.
and for you to assume that what you owe personally is debt, and what you owe as a citizen is merely an ‘accounting identity’ is really divorced with reality.
There are many differences between private debt and public debt. Public debt is a subsidy to people holding your currency, which you require them to do to extinguish your tax liabilities. So, public debt correctly understood is a “favor” from the govt to the non-govt sector, not the other way around.
i never cease to amuse myself at your MMT nonsense. you in particular are saying over and over again that public deficit is _required_ in order to have private savings… yet you cannot explain with your MMT theory how on u.s. soil there is 9 trillion of public debt and 50 odd trillion of private wealth and about that much more public and corporate wealth. monetarists are in fact covert marxists, don’t pretend otherwise.
You are conflating private sector wealth with private sector money. The national debt level is the same as the money savings in the non govt sector, not the total monetary value of all assets used as saving. Just because someone has a house with a price of 1.5 million does not mean they have 1.5 million of savings. The same goes for a stock price or gold price or any other commodity price.
If you want a clearer picture of the difference between private debt and public debt let me ask you this;
Would you rather have a $100,000 mortgage or a $100,000 treasury bond? If you think they are equivalent you can have my mortgage and I’ll take your treasury bond……….. deal !!??
yet you cannot explain with your MMT theory how on u.s. soil there is 9 trillion of public debt and 50 odd trillion of private wealth and about that much more public and corporate wealth
baychev, if you bothered to ask, I’m sure a lot of people would have explained this to you. As Greg correctly notes, you’re confusing wealth and savings of net financial assets. If you want to follow the accounting go here.
Hey, Cullen….I’m SURE Krugman gets it. He simply made the
crack so he can dismiss MMT before it gets additional mainstream traction. This is the way it’s done in the academic world. To protect one’s body of work, one must make the superior and more
logical body of work look like it was invented by crackpots:-)
Hm, that would be a stupid strategy. The right argument usually wins. The more exposure you give it, the better chance it will prevail.
James Galbraith already crushed Krugman on this debate once. Is there really a need to rehash it? Is Krugman a masochist?
http://heteconomist.com/?p=653
No comments have been approved so far (lol)…. Is that normal?
I thought that once you become a member of the site, you could be trusted to post without moderation…
OK.
Has everybody here written to the editor at the New York Times and requested that they commission an article from the MMT published people as a response to Krugman?
Let’s push for an article by Scott/Randy/Warren/Bill. Get those emails in.
Krugman’s article is propaganda. The NY Times will withhold the posting of comments until the vast majority of short-attention span theater America has read the article, accepted it as gospel, and moved on to the next bit of infotainment.
Looks like you’re right. Still no comments posted.
Politics, guys. It’s everywhere. Facts do not matter; rhetoric does. Accept it.
AAAH, and there it is…..politics…..human nature……sadly the reason MMT will never be used to run anyone’s economy because the person to deftly twirl the knobs has not been born yet(other than maybe cullen [haven't fished with him for a week, so i'm not positive] and i don’t think he’s ready for the washington meat grinder[he's having tooo much fun])…..
they are so smart(?) in europe and look what they’ve got themselves into…….washington?….give me a break(i’m with adam on who’s electing who).
the angels to run it are not here and if they are/will be they will never be permitted to run the show…….its just my opinion.
heady to realize i know more about MMT than a nobel prize winner, tho…….wait a minute, obama won one of those, maybe i take that back.
Dear Pragmatic Capitalism,
I’m not sure if you understand Paul Krugman.
He writes,
“Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.”
To which you reply,
“This is an absurd misrepresentation of the MMT position”.
Moreover,
“Some people claim that MMTers say deficits don’t matter. That is a vast misrepresentation of MMT. No MMTer would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower.”
You’ve misunderstood what Krugman meant by “deficits don’t matter”. He didn’t mean “deficits don’t matter for the health of the economy”. He meant “deficits don’t matter for the govt’s ability to borrow and ultimately to spend”.
E.g. (Random comment from Warren Mosler’s site) “If the US can’t run out of dollars then it can spend first – an amount that it can choose precisely” (Neil W)–i.e., “deficits don’t matter”.
“He meant “deficits don’t matter for the govt’s ability to borrow and ultimately to spend”.”
He’s wrong there, too.
The point is, the scenario Krugman builds in which he (incorrectly) presents it as difficult for the govt to finance its deficits is one in which MMT’ers would never propose running large deficits for anyway. Complete misrepresentation, as it’s already been explained 1000s of times.
“He’s wrong there, too.”
So the size of the deficit constrains govt’s ability to spend?
It is not the size of the deficit that constraint public spending, but the degree to which the economy is at full capacity. At full capacity, increased spend (via private debt issuance or government deficit spending) will generate inflationary pressures. In such a situation, that could be a relatively small deficit or a large deficit, the size doesn’t matter.
I think you’re giving PK too much credit for his knowledge of MMT. To me, it is clear that he’s saying the deficit should not remain at $1T or whatever and he builds this ridiculous argument against that case. The problem is, no MMTer ever said we should run permanent $1T deficits…..
That’s still not right. Krugman is saying that govt is constrained in its ability to run deficits by the need to borrow (i.e. by the GBC). But, that there are these “modern monetary theory people” who disagree with that. Then he gives a hypothetical situation in which the government finances its deficit by issuing base money.
You appear to honestly believe other people are wrong when you proclaim them to be wrong. It’s a good way of convincing yourself that you’re not wrong and a horrible way to engage someone in productive debate. Enjoy our weekend.
I made an argument: Krugman thinks that the govt is constrained by its need to borrow. He claims MMT thinks otherwise. Both propositions seem reasonable to me–I don’t see that you’re misrepresented or misunderstood at all.
See Krugman’s follow-up post:
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.
I disagree.
krugman pigeonholes all interest rate maintenance operations on the ability to issue debt. he’s not thinking hard enough
It’s another strawman. And he blasts right through it with all his might!
MMT doesn’t say that government can just spend limitless without repercussions because it’s not constrained by it’s ability to borrow. This is what Krugman implies.
“Because the United States is running a current account deficit and the private sector is paying down debt (as opposed to borrowing and spending as they might do in a healthy economic environment) the government sector MUST maintain a higher than normal deficit.”
I think I get what you’re saying here, and (if I understand) then I agree with your economic understanding 100%; but how can you say ‘MUST maintain a higher than normal deficit’?
Every time a person says a statement such as ‘We need/must do such and such’, there is an implicit statement; [in order to achieve such and such] tacked on to the end. For example, ‘You mustn’t eat 5000 calories everyday [in order to stay healthy]‘ or whatever else. If there isn’t an implicit statement like that, then it must be universally valid; that is, every single person involved must implicitly (and necessarily) seek the goal that is achieved. For example; simply ‘We must breathe’. (We all want to live and affirm that by being alive).
So, what is the [in order to ...] involved with asserting that the government should have a higher deficit? My hunch is that it would be an economic goal. If my hunch is correct, then; why is that a goal? Who agrees with it? Who doesn’t? Why should that economic judgement be forced upon others? If you use force (government), then you violate an implicit and necessary corollary of life; that people own themselves and their property..
Again, I agree 100% with the economic judgement, I just think that we violate something higher than economics when we attempt to force our goals upon others. Apologies, this comment is perhaps irrelevant to the investing focus of this site…
It is “must” because paying down debt implies an increase in savings. If you run a current account deficit amd you are going to net save – that is decrease private debt – then you MUST have government deficits. This is not a prescription or advocating a political position, but a statement of the accounting identiies that must hold.
Another way to look at it is to state that without a government deficit, the public will not be able to achieve their desire to reduce their debt obligations. Which is probably why the banks don’t like deficits.
Paying down debt does not require that the government runs a deficit as a matter of accounting. The private sector isn’t in debt to the government – it’s in debt to itself.
Ok, it’s clear to me that savings over investments by the private sector has to equal government spending over taxation and the current account balance. What isn’t clear to me – if this is being said – is why it is taken as a given that some components should remain in the range/trends that they are – to then advocate deficit increases. To advocate and execute government deficits changes the picture and the story that was seen to enable them in the first place… If you say, ‘the government’s deficit must increase to compensate the private sector’s increasing savings’ then that perception of reality helps bring about what you thought was a given..
Without advocating and enabling government deficits, the sectoral balances would just go where they would need to go; and we wouldn’t know if that would happen in one month or one decade. The premises about the trends in the private sector balance and the external sector balances could be blown out of the window; who knows how it would be resolved. Perhaps I don’t understand, but I think there are some value judgements lurking in there somewhere. If the original statements were literally meant to express the accounting identity, then please ignore me.
You can’t easily change the current account balance. It’s quite easy to change public / private sector balance via taxation.
Do you think it’s more desirable for the private sector to run a deficit and the government to run a surplus?
I don’t think that my (or your) perception of what is ‘desirable’ should be used to violate private property rights. I don’t think that I (or anyone) should determine to whom capital flows; I say leave it to the market.
Keynesianism, MMT are permagrowth theories. You gotta achieve maximum growth and be it in a straight line regardless how capital intensive your business endeavours are. If you are building an university or spending on personal recreation, it is all the same for them and there have to be apparatchiks that tell you where you should put your money or where they should oblige you to repay debts. These are classic dogmas and i dont see how intelligent people can strictly follow them, it is beyond common sense.
@ Gresham’s Law
I hear your call.
MMT is full of value judgements that I have been debating for long and I do not see as a given. You are right, they describe the money mechanics and say – see no theory. And then they start throwing the MUST DO prescriptions. In the end they strive for a command economy, similar to Ben’s aspirations. Just they use the deficit tool, not the monetary tool. (but they claim the two tools are different sides of same coin and should be united legally, as they are united economically).
It is not self-evident that the govt should run a deficit, so that the private sector can net save. Household sector is in debt to the banks, so it saves vs. the banks. Deficit bails out the banks over time, who did misallocations. Exactly the same problem Cullen has with the Fed.
And the arrogance to be able to manage the economy just in time with the proper level of spending, needs no comment. Of course I do like automatic stabilizers, but do not like one-sided discretionary policies.
And arguments like “we only make sure the economy gets enough money, so that it can operate normally” are proposterous. There is never enough money in the capitalistic economy. Throw money and spending will occur, no matter if it has any utility. The series of bubbles show you that there is more than enough money. The problem is that it is in a small circle of hands (top 2-5%).
InvestorX
@ Baychev & Anonymous
Glad you understand.
I don’t know much about the MMT, but I really like the parts that I can integrate with my view of the world (especially the sectoral balances stuff). Who knows, maybe they can alleviate my misgivings…
Good Post.
Its managing the offering side,the supply side of money via the Leviathan choices instead of the market choices. It’s no coincidence that Government and the Financial Sector benefit most in the MMT world.
Can someone explain to me why Krugman’s politics (or the NYT position) is dead set against MMT? It would seem to me that liberals would pretty much embrace MMT (although I do get that they then run out of reasons to raise taxes on the rich). Other than that, what am I missing?
PK has to reject MMT. It is in many ways similar to his own beliefs, but entirely debunks much of the work he has done throughout his career. To accept it at this point would be akin to a Roman Catholic living his entire life and winning all sorts of awards and then suddenly deciding to become a Protestant at the end of his life. There’s an obvious contradiction in all of that. He HAS to reject MMT.
PK has to reject MMT. It is in many ways similar to his own beliefs
It isn’t, really. The policy recommendations of both end up overlapping during periods of disinflation and deflation, but those camps make those recommendations for different reasons, and then make very different recommendations during boom periods.
I would agree with you that Krugman’s summation of MMT is misleading. But he is correct in that MMT believes in operating with permanent deficits, just varying the size of those deficits based upon economic conditions.
While a neo-Keynesian such as Krugman would want to run surpluses during good times, someone such as Mosler believes that government should and must run deficits at all times. A Keynesian sees government spending and taxation as fiscal matters, while MMT believes that government spending and taxes are monetary drivers.
A Keynesian believes that a government’s ability to deficit spend is constrained by the need to eventually repay it. An MMTer believes that government spending isn’t constrained by interest rate or default risk. I suspect that this is what Krugman was talking about, although he is wrong to equate this to unlimited deficit spending. MMT has spending constraints as well, but they aren’t fiscally driven.
These positions are fundamentally opposed for the most part, but both just so happen to end up at the same policy place when an economy is on the brink of depression. I can see why Krugman objects — the premises of MMT are so very different that they make very little sense from either a Keynesian or a monetarist perspective. The ending points aren’t necessarily very different, but the path to reaching them are quite different.
“But he is correct in that MMT believes in operating with permanent deficits, just varying the size of those deficits based upon economic conditions.”
Budget deficits are normal for trade deficit countries. For trade surplus countries, a budget surplus could potentially be normal.
Actually, most mainstream economists don’t have a problem with deficits as such. They just think (wrongly) that there is some limit to the debt/GDP ratio above which the government runs out of money.
Actually, most mainstream economists don’t have a problem with deficits as such. They just think (wrongly) that there is some limit to the debt/GDP ratio above which the government runs out of money.
A Keynesian wouldn’t blame recessions and depressions on budget surpluses, as has Mosler. MMT believes that deficits are necessary for growth, as the budget is ultimately a monetary operation, while Keynesians rely on deficits to temporarily replace private sector when the economy slows.
And it needs to be remembered that “debt” and “deficit” are not quite the same context. The debt is the total principal owed to lenders at a given time, the deficit is a shortfall in annual government revenues in comparison to annual spending.
MMT doesn’t call for permanent deficits. Did you even read the post? You just repeated Krugmans argument. Jesus you are dense.
MMT doesn’t call for permanent deficits.
If you’re going to argue a theory, you should at least know what it is.
This is what Mosler says about the subject: “Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation.”
Under MMT, budget surpluses are bad, because deflation is bad, and surpluses inevitably create deflation because they drain money out of the economy.
A proponent of MMT would agree with a monetarist that a bit of inflation is good. But whereas a monetarist would control inflation through open market operations (setting the overnight rate), a proponent of MMT would keep the overnight rate at close to zero at all times, and use tax rates and deficit spending in order to control the money supply.
Again, MMTer’s believe that fiscal policy is the root of monetary policy. Under this notion, surpluses are bad. The very most that you’d under MMT is a balanced budget; anything beyond that would be going too far. That differs quite notably from the Keynesian view, which sees budget surpluses during good times as savings that can be used to work one’s way out of the inevitable cyclical downturns.
Wrong again. From Randy Wray:
“Far from recommending perpetual deficits come what may, the functional finance approach recognizes that the private sector can become overheated, which is remedied through rising taxes to drain HPM and disposable income. ”
Before you criticize a theory you might want to at least know what it is.
Wrong again.
I just quoted Mosler, verbatim. So unless you want to disavow him (and I’m pretty sure that you don’t want to do that), I’d reconsider that comment.
the functional finance approach recognizes that the private sector can become overheated, which is remedied through rising taxes to drain HPM and disposable income. ”
This does not contradict, in any way, what I — or I should say, what Warren Mosler — was saying.
The MMT solution is to an overheating economy is to increase taxes and/or reduce the amount of the deficit, while still maintaining a deficit. The MMT solution is NOT to run a budget surplus.
Let’s cite Mosler again: A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation.. Surpluses cause deflation, and deflation is bad.
Don’t change the point. You said MMTers ALWAYS advocate deficits. Warrens comments dont say that. A balanced budget is not a deficit. Thats a pretty simple point to understand. I’m not getting in one of these absurd arguments with you again. You took the comments out of context. Move on.
You said MMTers ALWAYS advocate deficits.
The only way under MMT to support a balanced budget is to have a perfect economy with no need for adjustment. In other words, a Utopia that cannot and will not exist.
I don’t know why this bothers you — I’ve simply quoted Mosler, and I’ve fairly represented the MMT position (unlike Krugman, who missed much of it.) In the MMT universe, surpluses are bad.
Since you agree with the currency monopoly theory inherent to MMT, it shouldn’t bother you that deficits are inevitable, since taxes don’t fund anything, anyway. This perpetual deficit thing shouldn’t offend you — on the contrary, you should be defending it. But what Krugman should understand that the deficits are neither unlimited nor arbitrary — there is an MMT approach for determining how much the deficit and tax rate should be.
If anyone is under the impression that Mosler is alone among the MMT crowd in thinking this way, here’s an excerpt of an article by Randall Wray:
Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt…
The United States has also experienced six periods of depression….With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves.
http://www.huffingtonpost.com/l-randall-wray/the-federal-budget-is-not_b_457404.html
Is a balanced budget = to a deficit? No. Game over.
Is a balanced budget = to a deficit? No. Game over.
A balanced budget is effectively an impossibility, given that it is one exact dollar figure.
And under MMT, it’s totally unnecessary, given that taxes and government debt don’t fund spending, and are just levers that are used to ensure that the private sector can function.
But fine. In that case, show us some MMT work that advocates that balanced budgets be strictly maintained during good times. I don’t see anything in MMT that places any importance or priority on having a balanced budget. We certainly can see that surpluses are bad and I think that MMT proponents would agree that some amount of growth is good, so I can’t see why an MMT proponent would aspire to ever have a balanced budget.
I’m not doing this with you. You were wrong. Get over it.
I am not sure I understand what Mosler says here, words like “from inception” get in a way. Basically, since all the “money” is injected by the gov, over the years the govt cannot take out more than it cumulatively injected. It doesn’t mean that it cannot do it in a certain period. And if you are in inflationary period, then running domestic surpluses (since you might still have external deficit) is not deflationary but rather dis-inflationary and no MMTer would object to that, I think.
The fact that MMTers like to point to the 6 periods of surpluses doesnt mean they are against surpluses in principle. But I am not sure what Mosler is saying in this quote.
I am not sure I understand what Mosler says here, words like “from inception” get in a way.
What he’s saying is that the minimum acceptable surplus is zero, i.e. no surplus. Either you run a deficit or else you run a balance, but surpluses are deflationary. He put “minimum” in all-caps in order to emphasize the point.
The basic argument is that a public deficit is necessary if there is to be private savings. A government budget surplus forces down private sector spending, which causes downturns.
This is especially true for the United States, because it also runs a trade deficit, and that too has to be balanced with a public deficit. So under MMT the US has no choice but to run a budget deficit, just to balance the trade figure.
This is how Randall Wray described it circa 2001:
The question is whether the US government can run deficits forever. The answer is emphatically “yes”, and that it had better do so. If you look back to 1776, the federal budget has run a continuous deficit except for 7 short periods. The first 6 of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession.
Why is that? By identity, budget surpluses suck income and wealth out of the private sector. This causes private spending to fall, leading to downsizing and unemployment. The only way around that is to run a trade or current account surplus.
The problem is that it is hard to see how the US can do that—in fact, our current account deficit is now rising toward 7% of GDP. All things equal, that means our budget deficit has to be even larger to allow our private sector to save. Given our current account balance, the budget deficit would have to reach 9% of GDP to allow our private sector to have a surplus of 2% of GDP.
http://www.cfeps.org/pubs/pn/pn0601.htm
Under MMT, there is no compelling reason to have a balanced budget. The greater priority under MMT is inducing sufficient (but not excessive) private savings, not in balancing the government budget. Since taxes and don’t fund the government, anyway, there’s no point in worrying about having a balanced budget. Under MMT, the argument would be that it appeals viscerally to people, but accomplishes nothing and almost invariably will make things worse.
Angry, I think we agree. First, as long as you have CAD you need to offset it. If the domestic sector still desires to net save – you need to offset it. If, however, you’re in inflationary environment – then you need to act in the opposite direction. So reducing deficits (or maybe even running surpluses) in inflationary environment is dis-inflationary, not necessarily deflationary. See my comments below as well.
So reducing deficits (or maybe even running surpluses) in inflationary environment is dis-inflationary, not necessarily deflationary.
“Disinflation” refers to a rate of inflation that is too low. It is not a term used to describe the process that is used to reduce the inflation rate.
““Disinflation” refers to a rate of inflation that is too low. It is not a term used to describe the process that is used to reduce the inflation rate.”
OK, maybe I used the wrong term, but you understand what I’m saying? Looks like you do.
I agree that MMT calls for reducing deficits when conditions are inflationary.
Or perhaps more to the point, MMT calls for increasing taxes when conditions become inflationary. When those taxes are collected, the deficit goes down because net private savings are reduced.
““Disinflation” refers to a rate of inflation that is too low. It is not a term used to describe the process that is used to reduce the inflation rate.”
Peter is correct in his usage. “Disinflation” means that the rate of change of the rate of inflation is negative, but that the rate of inflation is still positive. Deflation means that the rate of inflation is negative.
If inflation falls from 4% to 2%, say, the rate of inflation is falling, but the price level itself still has a positive growth rate (2%)–and this is what is referred to as disinflation.
Chalk up another comment proving MBA is an ignorant fool.
I’m sure it doesn’t prove that. What I just wrote is the standard definition of the term, I think–but anyone can get stuff wrong, even very smart people.
“Disinflation” means that the rate of change of the rate of inflation is negative, but that the rate of inflation is still positive. Deflation means that the rate of inflation is negative.
In this context, disinflation is part of a continuum that begins with the premise that some inflation is needed for growth, but that there is an optimal rate of inflation, i.e. that there can also be too much inflation.
Deflation means that the rate is negative; disinflation is when the rate is above zero, but not high enough to be optimal. TPC uses it in this context frequently, as do other commentators.
Inflation in this context isn’t just any amount of inflation, but inflation that exceeds the optimal or target rate, whatever that is. Hyperinflation, of course, is when some amount well above ordinary undesirable inflation.
There isn’t any doubt that MMT calls for using fiscal policy to curtail excessive inflation, nor would it want it to be at disinflationary levels. This is a point with which neo-Keynesians, monetarists and MMTer’s would all agree.
I most certainly do not use it in that context. When I predicted the disinflation of 2010 it was because I believed inflation would remain positive, but would decline from its 2009 high. Disinflation is a slowing in the rate of inflation. You have misused it.
http://www.investopedia.com/terms/d/disinflation.asp
“In this context, disinflation is part of a continuum that begins with the premise that some inflation is needed for growth, but that there is an optimal rate of inflation, i.e. that there can also be too much inflation.”
Dude, what I wrote is standard. Set P=1 for simplicity, then, pi = (dP/dt)/1 = dP/dt (inflation is the proportionate growth rate of the price level), in which case disinflation is defined as dP/dt > 0 & d(pi)/dt < 0, or the situation in which the level of prices is increasing but at a decreasing rate.
In the rest of your comment you seem to be confusing these terms which just describe rates of change of a particular variable with some kind of policy makers optimisation problem. You can actually do this and derive a kind of inflation-tax Laffer curve, but rest assured, the definitions of inflation, disinflation and deflation remain the same.
“Actually, most mainstream economists don’t have a problem with deficits as such. They just think (wrongly) that there is some limit to the debt/GDP ratio above which the government runs out of money.”
The government’s budget constraint states that the present value of its purchases of goods and services must be less than or equal to its initial wealth plus the present value of its tax receipt (net of transfer payments). A constantly increasing level of debt will satisfy the constraint if its growth rate is less than that of the real interest on the debt.
Which would lead to hyperinflation. But even in hyperinflation the government doesn’t run out of money.
Isn’t it the other way around? You can satisfy the constraint if your growth rate is greater than interest on debt (since your expanding economy is paying for itself, so to speak). Like in that Blanchard et al paper. If your growth is slower, then you need to run primary surpluses every once in a while.
Peter, yes but you’ve slightly misunderstood me–I was referring to the growth rate of the debt, not the economy. If the debt grows at a lower rate than the real interest rate on the debt, then it can be constantly increasing and still satisfy the government’s budget constraint.
You’re misrepresenting MMT because you STILL don’t understand it. We’ve had this conversation more than a few times already…..
You’re misrepresenting MMT because you STILL don’t understand it.
Tell me specifically what I am allegedly misrepresenting or what I supposedly don’t understand.
I’m sorry, but it should be fairly evident how a neo-Keynesian and an MMTer would disagree on the fundamentals, while overlapping on policy prescriptions when faced with disinflation. Why would Krugman be inclined to agree wholeheartedly with a philosophy that clashes with his on the basics?
MMT doesn’t propose permanent deficits. You’re misrepresenting it in the exact same way pk is….
MMT would propose permanent deficits only if they corresponded to non-govt sector (both domestic and foreign) combined desire to save in your currency. Saved currency is by definition non-inflationary.
OK, MMT would say that depending on the situation it is possible that you will have to run perpetual deficits. Even mainstream economists agree with that if your economhy grows faster than interest on debt. See Scott Fullwiler’s Interest Rates and Fiscal Sustainability page 27 for this reference:
This is also true. You can find this result in all the mainstream text books, e.g. Romer, which is the standard introductory graduate macro text.
Cullen, I have a strong suspicion that PK’s post is actually not primarily intended as a critique of MMT. I believe he’s using the money modern approach as a pretext to send a message to (and perhaps get back at) liberal and left-leaning economists who may be tempted to stray off the traditional liberal position of being tough on deficits (when it becomes necessary). PK’s comments demonstrate a surprising lack of professional integrity for an economist as reknowned as he is. It’s pretty obvious PK didn’t bother to read up on modern money before writing this entry. As everyone knows, the problem he raises has been addressed ad nauseum by modern money economists.
Recall that James Galbraith and others (Paul Davidson and Robert Skidelsky) raised a few eyebrows back in July of 2010 when they declined to support Harold Evans’s letter calling for additional stimulus. My recollection is that JG and the others declined to sign the letter because it included the following statement: “We recognize the necessity of a program to cut the mid-and LONG-TERM federal deficit…” JG explained it here: http://www.newdeal20.org/2010/07/21/statement-on-evanss-stimulus-letter-from-davidson-galbraith-skidelsky-15498/
PK knows JG essentially agrees with the modern money view. For this reason, I get the impression PK’s just trying to settle the score that’s been pending since their last encounter on his blog…
Cullen wrote:
Currently, the federal government is running a 10% deficit so the private sector is able to save in excess of 7% of GDP (we are running a -3% current account deficit so the math can be no other way).
Where is the excess of 7% of GDP reflected in our savings?
Don Levit
a lot of it is held as debt by foreigners
Don, pension funds, private savings, corporate cash etc
The comments have been put up.Not surprisingly, Paul’s nonsense is getting refuted in almost every comment.
Where is Paul to defend his blog though? Surely he must read the comment section….
i’m not an economist, but i’m going to blunder in a make some points anyway..
- your mmt deficit debate seems like keynesianism but displaced by some long-term mean inflation rate,, yes???
- i also find it funny how the name of your theory takes on the status of a mantra,,, if you’ll forgive my poking fun you do sound a little like jedi. i’m suspicious of this— it comes across as dogmatic. people talk about money making the world go around, but we really live in a world of credit; should the commercial banks not be given more importance in your discussions?
- finally, what if deficits/inflation are larger than the natural growth of an economy in the long term… is this not the “free lunch” mentioned above.
i’d appreciate any comment– this interests me,
thanks.
I think you’ll find your answers on growth and long term here Scott Fullwiler – Interest Rates and Fiscal Sustainability
Well, my hyperinflation piece should send him back the troll drawing board.
Hope you guys are on the way back to respond to Krugman’s follow up -
http://krugman.blogs.nytimes.com/2011/03/26/a-further-note-on-deficits-and-the-printing-press/
studentee and others:
If a lot of the 7% of GDP savings is held by foreigners, what does MMT have to say about that, as opposed to the debt being held by citizens?
Also we know a portion of the savings is held by one part of the government from another part of the government.
For example, the Social Security trust fund’s savings are owed to it by the Treasury.
What Does MMT have to say about this type of savings, compared to the more conventional citizen and institutional-type savings?
Are some “savings” less risky for our future than other “savings?”
Don Levit
Don, I think I replied several times to you both here and at New Deal 2.0 about debt held intra-government. It is not debt at all – it is an accounting fiction. Only when you actually send a SS check is there an injection of NFA (~money) into the economy.
Concentrate only on total amount of NFAs out there. Some of it is in the form of cash (very little), some in the form of bank reserves and some in the form of US Bonds. As long as this total amount is less than or equal to the non-govt sector’s desire to hold NFAs, you get no demand-pull inflation.
There he goes again! Krugman has another post up with more nonsense:
“A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.”
1. The Fed sets the overnight interest rate at whatever it pleases. The only constraint is that the interest rate can’t be below zero. The bond market has no say in the matter.
2. The government can’t “lose access to the bond market”, because it doesn’t need it to begin with.
3. The size of the monetary base is irrelevant. Does Krugman believe in the debunked money multiplier?
4. Who thinks that high interest rates are a permenant solution to an inflation problem? It’s a straw man argument.
Cullen, I highly respect most of your work, but you seem to lose sight of the fact that MMT is only embraced by a tiny minority of economists. You are a passionate defender, but aren’t you overshooting a bit here and taking Paul all too literal?
What MMT clearly argues is that deficits matter much less than almost anybody think but of course there are constraints (resource constraints, natural rate, monetary confidence, etc.)
I also find it weird, to say the least, that according to MMT, the Government can just spend, without having to issue debt. Then why are they issuing so much debt? The MMT answer to that would be that it is a ‘monetary operation’. If that is the case, then why is the Fed buying up much that debt under QE? Much easier not to issue it in the first place, isn’t it..
STP,
Don’t take this comment to be an insult, but it is clear that you have not fully grasped MMT. I cover most of your comments in here:
http://pragcap.com/resources/understanding-modern-monetary-system
Plus, while MMT might be unorthodox it is accepted by some very high profile economists. Jamie Galbraith & William Black are two of the higher profile people that you’ve probably heard of. Remember, it was once orthodox to believe that the earth was flat….
modern portfolio theory/CAPM, EMH, rational expectations are also orthodox concepts… and are utter nonsense
Cullen, in the link you provide you say this:
["(1) Currency issuance through government disbursement is used to increase non-government net financial assets, and taxation withdraws net financial assets from non-government. (2) Debt issuance by the Treasury is a monetary operation for draining reserves to permit the Central Bank to hit its target rate."]
That’s basically what I said!
And I said two other things. That of course there are limits to the deficit and I don’t think Paul ascribes ‘no limits’ literally to MMT. Limits like resource constraints, NAIRU, and confidence in the monetary system.
And I said this as well:
["I also find it weird, to say the least, that according to MMT, the Government can just spend, without having to issue debt. Then why are they issuing so much debt? The MMT answer to that would be that it is a ‘monetary operation’. If that is the case, then why is the Fed buying up much that debt under QE? Much easier not to issue it in the first place, isn’t it.."]
My question still stands. Why are they issuing all this debt only for the Fed to buy it up again (at least a significant part)? Supposedly the rationale is to keep interest rate lower at the long spectrum and/or bank reserves higher, but wouldn’t not issuing debt be way easier to achieve that? After all, according to MMT debt doesn’t have to be issued to fund the public deficit! (which I think is nonsense anyway, but that’s another matter).
And for Furtweiler to have a go at Krugman’s nobel prize because he exaggerates a little in a single frase, well.. let me put it this way. It says way more about Furtweiler than it does about Krugman.
What MMT clearly argues is that deficits matter much less than almost anybody think but of course there are constraints (resource constraints, natural rate, monetary confidence, etc.)
It doesn’t. What it is claiming is that a government deficit is just an accounting offset to private sector activity. The deficit doesn’t have to be funded, per se, it just needs to be in the accounting in the correct amounts so as to allow the private sector to generate the activity that the private sector is supposed to generate.
In other words, the deficit is a tool, not a burden. Under MMT, the government just turns on and off spending and tax levels in order to balance the private sector. The government doesn’t need to worry about collecting money to pay for its own activities because it controls the entire chain of money, and can print or destroy the quantities as needed.
In order to buy into MMT, you have to embrace their principal of the currency monopoly, the notion that the tax system and fiscal spending can be used as effective monetary levers to drive the private sector, and the premise that central banking (read: monetarist rate setting policy) is unnecessary and undesirable. If you don’t (and I don’t), then you won’t agree with it.
Or to look at it another way, MMT sees government as a facilitator of the economy, not a direct participant in it. Since it prints all the money, it doesn’t need to collect or borrow it for its own sake; government flows are offsets to private flows, not paying for government activity.
MBA, you keep saying you disagree with MMT, but you don’t explain why. What do you disagree with specifically and why?
you keep saying you disagree with MMT, but you don’t explain why
I just summarized it above: “In order to buy into MMT, you have to embrace their principal of the currency monopoly, the notion that the tax system and fiscal spending can be used as effective monetary levers to drive the private sector, and the premise that central banking (read: monetarist rate setting policy) is unnecessary and undesirable. If you don’t (and I don’t), then you won’t agree with it.”
-The government no more has a monopoly on money and exchange than Starbucks has a monopoly on beverages, even though it has a monopoly on Starbucks coffee. A US dollar, ECB euro, Japanese yen, etc. is, on some levels, a commodity in a market place that has to attract interest and compete for business, and its brand equity has to be constantly defended for the market place to want it.
Mosler likes to claim that the powers to tax and imprison give the dollar its authority, but that’s woefully wrong. If dollars weren’t desirable for their own sake, then we would simply reduce our activities and not bother with pursuing tax burdens in the first place.
-MMT’s focus on accounting identities is a classic accountant’s error, one that confusing accounting identities with the behaviors that create economic activity. MMT focuses on numeric spreadsheet balances, while ignoring that its policy prescriptions could provoke reactions that create further imbalances, not simply generate the mathematical result that MMT would claim. In other words, there is a lot of Accountants Gone Wild theory at work here, with people who confuse accounting (i.e. the compilation and categorization of past results) with finance and operations (the activity that creates output and future results.)
-Re: monetary policy, I would think that the failure of old-style Keynesianism to anticipate or cope with inflation, due to its exclusion of monetary policy, makes it fairly clear that a monetary system driven exclusively by fiscal policy is a recipe for failure. (As a neo-Keynesian, I suspect that this is what is bothering Krugman so much about this.)
A monetary policy governed by a central bank provides flexibility that a purely fiscally-driven policy cannot. Anyone who is familiar with the actions (antics) of the US Congress should understand that the legislature cannot be expected to use tax and budget policies as effective economic stabilizers in real time, as is required under MMT. Unfortunately, the central bank can only do so much when things get this bad (the central bank can’t do much once it hits the zero bound), and you can see how ineffective Congress is when they’re the ones responsible for righting the ship.
Nor should Congress be that flexible. MMT would call for the ability to immediately adjust tax rates, while forgetting that a completely flexible tax regime could reduce long-run output because of the uncertainty that such a system would allow. Furthermore, we could be stuck with the after-effect of sticky tax rates (i.e. the blowback that would occur if the MMTer’s in charge were to try to jack up taxes quickly in order to prevent inflation) — does anyone honestly believe that the government could simply hike up taxes quickly and not provoke a nasty response from the electorate, or that those who seek to stay or get elected wouldn’t respond accordingly?
So let me ask you a question then – if we did not have to pay taxes (and fear going to jail) would we ALL still use US dollars?
if we did not have to pay taxes (and fear going to jail) would we ALL still use US dollars?
Of course. The dollar allows us to get stuff that we want, and is stable and dependable enough that we would continue to want it.
I don’t earn dollars because I really enjoy paying taxes. (Who in the hell does that?) Taxes are a necessary cost of doing business, and I pay them because of what’s left over after I’ve paid them. It’s ultimately about the dollars themselves.
If the dollars left at the end weren’t useful or desirable, then I’d go earn something else, or if possible, go relocate to another country that has a more desirable currency. But at present, I like dollars enough that I’m willing to share some of mine with Uncle Sam in order to keep the ones that are left after he has taken his share.
You assume so, but what would stop Walmart from saying that they only accept gold? Nothing. And at that point the fabric of the whole dollar system starts to fall apart.
what would stop Walmart from saying that they only accept gold?</i
A lack of stupidity. In today’s universe, dollars are desirable because they are readily convertible into goods, services, hard assets and savings, and it’s unlikely that there will be a situation in which they suddenly become undesirable. It’s absolutely in my best interests to want more dollars.
The government’s job is to make its currency desirable to its customers, just as Walmart needs to be desirable to its customers. Under today’s circumstances, a dollar would be desirable, even if the tax rate was zero.
A lack of stupidity? Freudian slip as you realize how illogical your argument is? The fact is, if the government allowed us to transact in any currency we wanted people would start making up any currency they wanted. Just imagine all the gold freaks out there who would never use dollars. There would be a slow deterioration in the money system as demand for dollars was drowned out by other alternatives. Your fantasy world with no taxes would lead to hyperinflation and collapse of the dollar.
The fact is, if the government allowed us to transact in any currency we wanted people would start making up any currency they wanted.
How exactly is that a “fact”?
Nobody forces me to earn dollars now. If I have no income, then voila! no income tax.
Obviously, the world around me likes dollars. People buy lottery tickets, sit in traffic and endure long commutes, and go to Vegas with the hope of getting more dollars.
There is a reason why I can walk into a bank in Paris and turn my US dollars into euro, while I’d have a very tough time doing the same thing with Zimbabwean dollars. It has nothing to do with the French having an intimate relationship with the IRS.
If the US government allowed competing currencies inside the USA the banks could all offer notes backed by physical gold. There would be huge demand for these new notes and as businesses started accepting these new notes the old dollars would collapse into hyperinflation. You are not thinking this through realistically.
If the US government allowed competing currencies inside the USA the banks could all offer notes backed by physical gold.
There isn’t enough gold in the world to allow for a functioning gold standard. The market has already expressed its desire for certain currencies — the value of money is greater than that of gold.
If we didn’t like dollars, then we would find alternatives to them. There would be black markets and barter, and production would slow to a trickle if the black market and barter couldn’t monetize it fast enough. But we keep producing, because we like to have money.
If you want to be realistic, then accept the reality that the world is perfectly content with fiat currencies when they are well managed and backed by reasonable economies and governments. The only way that the dollar is going to become undesirable is if the Fed starts treating it like trash. And it’s fairly obvious that this isn’t going to happen anytime soon.
And take a trip outside the US, so that you can see that merchants will happily accept multiple currencies if it serves them to do so. If they can make money of the forex, they’ll do it, and no one is the worse for it. But this isn’t common in the US, because dollars are perfectly fine and are something to covet, not avoid.
You don’t get the point. The banks would issue fiat paper “connected” to real assets. It would be gold notes, copper notes, silver notes, etc. The point is, there would be a real competing currency within the USA and the users of the currency would obviously choose to use the fiat money backed by a physical commodity rather than the full faith and credit of the US government. These competition of currencies would cause a collapse in the old US dollars.
This is just a realistic sequence of events. I don’t know how you can so blithely reject it.
You don’t get the point.
I get your point — your point is wrong. You keep talking about “being realistic”, when we already plenty of examples in the real world that show how you’re mistaken.
There is no need for banks to get into the US currency printing business, because the US dollar is already desirable enough. We like dollars because of what they do for us.
If we didn’t like dollars, we’d be working less, bartering, participating in black markets, and raiding the stores to strip the shelves bare of goods as quickly as we could. The US would be a very different place, and the IRS couldn’t do a damn thing about it.
Jesus you are dense. Do you read your comments right out of a textbook?
The banks would offer the competing currency in an attempt to attract clients and deposits. It would be an ingenius way to benefit from the commodity boom. So they begin to offer these gold back notes that you can transact with. Think of them like ETF’s backed by commodities, but you can buy whatever you want!!! There would be HUGE demand for these new notes. In fact, you’d have to be an idiot to continue transacting in the old dollars. So, the banks would become the new currency issuers and the government’s money would become void over time as hyperinflatino ensued in dollars.
The enforcement of taxation does not just create demand for US dollars. The real purpose of maintaining a strict tax system is to avoid demand from any competing currency. This is why the government created the Secret Service – to ensure there is no counterfeiting of US dollars.
Your argument is not realistic and that’s why it’s wrong. Put down your textbook and walk outside. Reality doesn’t reside in a textbook.
You must live on some other anarcho-capitalist planet where banks print money just for kicks whenever they get half a chance. Your argument simply doesn’t make any sense.
You seem to earnestly believe that the dollar is undesirable, and that we only use it because we have no choice. I find that to be rather odd and completely disconnected from the reality that you profess so much to care about.
If we get to the point that nobody likes dollars anymore, then you can bet that we will seek out alternatives to them. The fact that the sentiment is quite the reverse tells you something about the dollar, not about the tax man.
You’re not thinking about the realistic sequence of events that would occur. You are rejecting the fact that banks create products to generate profits. They do this all the time. If they were allowed to create currency that would result in increased deposits they would absolutely do it. If the banks do this en masse they could easily convince businesses to accept their new currency. Over time the banks would become the monopoly issuer of currency and we’d have a bank run economy. What would happen to the US government? It would collapse under hyperinflation.
This is just the logical sequence of events. Fortunately, it will never happen because the US government doesn’t allow competing currencies because they strictly enforce our tax laws.
These are real facts. You look ignorant when you reject this as a very realistic possibility. And most importantly, it totally debunks the nonsense you’re spewing here.
You really don’t get it. We know that dollars are highly desirable right now because of all the trouble that people go through to get them.
If we didn’t like dollars, we’d already be seeking out the alternatives, right now.
The Fed’s monopoly on dollars, in a vacuum, means little. The Cuban government has a monopoly on Cuban pesos, but nobody cares — nobody outside Cuba wants them, and not many people inside Cuba are willing to do very much to get them. Yes, the Cuban people will work a little bit in order to earn money, but they certainly won’t work very hard for those pesos, which leaves them with a rather miserable economy and few prospects just so long as the current regime remains in power. Their GDP is low for a reason, and having an efficient tax authority won’t save them.
You keep talking about “being realistic”, yet I get the distinct feeling that you’ve never left the country for more than a couple of days at a time, and you haven’t read much about economics or economic history. FFS, even a trip to Canada or Mexico will show you plenty of examples of merchants who happily accept US dollars, even though the Canadian government doesn’t collect taxes in US dollars, nor do those merchants have to pay US taxes. Your comments simply make no sense at all.
Angry MBA: If I have no income, then voila! no income tax.
Income tax wouldn’t drive the model, as Mosler and others readily admit. Property taxes or some type of head tax would. And once some people need to pay taxes, other people desire dollars so that they can buy services of those people.
Income tax wouldn’t drive the model, as Mosler and others readily admit. Property taxes or some type of head tax would
The type of tax isn’t relevant, I simply used that as an example.
The point is that you won’t much hard work being done in a system that doesn’t provide the opportunity to be awarded for it. If the system sucks, then we certainly won’t be inspired to own property in it, let alone generate much income in it.
I understand the MMT argument of using tax rates to influence the money supply or velocity; that belief is not uncommon to many schools of economic thought. But Mosler’s focus on using enforcement power as a tool of creating demand for money is clearly wrong. Enforcement power can be used to reduce the number of cheaters, but it can’t be used to instill a work ethic.
No, you don’t understand the MMT position so stop posing as some sort of expert. This is reaching a level of absurdity. I know you’re not one to admit defeat but Jesus Christ man. This is ridculous.
I want to come to Angy’s defense here. Chartalist argument of tax driven money is predicated on the ability to enforce taxation, and this in itself is a political issue. IF tomorrow all of the US population because of some brain-fart decided to join the Tea Party and not pay taxes, the MMT argument would break. IT is a behavioral argument that is interlinked with desirability of dollar, as Angry suggests. It is true that enforceable taxation is sufficient to give value to currency, but it might mot be necessary.
That’s what I’ve always argued. A breakdown in the tax system is game over. But it’s only one link in the chain. There are lots of things that can cause a currency to collapse. While taxation is a particularly important link it is not the only one. I don’t see why anyone is having trouble understanding this….Again, refer to the diagram below.
If tomorrow all of the US population because of some brain-fart decided to join the Tea Party and not pay taxes, the MMT argument would break.
I don’t think that it would even need to go that far. Dangling tax increases in front of the electorate is like waving a red flag in front of a bull. They are going to get upset, and the Republicans will promise them the same supply-sider free lunch that they have been pitching for over thirty years. It’s one reason why we need to rely on a central bank — the legislature presents too much of a political football to be trusted to handle this timely and adequately.
Not only that, but completely flexible tax rates would create a level of uncertainty among taxpayers that could reduce output. If a producer can’t feel comfortable predicting its anticipated tax rate from one year to the next, then that producer may be inclined to withhold risk capital or shift it outside of the United States, because of the added element of risk posed by being less able to predict the enterprise’s after-tax income. A system with unpredictable tax rates is going to create its own set of problems, regardless of the monetary arguments used to justify them.
Angry MBA:
Dangling tax increases in front of the electorate is like waving a red flag in front of a bull. They are going to get upset, and the Republicans will promise them the same supply-sider free lunch that they have been pitching for over thirty years. It’s one reason why we need to rely on a central bank — the legislature presents too much of a political football to be trusted to handle this timely and adequately.
Use some sort of automatically adjusting tax system.
Not only that, but completely flexible tax rates would create a level of uncertainty among taxpayers that could reduce output. If a producer can’t feel comfortable predicting its anticipated tax rate from one year to the next, then that producer may be inclined to withhold risk capital or shift it outside of the United States, because of the added element of risk posed by being less able to predict the enterprise’s after-tax income. A system with unpredictable tax rates is going to create its own set of problems, regardless of the monetary arguments used to justify them.
Ahh, come on! The same could be said about interest rate risk. As soon as you have a flexible tax system, I assure you the Wall Street will come up with all kinds of tax derivatives to hedge your tax exposure. You’d have to actually start regulating it
Yes, there could be unforeseen consequences for shifting to something new like that, but seems to me worth exploring.
Seems to me that your position reduced to something like “don’t pay attention to the man behind the curtain”. In other words, there is a useful illusion (that is, acceptable to the electorate and every body else) that taxes and borrowing fund govt spending. Let’s keep it this way because we don’t know what exposing this illusion might do. To a certain extent, I can sympathize. The problem is, illusions tends to be debunked every once in a while.
This is my final comment because it’s clear to me that you’re not even willing to consider the fact that you are wrong.
You said:
“If we didn’t like dollars, we’d already be seeking out the alternatives, right now. ”
No one said dollars aren’t desirable now. I am saying that dollars will lose their desirability under your scenario where the government doesn’t require taxation. Under this scenario there is no reason for the US government to enforce the use of dollars. As you believe, the demand of dollars is just a virtuous cycle. The problem arises when someone creates a viable alternative to the old currency and the government allows it to happen. That’s when hyperinflation ensues in the old currency and the government collapses.
I can see that you don’t have the mental aptitude to understand these comments so I’ll just let you go on believing you’re right.
I am saying that dollars will lose their desirability under your scenario where the government doesn’t require taxation
I understand your point. Aside from your point being about 100% wrong, I don’t object to it.
You haven’t explained why the dollar loses its sex appeal if the tax rate goes to zero. You’ve simply swallowed this premise hook, line and sinker without giving it much thought.
Great debate guys. Allow me to interject and expand on LVG’s points:
1. MBA’s 0% tax rate is a unrealistic notion so anyone reading this can see that you’re just building a strawman argument. This is the same thing PK did in his second response.
2. If the government didn’t issue or require tax payment there would be no way for the government to enforce its use.
3. This could logically result in competing currencies.
4. Banks could create currencies that are the equivalents of the securities they sell on exchanges today. If they were backed by commodities the sales pitch would be a no brainer. This would be a profit boon for the banks as they rake in deposits.
5. What would happen to the US dollar? It would collapse under the competition and the US government would collapse with it.
6. Anarchy would result.
But none of this even matters because the 0% tax idea is beyond unrealistic. It would lead to hyperinflation and currency collapse all by itself as the government spent without draining any demand.
Your argument has several holes in it MBA. I know you’re uncomfortable buying into MMT, but you’re exposing more and more flaws in the orthodoxy with every comment you leave here.
Addendum – when your whole argument is based on the idea that the US govt doesn’t need to enforce use of the currency (which is done almost entirely thru tax payments) so it implies that the US govt would be okay with competing currencies. That’s entirely illogical and a great foundation for hyperinflation.
Right on Cullen. Once you propose a 0% tax rate you have discredited your entire argument. We are better off discussing what will happen when Papa Smurf gets elected President of the USA. Sorry, but that ain’t happenin’.
Wait, it’s not!?!?!?
0% tax rate is a unrealistic notion so anyone reading this can see that you’re just building a strawman argument.
You’re strawmaning me. I never once claimed that we needed or would have a 0% tax rate. My point simply was that I would like and covet dollars, even if I had zero taxes to pay. And so would you.
If the government didn’t issue or require tax payment there would be no way for the government to enforce its use.
Enforcement is irrelevant. I like dollars for what they do for me, and you like dollars for what they do for you. If dollars could only be exchanged for sawdust and lint and tax payments, then we deal with them as little as possible, and we’d either find other ways to get what we wanted or simply not be productive and get very little in return. Black markets and bartering would thrive if dollars were undesirable, but fortunately, the US does a reasonable job of making dollars desirable.
This could logically result in competing currencies.
It could. But it doesn’t matter.
Banks could create currencies that are the equivalents of the securities they sell on exchanges today. If they were backed by commodities the sales pitch would be a no brainer. This would be a profit boon for the banks as they rake in deposits. What would happen to the US dollar? It would collapse under the competition and the US government would collapse with it. Anarchy would result.
That’s a huge leap in logic. The situation that you’ve described already exists in third world countries, in which the citizens don’t trust the currency, despite whatever the tax man may say.
The US dollar and other credible currencies derive their value in the same way that a share of stock derives its value — the value is derived from the management and potential output of the entity that issues it. If no one trusts the entity, then it won’t be worth much; if the trust level is high, then the currency will retain its value.
So taxes are necessary now? You’re backpedaling.
I am not getting involved in one of these ridiculous debates with you. You think you are never wrong. That’s fine, but please don’t waste my time and force me to correct your every comment due to your hubris. I really do appreciate your comments and vigorous debate, but this is reaching a level where it becomes counterproductive. If you want to start a website that counters all of my points (trust me, they already exist) then be my guest, but don’t waste my time by forcing me to correct your misleading comments.
Have a nice weekend.
So taxes are necessary now? You’re backpedaling.
Taxes are needed to fund government. They aren’t needed to increase my (or your) appetite for dollars.
If you permanently cut my tax bill to zero tomorrow, I’ll still keep craving dollars. The dollar’s allure isn’t coming from the IRS.
I like dollars because of what they do for **me**. If dollars didn’t serve any purpose but to pay taxes, then I’d behave like the Cubans and either find alternatives or else find some other way to amuse myself that doesn’t involve earning very much money.
I’m working for the net income and the benefits that comes from the net, not for the tax liability. I doubt that you are any different in that respect.
Taxes are needed to fund govt? Geez. How can you even respond with that sort of comment to me? It’s practically insulting. In the future, don’t bother.
Taxes are needed to fund govt?
I don’t subscribe to MMT, so yes, I do believe that taxes are ultimately needed to fund government.
Even an MMTer would accept that there is a limit to deficit spending, and that all things being equal, tax collections effectively reduce the size of the deficits. You can’t have sustainable spending at the levels that modern first world governments do while not having substantial tax collections that can keep the deficit in check. Spending with inadequate collections will, over the long run, lead to excessive inflation or default.
Are you saying there is no need to regulate the use of the currency?
Are you saying there is no need to regulate the use of the currency?
I’m not sure to which regulations you are referring.
If you’re asking whether we need to point a gun at peoples’ heads in order to use dollars, then my answer is “no.” We use dollars because they benefit us to use them.
The primary benefit of a currency is its network effects — it’s useful to have something that others will accept and that has a value that is readily known and quantifiable. If we had to barter for everything constantly or if we had a multitude of different currencies with varying degrees of demand, it would be an enormous PITA to function in the regular economy from day to day.
A currency monopoly or oligopoly is a convenience to our citizens; we would naturally gravitate toward that, anyway, if given the opportunity. We don’t need to strong arm the citizens and businesses of the US to use dollars, we just need to provide them with compelling reasons to want them. So far, so good.
Okay, if we don’t need to regulate the currency then you should have no problem with competing currencies in the USA, right? Otherwise, there is no need to “point the gun”….
if we don’t need to regulate the currency then you should have no problem with competing currencies in the USA, right?
People already can barter if they wish. If they can find people who want their gold coins or stamp collections or whatever, they can do it right now, today. If Starbucks wanted to sell lattes in Chicago for yen or euro, they’d go ahead and do it.
We use dollars because we like them. If we were stuck with rubles, we’d seek out alternatives, while the economy would grind to a halt because we wouldn’t have sufficient demand for the currency to maintain output at its current levels.
The dollar wins on its virtues, not with force. Economies that attempt to force a lousy currency down the throats of its citizens ends up with black markets and no growth.
If there is no need to regulate the currency then why does the govt put people in jail for not paying their taxes? Why do they put people in jail for counterfeiting? Obviously, there is a need to regulate the currency. You appear to be living in some fantasy land where everyone just transacts in USD’s because they are in love with pieces of paper with old dead white men’s faces on them….That’s simply not the case. The US govt does regulate the currency because anyone that undermines the USD undermines the state. And if you undermine the state you can topple the state. And that’s unacceptable.
I am surprised by your naivete here.
If there is no need to regulate the currency then why does the govt put people in jail for not paying their taxes?
Because they really want their money.
Why do they put people in jail for counterfeiting?
Because the users of the money won’t trust it if they believe that the odds that it is fake are high. The central bank, treasury, etc. have a vested interest in making its customers (us) happy with the product.
Obviously, there is a need to regulate the currency.
I wouldn’t consider a law that requires us to pay taxes as a form of currency regulation. The reasons for banning fake US dollars are obvious. (Incidentally, Levi’s and Gucci also get fairly upset if you mimic their products without their permission.)
You appear to be living in some fantasy land where everyone just transacts in USD’s because they are in love with pieces of paper with old dead white men’s faces on them
It’s quite the opposite. The fantasy is to believe that a country can rely upon force to make its money worth something.
A productive economy requires productive people. If people can’t be adequately rewarded for their efforts, they will respond by working less.
If the currency is crap and there is some law that attempts to maintain a ruble-style currency monopoly, then the public will make minimal efforts to earn money. Do that long enough, and you’ll have empty shelves, black markets, minimal consumption and not a whole lot of output.
If the currency is crap but there is no monopoly, then you’ll find more people turning to better foreign currencies such as dollars or euros and/or to precious metals.
This has already happened, so it isn’t just fiction, it’s what happens when systems break down. Fortunately, the US dollar is one of those go-to currencies, so we don’t need to look abroad to find a decent currency.
We’ve had this conversation before. You know I believe the currency is only as good as the value of the goods and services it is able to purchase.
You’ve entirely misinterpreted the MMT position. Taxes don’t give the money value. They help to regulate demand. If you don’t pay your taxes you go to jail. It’s that simple. The govt regulates the currency via taxation and strict enforcement because the state falls apart once people decide they don’t need their currency. Think of taxes as a key link in the system. If that link in the system fails then the entire system fails.
Do you agree that a failure in the tax system would collapse the currency? The only answer is yes.
You’re thinking about all of this too one dimensionally. This diagram might help:
I know I am not going to change your mind, but you need to stop misrepresenting my position. It’s incredibly disrespectful.
You know I believe the currency is only as good as the value of the goods and services it is able to purchase.
I understand that; on this point, we agree. However, we have different reasons for the source of value.
Taxes don’t give the money value. They help to regulate demand. If you don’t pay your taxes you go to jail. It’s that simple. The govt regulates the currency via taxation and strict enforcement because the state falls apart once people decide they don’t need their currency. Think of taxes as a key link in the system.
I understand the argument, but it is flawed.
The desire to earn money is not driven by a stick (taxes, enforcement), but a carrot (what producers and consumers can do with the money.) If the store shelves are empty and foreigner exporters don’t want it, then it’s fairly useless stuff to most of us and we won’t do much to get it. You can hire all the IRS agents who you want, it won’t change a thing.
Do you agree that a failure in the tax system would collapse the currency?
A failure in the tax system would be symptomatic of a dysfunctional government, and a dysfunctional government isn’t one that will merit a lot of trust in its currency. So I would expect such a dysfunctional system to produce high inflation and a search for alternatives, but the tax collections would be just one of its many problems.
Still thinking too one dimensionally. This isn’t an “all or nothing” system. There are multiple links in the chain here. You think there is one link in the chain and that’s why you’re not grasping the concept.
Still thinking too one dimensionally. This isn’t an “all or nothing” system. There are multiple links in the chain here.
I never claimed that it was an “all or nothing” system. I don’t follow what that is supposed to mean.
My point is fairly simple — a currency won’t have much value if people don’t want it. As would a company, the US government sells a product, which in this case is US dollars. For that dollar to have appeal, it needs the virtues that a good currency is supposed to have, such as the ability to convert that money into goods when I feel like it, and for it to be accepted by those with whom I’d like to do business.
If the US is a well-managed shop with a customer orientation, then it will do its best to make its featured product — the greenback — something that we aspire to use and acquire. In econospeak, that translates into GDP, employment and money velocity.
If you want to argue that tax rates can be used to influence output, I will agree, at least to a point. But the taxman-with-a-gun argument as used by Mosler is a poor one. The taxman can use his power to collect his share of pie, but the taxman can’t use his gun to motivate you to bake a bigger pie. If the money itself isn’t desirable, then that pie is going to shrink, and Uncle can try to get his slice from a smaller tin.
Yes, your point is overly simple which is why you’re not getting mine. Taxes, on their own, are not sufficient to give a currency value, but they are a crucial link in the chain. Refer to the diagram again. You’re misinterpreting and misrepresenting my position.
Taxes, on their own, are not sufficient to give a currency value, but they are a crucial link in the chain.
Tax collections are critical for a reason that MMT rejects — because they fund the government. No need to strawman my point; we fundamentally disagree on how a government pays for itself.
I never once claimed that the government shouldn’t collect taxes, so there’s no need to go there. What I did claim is that tax enforcement doesn’t stimulate demand for the currency, as Mosler claims. I will continue to want US dollars, even if I don’t have to pay taxes, because US dollars are very useful for many things aside from making tax payments.
The regulation of taxes creates demand for dollars. If you don’t believe this then don’t pay your taxes this year. I need to pay my taxes in the next two weeks. I am self employed and I have saved a shitload to do it. I have literally hoarded money just to pay my taxes. That is me demanding dollars to pay taxes. Would I still demand dollars if I didn’t have to pay taxes? Sure, I might. But to tell me that I am not saving and demanding dollars right now to pay my taxes in two weeks is just flat out wrong. I can tell you from personal experience that you are undeniably, 100% categorically wrong. Sorry MBA, but it’s time to chalk this one up and move on.
I need to pay my taxes in the next two weeks. I am self employed and I have saved a shitload to do it.
My last estimated payment in mid-January (which should cover the 2010 tax year) alone was enough to buy a new car, let alone the three estimated payments that I made before that. But I don’t mind paying the taxes because of the amount that was left.
Let’s take this to an extreme — if the tax rate was 100%, I wouldn’t bother to work, unless I just felt like volunteering to help the government for the sake of charity. Enforcement helps to encourage me not to cheat, but it’s the usefulness of the dollar that motivates me to work.
But to tell me that I am not saving and demanding dollars right now to pay my taxes in two weeks is just flat out wrong.
That isn’t what I said. Again, you work for the net income — the tax liability is a cost of doing business, just as the cost of your internet connection, telephone, business travel, payroll, etc. are all costs of doing business.
The taxes are a means to an end — if I want the net income and the chance to enjoy outside of prison walls, then I have to pay the taxes. But if the taxes were too high or the net income couldn’t be used for anything, then I’d reduce my work hours. Uncle would still collect some taxes, but he’d be collecting less.
This is just another circuitous argument. You’re just blatantly rejecting the notion that people save money to pay their taxes. It’s an indefensible position and you’re just wasting my time now and trying to save face. Do me a favor – learn what disinflation is before you try to lecture people on monetary policy. I lost a lot of respect for a good commenter today.
You’re just blatantly rejecting the notion that people save money to pay their taxes
Again, you keep creating strawman arguments to my points.
Obviously, you have to pay your taxes, just as you have to pay for the stationary used at your office.
But you don’t get up to work each morning motivated to enrich and delight the office supply company. Your motivation is to enrich yourself, and you pay the office supply folks because you can’t make money for yourself without business cards, envelopes, paper, etc..
The office supplies bill is merely a means to an end, it is not an end unto itself. If your business only paid you with something of little use to you, then you’d pack it in, work on your tan, and not bother maintaining an office.
Your tax bill is like your office supplies invoice. At the end of the day, if the money doesn’t matter to you, then you’re going to work less and both bills are going to be smaller. You’ll use less paper and pay fewer taxes, and there isn’t anything that either the office supply store or the tax man can do about it.
I never said otherwise, but in your circuitous attempt to save face you just keep misrepresenting my point. Who even cares? It’s not like you’ll ever change your mind. You’re just arguing the same point over and over again in order to justify your own prior findings. It’s called confirmation bias and you suffer woefully from it. MMT sheds a great deal of doubt on your personal conclusions and that makes you very uncomfortable. It’s understandable. Just look at your boy Krugman who has egg on his face and has lost the respect of thousands of his peers this weekend….
Starbucks doesn’t have a monopoly on coffee. The analogy doesn’t work.
Starbucks doesn’t have a monopoly on coffee.
Starbucks doesn’t have a monopoly on coffee. It has a monopoly on Starbucks-branded coffee.
The Federal Reserve doesn’t have a monopoly on money. It has a monopoly on United States dollars.
Just as you can’t force me to drink Starbucks coffee, you can’t force me to use US dollars, either. But I like caffeine, I like US money, and I don’t want to live off the grid, so I choose to have both.
Apples and oranges. Think harder.
No, there is nothing apples and oranges about it. As a devotee of MMT, you simply refuse to see a rather basic failure of the MMT argument.
When people don’t like a currency, they don’t work hard to earn it, and they exchange the amount that they do get for assets as fast as possible. The tax man can’t force anyone to be productive or ambitious. The motivation to work comes from what’s left after the taxes are paid, not from paying the taxes.
your analogy is flawed. You’re comparing a currency user to a currency issuer. Starbucks can’t make all the coffee in the entire world. But the USA can create ALL of the US dollars in the entire world. You’re whole argument is bullshit. Sorry.
You’re comparing a currency user to a currency issuer.
I’ve already covered this — to buy into MMT, one has to accept the premise of the virtues of the currency monopoly.
MMTer’s refer to this currency monopoly argument as if it is something holy and unimpeachable, when it’s a premise that you have to prove.
We all know that the Fed is the only producer of dollars — big deal. You need to start by proving why the Fed’s monopoly on US dollars (not all money or means of exchange, but just US dollars) is relevant for creating demand among those of us who choose to use and covet them. The Mosler tax-as-value creator argument is deficient, so repeating that won’t cut it.
Well, I am enjoying watching LVG school you on the topic, but you’re too dense to understand it. Think harder.
You squawk a lot, but don’t say much. LVG didn’t even understand why a MMTer would support deficits — it’s ironic for an MMTer to take offense to that, when an MMTer should be the first to point out that a deficit in the MMT lexicon is just an accounting offset, not a debt that has to be repaid.
And the fact that you believe that I’m a pure Keynesian makes it clear that you don’t understand Keynesian economics, either. Sorry, but I just can’t take you seriously.
This probably masochistic of me but I want to try a different angle with you MBA. I’ve somewhat enjoyed the back and forth between you and the others but much of what you say is simply……….. wince inducing.
MMT has never claimed that taxation is a sufficient condition to keeping a currency viable but it is a necessary condition to getting one STARTED. You are correct that no one thinks how much they want to work so they can pay taxes however try avoiding taxes for a year or two and see how much youll need to work later to make up for it, and you will be doing it solely to reduce your penalty. In addition if your boss decides to pay you in something other than dollars you probably wont like having to do whatever additional work would be required to exchange it back to dollars to extinguish your tax liability. You obviously like using the dollar here (me too!) and it is a great thing to live in a place where everyone uses the same currency, all prices are consistently posted in one numeraire and that is a big part of why the US is a desirable place to live. It is why the Eurozone invented the Euro partly (and they require taxes to be paid in Euros). So how do you not recognize that if no one HAD to use dollars because they needed to settle a tax obligation with them that SOME people would choose not to. Now you would have currencies running side by side, competing so to speak. This would make the “dollar zone” smaller, less continuous and more fragmented. The dollar would lose its status here.
Try engaging in this thought experiment with me. You are the treasury secretary of the NCSA (New Confederate States of America) in 2013 after the south re-seceded from the union. How are you going to establish your new money and how are you going to ensure your citizens use it instead of something else (provided you think its advantageous for your country to have its OWN strong currency).
Now you would have currencies running side by side, competing so to speak. This would make the “dollar zone” smaller, less continuous and more fragmented. The dollar would lose its status here.
Again, this doesn’t matter. I would urge some of you to leave the United States, so that you can see ongoing examples of nations that maintain a fiat currency, yet have more than one currency being used at once. This belief that a currency can’t survive without an enforced monopoly is already debunked in a variety of places on this planet, today.
What’s funny is that you begin by reciting some of the reasons why societies naturally gravitate toward currency monopolies and oligopolies, only to do a 180 when it comes time to defend MMT. You’re allowing theory to blind you to real world practice.
Try engaging in this thought experiment with me. You are the treasury secretary of the NCSA (New Confederate States of America) in 2013 after the south re-seceded from the union. How are you going to establish your new money and how are you going to ensure your citizens use it instead of something else (provided you think its advantageous for your country to have its OWN strong currency).
I would do what every other country with a successful fiat currency already does — I would use a combination of good governance and economic output in order to win trust for the currency.
Again, currency monopolies alone don’t work unless there is a reason for the market place to support the monopoly. The Soviet tax man couldn’t make it work because the fundamentals of that economy and their governance were rotten, while the United States, post-war Germany and many other nations could. When a currency isn’t asset-based, then it needs to be income-based; a gold-standard based currency is just a proxy for a commodity, and a fiat currency is akin to equity.
Is taxation a crucial component of currency stability? Of course. So you agree, but you keep changing the point to other topics that we don’t even disagree on….What’s frustrating is that you don’t even prove a point. You just refuse to admit being wrong. As he said, you have to be a masochist to argue with you…..
No one is claiming that the $US would cease to exist if other currencies were running side by side here, what they are claiming is that it would definitely lose its stature and become devalued to some extent. The countries you cite as having multiple currencies do not enjoy the standard of living nor the coherence of their economy that we enjoy. I dont claim to know how much better or worse off WE would be in a situation where the $US was not the only game in town but the $US would definitely be worse off. I dont really, in the end, care about the $US though, so I’ll remain agnostic about the ultimate fate of our society in a world with a weaker $US. As long as currency of some form is available in sufficient quantities to meet our savings desires and transactional needs it doesnt matter what we call it. It might not matter to how we actually are able to conduct business but it definitely WOULD matter to the strength of any particular currency. Thats not even debateable.
Its also not debateable that if you HAVE to pay $10,000/yr in taxes denominated in $US you will do whatever work is necessary to acquire those dollars, unless you like spending time in jail.
You wrongly assume that MMT thinks a tax is all that is needed for a currency to stay strong. It will generate a minimum demand for a currency as a start but much more then needs to happen for it to continue to increase in value. There certainly must be an unwritten social agreement that we will all continue to use this currency because we all value the relationships we have acquired with it. It includes the relationships with our government, which is at a strain at present.
No one is claiming that the $US would cease to exist if other currencies were running side by side here, what they are claiming is that it would definitely lose its stature and become devalued to some extent.
That’s akin to arguing that Mercedes loses stature when Honda sells car, so Mercedes should respond to the challenge pass a law that attempts to outlaws Hondas.
If the dollar is good, people will use it, even if it has competition. (Again, travel outside the United States, so you’ll see how this sort of thing already happens, today.) If the dollar sucks, we’ll lose interest in, whether or not there is a monopoly.
Your analogy illustrates one of the core flaws of MMT — you assume that you neat and lovely fiscal levers for everything. The reality of life, however, makes it clear that the citizenry can respond to a money that it dislikes by seeking out alternatives and by reducing output. This is not just something that I made up, it’s a fact.
The countries you cite as having multiple currencies do not enjoy the standard of living nor the coherence of their economy that we enjoy.
You really need to leave the US on occasion. Seriously.
It might not matter to how we actually are able to conduct business but it definitely WOULD matter to the strength of any particular currency. Thats not even debateable.
Sadly, MMT doesn’t teach you how money derives its value, hence the problem with your statement.
Its also not debateable that if you HAVE to pay $10,000/yr in taxes denominated in $US you will do whatever work is necessary to acquire those dollars, unless you like spending time in jail.
Tax liabilities vary depending upon how much I’m willing to earn and spend. If the money loses value to me as a user, I will respond by earning less money.
You wrongly assume that MMT thinks a tax is all that is needed for a currency to stay strong.
You’re the one that keeps banging on about tax enforcement, so don’t try to claim that it doesn’t matter to you.
But as is TPC, you’re building a straw man. I never claimed that MMT argues that taxes are the only sole source of value. Rather, I’ve pointed out that the tax argument is simply wrong.
MMT argues that fiscal policy should replace monetary policy; therefore, MMT needs a flexible tax regime that can raise taxes when inflation becomes a problem. Besides how fanciful this position is (if the last two years have taught you anything, it’s that Congress can barely get out of its own way, let alone do anything decisive with tax rates), you continually forget that the market will behave differently in the face of completely flexible tax rates than it would with relatively predictable ones.
You think that taxes are a lever that you can flip up and down at will. You’ve got it exactly backwards — taxes are an outcome, a byproduct of an economy that is producing enough prosperity to generate surplus cash that it can afford to give to the government. When the business cycle is up and the public is productive, tax revenues go up; when the business cycle is down or the people become dour, tax revenues go down.
Monetary policy is an imperfect tool, but it beats a fiscal-only policy because it is less political, more responsive and deals with an input that is less raucous (base interest rates, not tax rates). It is this overdependence on fiscal policy that helped Bretton Woods to fail and led to monetarism displacing traditional Keynesianism; Congress couldn’t even be trusted to manage the price of gold, let alone the tax rate.
This is all wrong for reasons I have already explained. Youve entirely misrepresented the MMT and built an absurd strawman (ironic, yes) in an effort to protect Krugman and your own flawed thinking.
The very fact that you won’t even answer my repeated comment about taxes proves you wrong. Taxes are instrumental to a stable currency. That’s the MMT position and it’s something I know you agree with, but refuse to admit in order to save face.
Repeating your flawed thinking and misunderstanding doesn’t make you right. It’s time to just admit when you’re wrong and move on.
Funny, Angry, that you think that a monetary tool is superior to the fiscal one – exactly when you need it most it fails to work!
And as I said elsewhere in this thread, tax adjustment is not such a far-fetched idea. If done right and automatically, people will be OK with that. Exposure for businesses will be hedged away with tax derivatives and the adjustments can be very moderate from period to period. We have more variation in tax rates now with all the tax advantages being phased out or introduced than there’d be a need in a functional finance system.
Right! It’s widely acknowledged that monetary policy works with a tremendous lag anyhow (6-9 months), so MBAs whole argument falls flat on it’s face right there….
Funny, Angry, that you think that a monetary tool is superior to the fiscal one – exactly when you need it most it fails to work!
That’s a misunderstanding of my position.
-Monetary tools are useful during minor recessions and in the face of inflation. (Remember Paul Volcker.) But they hit the wall when faced with a liquidity trap.
-Fiscal tools are useful when the economy is caught in a liquidity trap, but they fail in the face of inflation. (Remember Bretton Woods.)
-Both tools have limited effectiveness in the face of balance sheet recessions, which calls for a legislative solution that cannot be provided with either traditional monetary or fiscal policy — debt cancellation.
There is no magic bullet solution to every economic ailment, and it’s frankly dangerous to try to find one single theory that fixes all problems. (This is why I choose to borrow from monetarism, neo-Keynesianism and aspects of behavioral economics, such as Fisher’s debt-depression model and Mandelbrot’s study of fractals.)
MMT is trying to find a universal magic bullet to fix both ends of the cycle, even though we have already seen quite painfully that fiscal policy doesn’t necessarily work very well when confronted with inflation. Like traditional Keynesianism, MMT is going to fail miserably if faced with inflation, even though its prescriptions will be adequate during a traditional recessionary cycle.)
Your tax increases will never get approved in a country like the USA, so the concept is already a non-starter — if a plan can’t be executed, then it isn’t much of a plan. Even if the concept made economic sense (and from a behavioral standpoint, it really doesn’t), you could never implement it. You can dream about it all you like, but taxes are a political football in the United States and no amount of wishful thinking is going to change that or the favored anti-tax rhetoric of the Republican Party.
More strawman nonsense.
First off, monetary policy works with a lag (a rather long one) so your whole premise is bunk.
Second, taxes aren’t the only measure we can utilize. Who needs to raise taxes necessarily? We would just cut spending to achieve a reduced budget. This approach is actually very flexible as tax cuts and budget cuts have the potential to be attractive to both parties when they would be needed….
Third, no one ever claimed MMT was some holy grail.
You have yet to establish a coherent argument, but I’ll commend you for fighting to the death….
Angry, what do you mean “Your tax increases will never get approved in a country like the USA”? Are you saying we won’t see any tax increases? Really? After all the BS coming from the likes of Mankiw about how we’re going broke if we don’t make painful sacrifices? These of course will include cuts to the safety net etc, but I cannot see those made without some tax increases. And it is always possible to cloak the whole thing in “temporary tax holiday” which can be reversed if needed. I agree that having it in the hands of the politicians is bad, that’s why you need to make sure people understand it to be done automatically.
Are you saying we won’t see any tax increases? Really?
MMT requires that you flip the tax lever (a) in the right amounts and (b) at the right time.
Explain to me, in detail, how the US political system could possibly allow for this degree of tax maneuvering. The current president couldn’t even get away with allowing a tax break to sunset out of existence on a tiny high-income group of people, let alone turn tax policy on a dime and maneuver it with precision, as MMT would have us do.
I agree that having it in the hands of the politicians is bad, that’s why you need to make sure people understand it to be done automatically.
Again, are you not following the news out of Washington?
-Politicians love to talk about tax cuts
-Citzens love to complain about their taxes being too high
-Supply siders believe in permanent tax cuts as a matter of principle
-Political conservatives attack taxes as a form of undue interference in their lives, irrespective of the business cycle
You folks are being seriously naive. Anyone who would base the success of an economic policy on the ability to jack up tax rates with minimal difficulty and in a timely fashion hasn’t been paying attention. It simply isn’t going to happen in the United States, which is why it makes far more sense to give the inflation control lever to a non-politician.
What also doesn’t make sense is to blame the central bank for a liquidity trap. A liquidity trap calls for a fiscal solution, and the central bank doesn’t control fiscal policy, as we all should know. If you loved how Congress didn’t manage their way effectively through a deflationary cycle, then you’re going to love it when they blow it with inflation.
You’re just talking in circles now. While monetary policy works with a lag Congress passed the ARRA in 2 weeks and had spent 20% of it in a matter of months. The recent tax cut was again passed in just a few weeks and is effective this year. So again, the facts don’t back up your claims.
Angry
I think you make some excellent points, especially this
-”Both tools have limited effectiveness in the face of balance sheet recessions, which calls for a legislative solution that cannot be provided with either traditional monetary or fiscal policy — debt cancellation.”
Debt cancellation is something Steve Keen has talked about and I agree.
This is also true, in my view;
“There is no magic bullet solution to every economic ailment, and it’s frankly dangerous to try to find one single theory that fixes all problems. (This is why I choose to borrow from monetarism, neo-Keynesianism and aspects of behavioral economics, such as Fisher’s debt-depression model and Mandelbrot’s study of fractals.”
Agreed 100%. If you follow the MMT thinkers they take much form Fisher, Keynes, Minsky and Lerner.
I dont agree with this;
“MMT is trying to find a universal magic bullet to fix both ends of the cycle, even though we have already seen quite painfully that fiscal policy doesn’t necessarily work very well when confronted with inflation. Like traditional Keynesianism, MMT is going to fail miserably if faced with inflation, even though its prescriptions will be adequate during a traditional recessionary cycle.)”
MMT is descriptive of how a fiat system can work. Thats all. It starts with the idea that who ever is the currency issuer never “has or doesnt have” money. So any discussion of financing or funding or borrowing are absolutely absurd and have NO applicability in that system. But more to the point of this discussion, levying a tax to be paid WITH the paper of choice DOES instill value to it. 200+ years down the road, obviously much more is happening than a simple tax enacted value, but that is how the game CAN and usually throughout history DOES start.
Of course if EVERYONE said phuck you to the tax man, we would win, so what? If everyone ignored traffic rules or murder laws or any other social convention we could change the game too. Thats not news. We live together mostly out of choice and we follow the laws because mostly we agree with them.
We arent using dollars because they are great, but because everyone else is using them and we need the stuff that everyone else has. If we didnt have to use dollars many people wouldnt and then the dollar would lose its value. Its value comes form people seeking to keep it. Less people seeking to keep it, lower dollar value.
“Mosler likes to claim that the powers to tax and imprison give the dollar its authority, but that’s woefully wrong. If dollars weren’t desirable for their own sake, then we would simply reduce our activities and not bother with pursuing tax burdens in the first place.”
I totally agree. Most dont like Austrian thought b/c it is not driven mathematically and that it seeks to understand everything only from the micro level, but there are many relevant qualitative truths to it, esp. with respect to the prevailing view on money, the “value” of it, and how such things affect individual behavior.
“Nor should [Here, I would add "COULD"] Congress be that flexible. MMT would call for the ability to immediately adjust tax rates, while forgetting that a completely flexible tax regime could reduce long-run output because of the uncertainty that such a system would allow. Furthermore, we could be stuck with the after-effect of sticky tax rates (i.e. the blowback that would occur if the MMTer’s in charge were to try to jack up taxes quickly in order to prevent inflation) — does anyone honestly believe that the government could simply hike up taxes quickly and not provoke a nasty response from the electorate, or that those who seek to stay or get elected wouldn’t respond accordingly?”
I completely, completely agree. Many politicians understanding that you can always lower tax rates, but that the problem lies with trying to raise them again. It’s just not that easy.
Additionally, the belief that, when faced with the realization that the U.S. is NOT revenue-constrained, politicians will choose to be MORE careful about the productiveness and efficacy of gov’t spending than when they actually thought the country actually WAS revenue-constrained, is quite a stretch, behaviorally speaking.
so, in reality, there absolutely are operational facts that MMT uncovers. But they choose to ignore the reality of the behaviors and prevailing knowledge of all economic actors. things cannot be always be driven from the macro level without an effect on micro behaviors. In this light, MMT makes the same academic mistake of thinking that what could done in a perfect world, in fact, cannot be applied, b/c/o misperception, a lack of understanding, or bias.
as the cliche goes, perception is reality. I would love to hear how they would counter behavioral “abnormalities” that have been fully ingrained in 99.999% of the world
until you educate and convert the world to such understanding and acceptance of the micro effects on their lives due to their share of macro responsibility implied by MMT, the theoretical options provided by MMT operational realities just cannot be implemented due to behaviors. until then, MMT will remain in the ivory tower due to its unrealistic, qualitative assumptions. but at least it is making progress since most academic frameworks lack both unrealistic qualitative AND quantitative assumptions.
on those points, I agree with AngryMBA 100%
behaviors matter.
Angry worships at the altar of Paul Krugman. Be careful who you agree with.
Most dont like Austrian thought b/c it is not driven mathematically and that it seeks to understand everything only from the micro level, but there are many relevant qualitative truths to it, esp. with respect to the prevailing view on money, the “value” of it, and how such things affect individual behavior.
Thanks for the kind words, but to be clear, I am positively, absolutely not Austrian in my beliefs. My position does not come from Austrian business cycle theory or their slavery to the quantity theory of money.
I do agree with MMTer’s that the quantity theory of money is wrong, at least in the short run. But that’s a position that is unique to MMT.
Many politicians understanding that you can always lower tax rates, but that the problem lies with trying to raise them again. It’s just not that easy.
And that is one of the benefits of having an (quasi-)independent central bank. Bernanke doesn’t have to worry about being reelected every two years, nor does he have to make big promises to Ma and Pa Kettle about how he’s going to save the universe with permanently low tax rates, ala the Republicans. Even if one agreed with the potential of this MMT fiscal-as-monetary-policy theory, there would be no way to implement it within the US political system as it stands today. Congress is too slow and too populist to make it work.
To correct another typo of mine, “I do agree with MMTer’s that the quantity theory of money is wrong, at least in the short run. But that’s a position that is **NOT** unique to MMT.”
Haha. The austrian and the uber Keynesian think they agree. Anyone reading this should be aware of the contradiction in these commenters’ points.
plesae don’t pigeon-hole me because I believe that many current “Keynesian” measures taken in the last few years are 100% necessary. and I could care less that ANgry is keynesian. There are many relevant concepts to all schools of thought. be careful to not too dogmatic in your own beliefs.
Austrians are many times quite clueless, but their focus on the perceived value (and the potential for flight to other currencies) is quite relevant
Ad hominem statements don’t add to the debate.
Angry-
I wasn’t calling you Austrian, but your qualitative and behavioral arguments about money, and the willingness to accept it, is Austrian-like.
And your points, and theirs, concerning perception of money, are very important in the case of implementing the operational realities of MMT.
So many point to the fact that the dollar cannot be replaced quickly- that we can continue this monopoly of dollar-denominated assets and debt, but I think it is quite apparent that headway is already being made for other currencies, including the RMB. it will take time,for sure, but then again, widespread freely-floating regimes are fairly new, and things may change more quickly than it is currently believed.
I appreciate your thoughts, though, b/c most here are so enthralled with the operational facts of MMT that they forget that to question its implicit behavioral assumptions, which I believe you highlighted quite well.
I wasn’t calling you Austrian, but your qualitative and behavioral arguments about money, and the willingness to accept it, is Austrian-like.
There is plenty of behavioral economics that isn’t Austrian. (It would probably surprise SS to know that Shiller, for example, is a noted behaviorialist.) Some of it is even mathematical, such as Mandelbrot and his theories that liken market behaviors to fractals.
In any case, Austrian economics isn’t centered on the behavior, per se, but on blaming government for everything. It’s a political theory masquerading as an economic one.
So many point to the fact that the dollar cannot be replaced quickly- that we can continue this monopoly of dollar-denominated assets and debt, but I think it is quite apparent that headway is already being made for other currencies, including the RMB. it will take time,for sure, but then again, widespread freely-floating regimes are fairly new, and things may change more quickly than it is currently believed.
For now, I’m not worried about the dollar — the US still has the world’s largest economy and continues to be productive, so Americans and the world should continue to desire to have dollars. The value of a currency is like a share of stock — if people like the management and future prospects of the issuer, then they’ll be happy to own it.
“For now, I’m not worried about the dollar — the US still has the world’s largest economy and continues to be productive, so Americans and the world should continue to desire to have dollars. The value of a currency is like a share of stock — if people like the management and future prospects of the issuer, then they’ll be happy to own it.”
Again, I agree. But CHina is openig up the RMB just like Japan did in the late 60s and 70s. More U.S. companies are selling RMB loans, and foreign individuals will continue to be able to hold more RMB-linked accounts, and later the RMB. Its just a matter of time until the productive capacity of the U.S. will be linked, on both the asset and debt side, to currencies outside of its monetary control. As power transfers to other countries, the US may not be able to demand that its obligations be denominated solely in USD. It will happen within my lifetime, for sure. ANd a lack of confidence in the USD, not matter how incorrect it may be, will only help to accelerate this process.
Btw China will not leave its crawling peg until times are better. It is too risky for them to do such a thing now.
didnt think you were.
And I dont subscribe to quantity theory either b/c I believe that there is a more complex relationship to the variables used- that its dependent and independent variables change constantly. more importantly, there are qualitative variables that are ignored.
I am soros-like in that way
I dont subscribe to quantity theory either b/c I believe that there is a more complex relationship to the variables used- that its dependent and independent variables change constantly. more importantly, there are qualitative variables that are ignored.
I suppose that SS refers to you as an Austrian for the same reasons that he thinks I’m a devoted follower of Krugman: he apparently doesn’t comprehend either one.
I felt that he was calling me austrian. But then again, they could ignore all the keynesian policies being called for by the monetarist bernanke. as if one school of thought dominates Fed policy, or anyone’s thinking for that matter.
of course, some things are inherently at conflict between schools of thought, but its just wrong to think that one rules supreme. NO economic framework has the monetary system figured out. its like thinking one religion has it right. we are flawed, as are the systems and frameworks we create.
That is why economics and modern theories of finance are so interesting to me: the continually attempt to model the “unmodelable.” but over time, we will make progress. I do not think that human behavior can be quantified, at least not now, and all theoretical framework are incomplete as a result.
economics is not physics, no matter how realistic is seems. social systems are not akin to the natural world.
but then again, I could be described an austrian in that way. but those are sorosian concepts, and he obviously does no subscribe to the austrian framework. his partner jim rogers is though.
MBA, do you have a twitter account? I’d like to follow it.
“there would be no way to implement it within the US political system as it stands today. Congress is too slow and too populist to make it work.”
my thoughts exactly.
Angry MBA,
I salute you for debunking the main fallacies in the Chartalist approach.
Cullen Roche and his followers think they have discovered the Holy Grail with their MMT and will treat as an ignorant, dense and idiot anyone who does not agree with them.
Having lived and worked for 20 years in an ex-communist country I can fully understand why a government can never make his currency desirable by force and why any time they try that, barter,black market and parallel economy flourish.
I also appreciate your arguments regarding taxation and congress as they are to the point.
Their theory needs to be debunked because it is dangerous as it has appeal to the politicians and could become mainstream.
As I have said many times in this blog, the only time the Chartalist where able to put their theory in practice was during Weimar hyperinflation.
All German economic cabinet of that time was composed of well known Chartalists. We know the disaster that followed.
Debunking? MBA doesn’t even understand what disinflation is. He’s a very bright guy, but he can hardly be trusted to debunk a complex monetary policy. His argument here is 1 dimensional and although I don’t disagree with his notion that taxes alone aren’t enough for currency acceptance he continues to backpedal so as to avoid losing face.
The truth is, MBA, like yourself, still doesn’t understand MMT so rejects it and fall back on the orthodox education that has led the world into the current catastrophe.
Plus, with regards to Wemar – it’s misleading to blame chartalism as a central cause of the hyperinflation was foreign denominated debt. MMT is based on a state theory of money so once you involve foreign denominated debt (non-state money) you are working outside of a chartalist framework. I am afraid to say that you have yet to write a cogent comment here and this sort of nonsense only discredits you.
You keep saying that the Weimar debt was foreign denominated, but the truth is that until the Chartalist started printing madly there was no hyperinflation. Then Austria when through the same hyperinflation with their own dose of Chartalism and they did not have any foreign denominated debts.
Casanova
You are wrong about hyperinflation. The money printing was a RESPONSE to the real hyperinflation that was occuring via the crash in the production system of the economy. All the money printing did was put some numbers on the high real price of goods in that economy.
Angry MBA,
I think you hit the nail – accountants gone wild. This is the problem with MMT. And its proponents are dogmatic – not that different than PK.
stpioc, yes it weird that the government sells debt only to buy it back. But what is even weirder is that most people don’t think it weird!
Wow, I am very impressed with the responses that were posted in the NYT. The message is getting out! Great job to everyone fighting this fight.
steve, me too. Really outstanding replies.
I think guys that in a way Krugman is right and you are missing one point. For liberals and progressivists Krugman’s framework is better because it allows to have both full employment and high deficit (you can offset it with tight monetary policy) and it will not be inflationary. Under MMT full employment and high deficit will lead to inflation (even hyperinflation). So in Krugman’s view government can be more active in economy with full employment if it can offset it with higher interest rates to cool private sector so there will be no high inflation. He is just classic left winger.
Tom,
Using high interest rates to cool off the private sector is inferior to using fiscal policy to cool off the private sector. In fact your post supporting Krugman is at odds with what he said. Krugman said that high deficits are NOT compatible with monetary policy, because high interest rates will exacerbate the deficit and lead to higher inflation. MMT recommends fiscal policy to cool off the private sector. There are better and worse ways to do this, of course.,,,
That and the fact that higher interest rate also contribute to inflation channel by augmenting income of bond holders.
Krugman said that high deficits are NOT compatible with monetary policy, because high interest rates will exacerbate the deficit and lead to higher inflation.
Krugman said something different:
running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation.
and in a later post:
A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.
So in his view it’s good to have monetary policy tool to manage economy, not only fiscal policy. And I think he can be right because it’s easier to rise interest rates by Fed than to convince Congress to rise taxes (obviously Krugman is against decreasing government expenditures).
Cullen:
You said a lot of hard work went into that $14 trillion of debt.
Well, $4 trillion of that debt was what the Treasury borrowed from the various trust funds.
That isn’t too hard of a job.
The balance of that $10 trillion, according to Adam anyway, or ir may have been studenttree, is money owned by foreigners.
What does MMT have to say about the risk of so much debt being owned by foreigners or the government to itself?
Don Levit
I have a question: when speaking of private vs. public sector, are foreign entities included in the private sector? I understand basic econ 101 (G-T)= (S-I)–(X-M), so I would assume the above would be the case. I am just trying to wrap my head around how expansive monetary and/or fiscal policy affects foreign-linked $-denominated assets and liabilities.
When we talk about deficits allowing for private deleveraging, public sector surplus allows for both over-leveraged domestic actors to save more, but also foreign holders, like CHina, to save, whether they need to or not.
Any thoughts are really welcomed. Just trying to understand the repercussions of a global world, as I have tended to think the private vs. public concept in domestic terms, which obviously is not the case.
Basically, I am thinking that there must be a lot of “seepage,” if that is a word
Dan,
From one Dan to another, Yes — foreign entities are included in the private sector, which is often defined as the non-federal government sector (with the federal government in question being the U.S. federal government). And, yes, seepage is an issue, in my opinion. If you step back and look at the big picture, it’s possible to leak money to China whilst making up for that with U.S. government programs to address real areas of national need (e.g. energy, environment).
So your thinking is correct, and there are significant implications with regard to how we proceed from the basic truth which MMT proclaims…
Well it is certainly true that MMT people don’t think deficits in your local currency can cause hyperinflation, and in this they are wrong.
http://pair.offshore.ai/38yearcycle/#mmthyperinflation
Vincent,
Hyperinflation only results from destruction of a country’s productive capacity, as far as I can tell from the historical record. At least this was the case in Zimbabwe and Weimar Germany. Do you have some other example of hyperinflation to support your point?
Certainly, indiscriminate expenditure of money could cause hyperinflation, but the real question is what is threshold. MMT people universally recognize the possibility of hyperinflation, in my experience. But it’s not something that will creep up on us without going through an inflationary episode that can be combatted with fiscal contraction, which is a central tenet of MMT…
Vincent,
That’s nonsense. I tackled the hyperinflation issue here. http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon
Still waiting for you to admit that you’ve been wrong about hyperinflation for several years running now…..
People, ignore Vincent, he’s a troll whose points have been addressed ad infinitum on almost every MMT blog out there. He doesn’t give up, though, being a genuine troll.
as long as hes not hurting anyone, I am fine with it. much better than a group of people nodding in agreement and repeating the same thing in every comment.
I love the operational aspects of MMT, but until it is implemented, the options offered are strictly theoretical. options which I think is much more risky, behaviorally speaking, that MMT proponents tend to believe.
love the site and the thinking though, guys. thanks.
we have been operating in an mmt world since 1971, with some baggage
You still there studentee?
what?
This is a good question:
i think you are discussing more closely fiscal policy, when a gov’t adds nfa’s, whereas the bonds vs. no bonds is a question is more closely a question of monetary policy (excepting the interest payments factor), no changing of nfa’s (?). bonds vs no bonds wouldn’t really affect the non-government sectors ability to fix balance sheets (excepting, once again, the interest payments factor).
bonds vs. no bonds i think can be addressed irrespective of balance sheet quality issues. assume even full employment. why would the issuing of bonds be relatively disinflationary?
bonds vs. no bonds i think can be addressed irrespective of balance sheet quality issues. assume even full employment. why would the issuing of bonds be relatively disinflationary?
Interest rate channel?
let’s chat over at heteconomist, less clutter
“I love the operational aspects of MMT, but until it is implemented, the options offered are strictly theoretical.”
I agree with your perspective Dan. I would be very interested to hear the concrete (detailed) actions that should be taken, given the current economic conditions, based on MMT theory. I think that will help me wrap my mind around MMT.
Thanks
On another note, Jesse seems to be warming up to MMT.
I am not so sure. He is a skeptic, albeit an open minded one. At least he is not dogmatic like many….
I hear you, dogma’s one tough customer.
In his new post maybe he means that the Fed decides to no longer buy government debt. Would that lead to insolvency?
Absolutely not…QE has nothing to do with govt spending.
I wasn’t talking about QE. I was trying to understand Krugman. What if the bond market AND Fed decided to stop buying govt debt in 2017. Treasuries would no longer be a risk-free financial asset, it would put the federal government in the same position as state governments. Or am I missing something?
Fed is part of the govt and a creature of the congress, so, it can be instructed to do whatever the congress wants. But regardless, why would a bond market stop buing govt debt at full employment, as Krugman suggests? If we have full employment, our economy should look very good. You can always construct scenarios that break a model – the trick is how to construct realistic scenarios.
The federal bond market doesn’t fund the government; MMT is correct. However, assume a situation where there is a buyer’s strike and PDs are the only (or by far the largest) bidders at an auction or two. If the Fed doesn’t then step in and buy (as it is doing now) and clearly signal that it will (as it is doing now), interest rates might blow up as the PDs as market makers lose their nerve. If the Fed steps in and buys, the world might panic and dump dollars because of the insolvency/banana republic meme. The Fed believes (hopes)this will never happen, and I have a hard time seeing how China and Japan can go on a buyer’s strike, but instability is increasing worldwide and unpredictability follows. Insuring against such risks to a modest extent is sensible, but where do you hide?
Deficits do matter, but they are a mix of first and second derivatives of other _relevant_ spending decisions, hence you needn’t spend much energy alalyzing them. You are far better off analyzing the market impact they may have.
Re:He doesn’t understand MMT like most people. He is so heavily invested in his former way of thought that the concept of a government that doesn’t fund itself it beyond his realm of understanding.
Of course he understands it: “If it was the first time I could forgive him. But he had 2 posts on MMT last summer and it was clearly explained to him there in the comments by dozens of MMT’ers and supporters that he had built a straw man.”
Krugman is simply an instance of the deplorable state of intellectual corruption in the country. “An ass and a political hack.” No lover of truth, but rather a lover of his pocketbook and of his inflated ego. Let’s stop apologizing for these criminals (big banks–read Bill Black and Michael Hudson) and their useful idiots (senators, congressmen, “intellectuals”).
as a trader, i understand relatively well the power (and perils) of leverage and its effect on wealth and MTM. but i still do not understand how you could argue that savings could be accumulated _only_ via public debt and your folly comes from the fact for you money is the only form of savings, you are monetarists before all, aren’t you? velocity of money is an arcane term to you, isn’t it?
but there are two beams of light in your post:
- you understand that gov’t debt is equal to the amount of _electronic_ money savings (not exactly so stated by you) and gov’t debt is 1:1 substitute for money only that it entices its holder to defer consumption by promising puny interest. gov’t debt can eventually be repaid only by printing;
- private money (debt creation by private banks) is out of control by the gov’t and thus MMT cannot be truly effective unless the banking sector is controlled by the gov’t (as marx argues).
still the biggest issue i have with MMT is that it is a theory about (mainly) a first derivative of economic activity: money. you cannot influence economic activity by tweaking the amount of money, you influence the reshuffling of existing money and debt first and it may have some negligible impact on the economy.
and as i trader, i have to say that buying and selling stocks and bonds, especially on the secondary market is not an ‘economic activity’. but that too counts towards GDP for some weird reason despite the fact not even a cent is created in the process, simply the money is being split differently by the 2-4 parties that take part in the transaction. this may give you a hint as to why monetary interventions have so miserably failed thus far.
but i still do not understand how you could argue that savings could be accumulated _only_ via public debt
Saving of net financial assets could be accumulated only via public debt. This is anot a theory but an accounting fact. Now why this matter? Read below.
private money (debt creation by private banks) is out of control by the gov’t and thus MMT cannot be truly effective unless the banking sector is controlled by the gov’t
Private money is not nt and thus tends to self regulate by expanding during good times and contracting during busts. Private money can go “poof” as it did just a couple of years ago. That’s why net-financial assets (cash, bank reserves and govt debt) matter – much more stable. This is even without invoking the founding argument – that you cannot pay taxes in private money.
gov’t debt is 1:1 substitute for money only that it entices its holder to defer consumption by promising puny interest
I am still to meet that one person that defers consumption to by a govt bond! This just never happens in my view. A decision to save takes place first, the form of saving later.
This is the usual fallacy of thinking that bonds can regulate consumer demand.
still the biggest issue i have with MMT is that it is a theory about (mainly) a first derivative of economic activity: money. you cannot influence economic activity by tweaking the amount of money, you influence the reshuffling of existing money and debt first and it may have some negligible impact on the economy.
You want MMT to be some sort of panacea it doesn’t pretend to be? Sorry. MMT just tells you you have a Ferrari of a monetary system, don’t try to ride it as if it were a horse-driven cart. It doesn’t save you from crashing or ending up in a ditch.
apparently you do not live on planet earth.
what you call ‘net financial assets’ represents the smallest share in the total wealth (wealth is someone’s savings plus capital appreciation) of the nation and very few people work to save ‘net financial assets’, it simply is not the goal to secure your future, to become rich or whatever. show me one fool that saves to have a pile of ‘net financial assets’ and not to better his own being and i will agree with you.
private money does _not_ go poof. as the federal reserve balance sheet expansion shows, monetarist is a fancy word for money printer. you may say the bernank is not a monetarist, but QE II is all about bailing out the treasury and i do expect QE III next year as well. and you can pay taxes with private money: you pledge them as collateral and get some of the tons of ‘bank reserves’ sitting around. takers to lend you ‘net financial assets’ that is in abundance against hard assets are plenty. if you have more than 20% equity in your home, call your bank and see that they will offer you a HELOC immediately.
gov’t debt is exactly a money substitute and sooner or later will be printed. we can only argue about the timing because the gov’t produces _nothing_. for reference see the state of social security and federal pension funds and medical ‘benefits’ programs. and there are ‘investors’ of a sort that do not need to consume, that could put pension contributions into land, productive businesses, gold etc., but they would not come out smart enough so they prefer to ‘play the yield curve’ or are outright obligated to invest in treasuries and make money out of… money. the net effect is just redistribution and constant drainage of pension funds’ assets.
i frankly do not want MMT to be anything, it is you that vehemently support this ‘theory’ and wants its recognition. i just point to your attention that since money is a derivative of economic activity and its form and shape does not matter in a sound money system to the level of economic activity, therefore changes in the quantity do not matter either to the level of economic activity. this is precisely why MMT cannot be effective. i said sound, this is different from hyperinflationary and deflationary and is achieved when money growth tracks closely economic activity growth.
in a highly leveraged economy money matters a great deal to blow bubbles and avert busts. over a full economic cycle, the impact of newly minted money (and debt) on economic activity is close to zero, the impact of tax code changes is much greater.
and if you can’t understand it, here it is in layman’s terms: at the end of the day we consume relatively stable amounts of food, clothing, vacations, entertainment etc. only the incremental labor we put in to achieve something above this can create savings, not the amount of money the gov’t borrows and promises that you and me will repay in the future with incremental labor that no one can force us to perform.
without net financial assets, the non-government sector cannot net save. you’re mixing up micro issues of what someone counts as wealth and the macro issues that mmt addresses. it’s no wonder you’re so upset
“…only the incremental labor we put in to achieve something above this can create savings…”
more indication that you’re still looking at micro dynamics
“…you may say the bernank is not a monetarist…”
who says that?
“…gov’t debt is exactly a money substitute and sooner or later will be printed…”
what?
“…we can only argue about the timing because the gov’t produces _nothing…”
i see you’re letting politics enter your arguments as well. gov’t produces a lot of human capital…
“…and there are ‘investors’ of a sort that do not need to consume, that could put pension contributions into land, productive businesses, gold etc., but they would not come out smart enough so they prefer to ‘play the yield curve’ or are outright obligated to invest in treasuries and make money out of… money…”
mmters are very skeptical of the financialization of the us economy
“…i just point to your attention that since money is a derivative of economic activity and its form and shape does not matter in a sound money system to the level of economic activity, therefore changes in the quantity do not matter either to the level of economic activity. this is precisely why MMT cannot be effective…”
net financial assets, capital injections by the govts are that which can repair broken balance sheets. you need to get much more specific in your use of the word ‘money’
anyways, there are plenty of mmters that are skeptical of aggressive ad hoc fiscal policy. i for one prefer the creation of better automatic stabilizers, eg through the job guarantee, to help offset contractionary pressures, instead of big tax cuts or big countercyclical infrastructure projects. not that i’m opposed to the latter, but there are many ways to bring about full employment and price stability
i would not be surprised if you are a PhD studentee. i highly regard education, but only the research and practical side of it, the theoretical work in the past has never been performed by professors on gov’t payroll (yes, even private universities get 30% or more funding from the gov’t directly and indirectly, just like housing).
but back to your ‘arguments’:
to the first ‘what?’ how could a gov’t repay exising debt?
- by printing money;
- by increasing taxes;
- by selling assets;
what is the established path and where would we be in a few years with these policies? one better believe in santa than in fiscally responsible gov’t. at the end of the day the chinese want dollars and are willing to labor for them, the u.s. politicians wants give handouts to be reelected.
‘gov’t produces a lot of human capital’
as to the net effect, i see absolutely negative effect. there are areas where gov’t is certainly needed, but not nearly as much. mises is right that a state has no raison d’etre without an enemy. look at the peace laureate obama, there is no other president that has waged so many wars and he promised to stop the ones started by bush. so much for the credibility of gov’t.
this must be a joke. i am not sure if the gov’t has been in your parents’ bedroom, but it has not been in mine’s
i bet MMTers are skeptical of the financialization of the economy, it takes away from the power of apparatchiks. but it appears to be for the wrong reason.
‘net financial assets’, gov’t injections do _not_repair broken balance sheets. look at the perpetual bailout candidate, citibank. it would have bankrupted 3 times for the past 20 years were it not for gov’t intervention. every time the blow up is bigger, the participants are ever larger, so are the donations to politicians by the way. gov’t injections simply perpetuate the existence of companies that cannot survive on their own. do not worry about the economy, it has prospered at much higher rate before citibank ever emerged.
who are you to tell people what they should invest in? what are you smoking to even suggest that a home builder or a real estate agent can work on an complex engineering project like a bridge or a tunnel? half of the unemployed are exactly in these 2 specialties.
why don’t you better suggest that we put them at the Fed, they may be even better qualified for the bernank’s position.
really, get out of the classroom, you can learn a lot more about life than by reading vacuum based economic theories.
baychev,
There are some good criticisms in there.
One thing though. This:
“i have to say that buying and selling stocks and bonds, especially on the secondary market is not an ‘economic activity’. but that too counts towards GDP for some weird reason”
Is not true. GDP is sum of expenditure on / income from final goods services produced by the economy in that period. Stocks and bonds on the secondary market most certainly does not count!
commissions are counted toward GDP (bank product?), so is the capital appreciation. GDP could be more appropriately called Grossly Distorted Picture. i would never suggest one counts product on the expenditure/income balance and say that if he has imported less than the previous month his GDP has gone up. sadly this is how statistics work, but nothing can hide the fact that the emperor has no clothes and despite that we just surpassed the pre-crisis GDP level, we are way worse off measured by gross income, net savings, capacity utilization, level of employment.
Financial services count. But if I buy a bond issued by a company to fund acquisition of a new plant, then the expenditure on the plant counts, but if we count my purchase of the bond, then we’re counting expenditure on the same flow of output twice.
Within the MMT approach, what is the difference between Eurozone governements and US government: is Eurozone doing the same as the US, that is spending first money, then taxing? And for the eurozone bond system, is it only a monetary tool and not a fiscal one?
I can’t give you the details, since I am not well-versed enough, but I do know you cannot think of the Eurozone govts as akin to the US. They are more like states within the US (as opposed to the fed govt), as each cannot print their own currency (they do not have full monetary sovereignty).
Nothing comes from nothing. The large deficit will not create prosperity instead it will and is creating a new bubble world. Greenspan and BB think that rising general assets price is wealth. They have this upside down. No wonder Keynes suggested the government should pay people to dig holes in the ground and then fill them up.
First:
I agree with you.
We can have all the vouchers for turnip soup we can issue, but first we must have enough turnips.
Don Levit