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Quick Thoughts on Modern Monetary Theory

Written by Dean Baker   
Saturday, 25 February 2012 13:47

Since there were many thoughtful comments on my earlier post, it seemed worth saying a bit more by way of response. As I noted at the onset, I did not see a difference between MMT and the Keynes that I first studied more than 30 years ago. I guess I still don’t see the difference.

In my prior post I noted that there were three channels to raise the economy back towards its potential:

  1. Government spending and tax cuts;
  2. Expansionary monetary policy; and
  3. Devaluing the dollar to increase net exports.

I should also add a fourth channel that can move the economy to full employment by reducing the average workweek or work year: work sharing.

As best I can tell, the MMT folks would have us only use the first channel and seem to disparage the other three routes to raising employment levels. I will briefly argue the merits of the other three channels and explain why I do not think reliance exclusively on the first channel is the best policy.

The Monetary Policy Channel

Several comments on my earlier post argued that monetary policy alone could not be counted on to get the economy back to full employment. This is true, but of course not what I was arguing.

I was making the case that the Fed can do more to boost the economy, even with short-term rates near zero. It could target a longer term rate, for example committing itself to push the 5-year Treasury rate to 1.0 percent or the 10-year Treasury rate to 1.5 percent.

This would boost the economy in several ways. First, investment is relatively unresponsive to interest rates, but it is not altogether unresponsive. In other words, with sharply lower interest rates, we should expect to see some additional private sector investment.

We should also see money freed up from mortgage refinancing. This amounts to a shift of income flows from creditors to debtors. That should lead to some additional consumption under the assumption that the propensity to consume for people with mortgages is somewhat greater than the propensity to consume among people who own mortgages or mortgage backed securities.  (Many people have over-estimated this effect, but it certainly is not zero. If we can get $4 trillion in mortgages refinanced at interest rates that average 1.5 percentage points less than their prior mortgage, it would reduce annual payments by $60 billion. If we assume that one third of this translates into additional consumption, it amounts to $20 billion a year in added demand. )

There is also the potential for higher inflation, especially if the Fed explicitly targets a higher rate of inflation as several economists (e.g. Krugman and Bernanke) have argued. A higher rate of inflation should both induce more investment by lowering the real interest rate and also reduce the real debt burden for homeowners, young workers with outstanding student loans, and other borrowers.

I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit.

A Lower Valued Dollar

Another benefit from more expansionary monetary policy is a decline in the value of the dollar, which would have the benefit of boosting net exports. Here too I fail to understand the nature of the objections of the MMT crew. Certainly the United States can run large trade deficits for periods of time, but this does have real consequences. If we assume that other countries will not subsidize our consumption indefinitely, then we will at some point have to adjust to a world in which we have some semblance of balanced trade.

I don’t see how we can think that going from large deficits (e.g. the 6 percent of GDP we ran in 2006) to balanced trade can be painless. Industries do not just spring up overnight. The process of adjustment will inevitably mean some inflation and reduction in living standards, as the goods that we used to get cheaply from abroad will be replaced by higher priced domestically produced goods.

To see this point, imagine a more extreme case. Suppose that we had a trade deficit equal to 50 percent of GDP. If the countries who were buying up dollar assets then decided that they had enough, so we could no longer rely on imports to meet half of our domestic demand, does anyone believe that the U.S. economy could quickly and painlessly replace our imports with domestic production?

I would not attribute this view to the MMTers, but then the question becomes one of a degree. Perhaps a trade deficit of 6 percent of GDP is okay, but presumably somewhere between 6 percent and 50 percent we get into a problem. It seems the question then has to be how quickly the U.S. economy could adjust to a much lower trade deficit and what is the risk that foreign countries will slow or stop their purchases of U.S. assets? We may differ on the answer to these questions, but they are the questions that must be asked.

Note that the reduction in living standards in this story is relative to a scenario in which the trade deficit does not change. It does not mean an absolute reduction in living standards since even a large increase in import prices can easily be more than offset by increases in productivity growth. For example, if the price of the 16 percent of GDP that we currently import rises by 20 percent (a huge increase) over three years, this would effectively reduce living standards by 3.2 percent, other things equal. If this increase takes place over three years, that translates into a decline of just over 1.0 percentage point a year, less than half the 2.5 percent average rate of productivity growth over the last 15 years.

Also the rising price of imports would not affect everyone equally. Those who most directly compete with imports in their work (i.e. manufacturing workers) would see wage gains that would almost certainly far outstrip the effect of higher import prices.

To see this, imagine that we deported half of our doctors tomorrow. This would send the price of health care soaring as doctors might see their pay double or even triple. The remaining doctors would have to pay more for their health care in this story like everyone else, but they would still see an enormous rise in their standard of living. It is the same story for manufacturing workers and those who could be manufacturing workers (e.g. workers without college degrees more generally) when the dollar falls making imports more expensive.  They would see sharp rises in their wage would far outstrip the impact of paying more for the goods that used to be imported.

The decline in living standards in this story would primarily be felt by people who are largely protected from import competition at present (e.g. doctors, lawyers, policy wonks). The class distribution of gains and losses is likely a large part of the explanation for why a lower valued dollar does not feature more prominently in policy debates.

By the way, there were some comments to the effect that we would have to lower our standard of living to Chinese levels to improve our trade balance with them. This is wrong. Our standard of living is determined primarily by our level of productivity. If the value of the dollar relative to China’s currency fell to the point where our goods were more generally competitive, it would simply mean that we pay more for the goods we import from China. There is no mechanism through which this would cause us to have Chinese level living standards.

Of course a rebalancing of trade need not have any negative effect on national living standards even in the short-term if it is in the context of an economy that is operating well below its potential. In that case, the increase in output associated with increased net exports would easily swamp the effect of rising import prices. (Imagine GDP rose by 6 percent due to the increase in net exports associated with a lower valued dollar.)

There is one final point on this issue that is worth mentioning. It is common to refer to the devaluation strategy as a “beggar thy neighbor” policy. It is important to remember how the alleged beggaring works in this story. We are making our neighbors buy more of their own goods rather than selling them to us. The premise here is that the world is suffering from too little demand and that no one knows how to get anyone to buy their stuff so all they can do is to sell it other countries.

Of course the argument that we can always create more demand through deficit spending applies to other countries as well. The countries that currently have large trade surpluses could absorb these surpluses with more domestic demand. This should not be painful in principle, it means consuming more. 

By contrast, to say that actions to reduce the U.S. trade deficit always involve beggar thy neighbor policy seems bizarre on its face. Is any deficit that we happen to run somehow the right deficit?  In the case where our trade deficit is 50 percent of GDP, would we be beggaring our neighbors if we tried to reduce it to 40 percent of GDP?

There is actually a simple neo-classical story about what trade deficits should look like. In the old days (before the U.S. started doing the opposite in a big way), mainstream economists used to teach that rich countries should have trade surpluses with developing countries. This meant that the rich countries, who had lots of capital, exported capital to poor countries that had little capital. To put it another way, this meant that capital flowed from slow growing rich countries, where it got relatively low returns, to fast growing poor countries where it could get much higher returns.

The world has rarely worked this way for a variety of reasons, but there is a fundamental logic to this view. Poor countries need to both raise the living standards of their populations so that everyone can enjoy a decent life and also build up their infrastructure, capital stock and level of education. In principle, this process would be much easier if they are able to borrow from wealthy countries. The reality is that successful developing countries have generally not been large importers of capital, but that is a major failing of the international financial system, not something to be applauded. In a well working international financial system, China should not be lending capital to the United States.

Work Sharing as a Route to Full Employment

In my original comments I did not mention work sharing, but it really should be included in any discussion of full employment policies.  There is nothing natural about the current length of work weeks and work years. They are the result of a set of historical processes and policy decisions which could well have been otherwise. In Western Europe, the standard work year for full time workers is around 20 percent shorter than in the United States.

All countries in the European Union must guarantee workers at least 4 weeks a year of vacation and many require 5 or 6 weeks. France has a 35 work week. All of them have paid sick days and paid parental leave. The United States could have gone this route if our politics had followed a somewhat different path over the last three decades.

Policy has also not been neutral on this issue. Our tax code hugely subsidizes employer provided health insurance. This is a large overhead cost that generally varies little with hours worked. As a result, employers would rather work the same worker more hours, even paying an overtime premium, than hire on additional workers and pay their health care costs. Therefore the government gave employers a direct interest in resisting shorter workweeks or work years.

In this context, it is difficult to see why we should not look to meet a shortfall in demand in part by encouraging employers to reduce work hours. The government already subsidizes layoffs through unemployment insurance. What can be the logic in saying that the government will pay half wages for workers who have lost their jobs, but not compensate for lower pay due to a reduction in work hours?

There are strong arguments that it is better for workers, employers and the economy as a whole to keep a worker on the job where they can be continually upgrading their skills rather than risk the possibility that they endure a long period of unemployment. This is a well-researched topic. The long-term unemployed have great difficulty finding new jobs and many will never be re-employed. If we have a route to avoid this risk, why would we not take it?

If it ends up being the case that increased use of work sharing leads to changes in the standard work week or work year, that would be great in my view. This would lead to more family friendly work places and likely better lives. The basic point would be that workers would be getting the benefits of increased productivity growth partly in the form of more leisure, not just higher income. (This assumes that we can restructure the economy so that workers do get the benefits of productivity growth.) Also, this should be great news for the environment. There is a very solid correlation between income and greenhouse gas emissions []. If people can get more time off in lieu of higher take home pay, it would be a relatively painless way to reduce greenhouse gas emissions.

Pitfalls of Going Solo: Problems of Relying Exclusively on the Government Channel

There is no dispute between MMTers and more traditional Keynesians like myself that increased spending and tax cuts can be an effective way to boost demand in a downturn. The question is whether this should be the exclusive route. I have argued above that we should also look to alternative channels to boost demand and work sharing to lower unemployment. Part of the reason is that I see no good reason not to push these alternative channels, however I also do see problems with relying exclusively on the government channel.

One of the problems is the potential for creating large structural imbalances that could be difficult to correct, as noted in the case of large trade deficits. But there are other reasons why exclusive reliance on the government channel may not be the best route.

First, if we go the spending route, there is a risk that some of the spending will be wasteful. This is both an economic concern and a political one. From an economic standpoint, we should always want our spending to be done in the most useful possible way. In the context where the alternative is just wasting resources by having workers and capital sit idle, then paying workers to dig holes and fill them up again would be an improvement, but we should hope to do better. Rushing huge amounts of spending into ill-conceived projects is not likely to be the best use of funds.

This also raises the obvious political issue that bungled projects make great stories for the political opponents of economic stimulus. We will be hearing much about Solyndra in the months and years ahead. It is worth taking political risks when there are clear policy gains from going a specific route, but if it is not necessary, why do it?

Alternatively, we can go the tax cut route. There is little doubt that if we have big enough tax cuts that we will eventually prompt enough consumption to bring the economy back to something resembling full employment. However, this does raise the risk that at some point when housing has recovered, the additional consumption from the tax cut will lead to a real problem of excess demand leading to inflation. I know the MMT answer is then to raise taxes, but I am not confident that this can always be done so easily.

Politicians are not generally eager to raise taxes. If we create a situation in which we are counting on big tax increases to prevent inflation, then we run a real risk that inflation could become a big problem, especially if we have been very loose with our monetary policy.

As a practical matter, I know that inflationary concerns in the U.S. economy have been vastly overblown. Only twice in the last half century (the late 60s and the 70s) is there a plausible case for inflation having been a problem and in both cases there were highly unusual extenuating circumstances (the Vietnam War and the surge in oil prices following the Iranian Revolution). Nonetheless, we have also never had a prolonged period of large budget deficits. There can be little doubt that we can run large enough budget deficits to cause inflation, especially if monetary policy is accommodating.

When we get to the world where we are raising taxes then we have to be concrete in terms of whose taxes get raised and by how much. This obviously raises many difficult political questions, including the extent to which we would substitute cutbacks in government spending. Suddenly we are in the world of tradeoffs between taxes and spending in which Washington is endlessly mired. I have spent as much time as anyone yelling about the need to boost demand and to restore full employment, but assuming we do at some point accomplish this goal, I don’t see how MMT gets us around the world of budget constraints that the honchos in Washington think we are in now.

I’ll conclude with a final point about my own reluctance to formally embrace MMT (which I don’t see as different from Keynes). I have long realized that in Washington policy debates who says something is far more important than what is being said.

We see evidence of this all the time. Witness the incredible sycophantism that surrounded Alan Greenspan before the collapse of the housing bubble. Note that the list of people engaged in Greenspan worship included not just Washington politicians and the top economic reporters at the Washington Post, Wall Street Journal and elsewhere, but even many of the world’s most prominent economists. The 2005 Jackson Hole meeting of central bankers was devoted to a Greenspan retrospective where they debated whether he was the greatest central banker of all time. In short, people who certainly should be able to think for themselves generally don’t.

I recall an extreme version of this back in the debate over privatizing Social Security. I made what should have been a fairly simple point: it was impossible to get 7 percent real returns in a stock market with a price to earnings ratio well over 20 and a projected real growth rate of 2.0 percent. This was simple arithmetic, but all the big names in economics, including the non-partisan professionals at the Congressional Budget Office and the Social Security administration continued to write 7.0 percent real returns into their projections.

We were finally able to score some points on this issue with the “No Economist Left Behind” test, which asked economists to write out a set of dividend yields and capital gains that added to a 7 percent real return. (in other words, they had to write down two numbers that added to 7.) Using the Social Security trustees profit growth projections, 7 percent real returns would have required either paying more than 100 percent of profits out as dividends or having price to earnings ratios of 300-400.  However, even our limited success in this case (no one in a position of authority acknowledged their error) was only accomplished after Paul Krugman wrote about the issue in his NYT column and the no economist left behind test caught fire in the blogosphere.

My point here is that anyone challenging the status quo is almost completely excluded from public debate. This was third grade arithmetic – the bad guys were just simply wrong – and we could not get people like the Washington Post editorial board and columnists to recognize this simple fact.

If we can’t win a debate on arithmetic, how can we think we will get people in policy positions to accept that their conceptual framework is wrong? For my part, I want to take every opportunity (and there are many) to show that the people in authority have gotten their arithmetic wrong. Rather than trying to challenge their theories of the world, I am going to point out that they will not apply them consistently.

You want free trade – let’s remove the trade barriers that protect highly paid professionals like doctors and lawyers. How about eliminating protectionist barriers like copyrights and patents that drain hundreds of billions of dollars out of the economy each year and, also redistribute income upward?  Let’s let all banks compete in a free market instead of giving some too big to fail insurance from the government. And, how about making banks follow the same laws as the rest of us when they file legal actions, like foreclosure?

I don’t see much hope of winning an argument about what sort of monetary theory the Fed should be applying. However, I think there is real political potential in showing that the people running economic policy seem to not understand arithmetic. And since they are willing to oblige us with so many examples where their arithmetic failures have real and demonstrable consequences, it would be a shame not to use them.

Tags: dollar | economy | jobs | Keynes | monetary policy

Comments (20)Add Comment
Keynes may have been sympathetic, but . . .
written by Dan Lynch, February 25, 2012 1:21
Re: difference between Keynes and MMT.

Keynes had to deal with the gold standard (though he advocated leaving the gold standard). He viewed deficit stimulus as a temporary thing during a recession, not as a permanent fixture.

MMT acknowledges that the rules have changed since leaving the gold standard in 1971. We no longer have to sell treasuries to finance a deficit (there is still a legal requirement to do so, but it no longer makes economic sense). Instead of merely running a deficit during a recession, we can, and probably should, run a deficit forever.

MMT embraces the equation Federal Deficit = Net Private Savings + Trade Deficit. That equation tells that the only way to sustain a balanced budget is to sustain a large trade surplus. I don't remember hearing that from Keynes.

If Keynes were alive today, I suspect he would embrace MMT as being compatible with his theories.

Re: single channel vs. multi channel. MMT is a description of how the macro economy works with a fiat currency. Some MMT economists, like Mosler and Wray, have gone a step further and emphasized other prescriptions like an employer of last resort. However, not all MMTer's agree with those prescriptions. And I suspect that many MMTer's would agree with some or all of your "multiple channels."

Hope that helps.
Nice Dean
written by Jesse Frederik, February 25, 2012 2:03
This was very thoughtful Dean. Just wondering, what's your opinion on the Job Guarantee proposal?
written by Dan Kervick, February 25, 2012 2:21
There is a tremendous amount to chew over here Dean. I really appreciate these thoughts and the time you have devoted here to engaging with MMT in such a thoughtful way.

I just have some initial reactions about your comments on the first channel - the central bank channel. My understanding is that the MMT economists are not uniformly skeptical of the effect of central bank policy in boosting economic performance. However, they argue that where the central bank has its effect is in targeting price not quantity. Scott Fullwiler, for one, has written a tremendous amount on the Fed's management of interest rates through open market operations, and on related issues of interest rate management such as the payment of interest on reserves.

Obviously in the current environment the interest channel is of limited further effectiveness.

But MMT has been very critical of the monetarist-inspired theories of the importance of central bank quantitative targets. They are critics of the loanable funds model, and believe the money multiplier is a myth. They argue that monetarists have the causation backwards. MMT sides with other post-Keynesian economists in defending the demand-side view that sees the credit markets driving the growth of reserves, rather than the supply-side view that sees growth in reserves driving the issuance of credit. For those of your readers interested in further reading, Fullwiler's article "Modern Central Bank Operations - The General Principles" is an excellent and comprehensive discussion of many of these issues, and Stephanie Kelton's work on the hierarchy of money is a complementary source of information. These articles can be found easily by googling.

And while I certainly haven't read all of their work, my impression is that the MMTers are also quite skeptical of a lot of contemporary thinking on the role of the Fed in setting expectations. The idea that the Fed is some sort of grand orchestrator of the economy, setting the real economy abuzz or depressing it by virtue of its authoritative pronouncements, seems alien to the MMT view of the world which focuses on real operations and mechanisms - not ethereal behavior voodoo from wizard-bankers issuing grand pronouncements.
written by JSeydl, February 25, 2012 2:37
Dean, thank you for this thoughtful post. I get the sense that a good portion of your professional career -- and your personal frustrations when dealing with the honchos in Washington -- is summarized in this post, and I really appreciate you taking the time to do that. I started reading your blog/research not even a year ago, and I can tell you with conviction that your work has completely changed the way I see the world. Please do not ever stop calling people out when they are wrong, especially on arithmetic. It is making a difference, and the world would be in much worse shape without your persistence and your wisdom.
written by Dan Kervick, February 25, 2012 3:07
First, if we go the spending route, there is a risk that some of the spending will be wasteful ... Rushing huge amounts of spending into ill-conceived projects is not likely to be the best use of funds.

Then let's rush huge amounts of spending into well-conceived projects!

Anybody who has worked in the private sector can tell you that private sector enterprise is perfectly capable of wasting gobs of money and throwing away fortunes in scarce and valuable resources.

The private sector in the US is creative and ingenious. But it is also somewhat dilatory, flighty and wasteful, continually draining off valuable resources into flim-flam, titillation, scams, redundancy, rent-seeking, the expensive competitive marketing of miniscule product differences, and the decadent over-consumption of useless ephemera.

I'm sick of giving the benefit of the doubt to conservatives who portray the United States government and public purposes as just so many wasteful ditch-digging operations. We need more government activism in 2012 and beyond, not less. And we don't just need it because we need the government to play the economy-boosting role of spending some money. We need more public sector activism because we are in desperate national need of the kinds of long-deferred public goods and investments that only government and an energized democratic polity can can provide.

I can't believe people looking around at a country and global environment that is literally falling apart before our eyes can't think of scores of value-adding tasks and public investments to carry out. I wrote about this recently:


Paradigms change; world-views change. It happens. This is no time for defeatism.
Accounting as an aid to thought, not a substitute for it
written by streeteye, February 25, 2012 6:22
OK, Federal Deficit = Net Private Savings + Trade Deficit.

Why does a balanced fiscal budget imply a trade deficit? That assumes the private sector has to be net saving.

Suppose I work in a factory, consume 75% of my income, and spend the 25% building a house. I am not borrowing or financing anyone else, my balance with everyone else is is zero, and yet I am in a perfectly happy and medium-term sustainable consumption/investment mix.

If I want, I could use private sector financial intermediaries, save a down payment for five years and finance other people, then borrow from private sector institutions and build my house. The private sector financing balance is still zero.

I don't see anything at all limplausible or pathological about the private sector having a zero balance with other sectors. It can still consume and invest at a variety of reasonable levels and finance itself.

If a permanent deficit is desirable, it assumes some kind of long-term demand shortfall. Maybe there is one and maybe there isn't, but it's not due to an accounting identity. And I don't see how the shortfall how any shortfall arises and differs from Keynes's 'animal spirits' and 'liquidity trap.'

I ask myself how the IS-LM curves look different under MMT and can't figure it out or find a straight answer. The curves just describe a relationship between interest rates, investment and consumption supply and demand. If a theory doesn't make any prediction about that relationship, it doesn't seem like a very complete theory.

I get the impression MMT has a set of things which were well understood by Keynesians, if maybe emphasized differently, and a few things which seem outright wrong or misleading.
written by Dan Kervick, February 25, 2012 10:23
The private sector financing balance is still zero.

The how is the private sector growing? Or rather, if the private sector is growing during a period when its net financial assets are not increasing, isn't it facing deflation?
written by streeteye, February 26, 2012 12:19
How does a company grow without external financing? It retains earnings.

The private sector can grow without external financing, by allocating its own resources to accumulating capital and improving technology.

It doesn't need to get a license from any other sector to do that.

Public, private, foreign, are just tags that you place on activities that have little to do with whether/how they generate growth.
written by Dan Kervick, February 26, 2012 8:32
Yes, the private sector as a whole can do productive things with its real resources, grow its capital stock, and grow the supply of goods and services available for sale. But again, if its somehow manages to do that while the sector's total supply of financial assets is not growing then won't it be facing a price deflation?
Job Guarantee
written by dean, February 26, 2012 10:52

i would be hesitant to have a generic job guarantee. Having a large jobs program, especially for young people, makes sense in a downturn, but I don't know if I would consider it desirable in ordinary times. The idea is that it would put a floor on wages, since everyone would always have the option of taking advantage of a government job. But I worry that it would be hard to manage and monitor. We would not want it to be a dumping ground for people who don't feel like working and still getting a pay check. Ideally, there would not be a need for this sort of program most of the time, assuming that our macro policies are working reasonably well.
written by streeteye, February 26, 2012 12:08
If there's money growth commensurate with growth, there's no deflation. If there's no money growth there might be deflation.

OK, if you conflate monetary policy with fiscal policy I see your point.

But all I see is a different way of counting up the beans. I don't see any difference in the simple IS/LM picture.

And since institutionally fiscal and monetary policy are made separately, it doesn't seem misguided to break them out and look at how they act through different channels when they sometimes pull in different directions.
written by Philip Pilkington, February 27, 2012 7:18
"This would boost the economy in several ways. First, investment is relatively unresponsive to interest rates, but it is not altogether unresponsive. In other words, with sharply lower interest rates, we should expect to see some additional private sector investment."

Where? My guess is that we'll see the money flow into commodities and drive up prices. Those that call for ever lower policy rates always ignore the simple fact that investors are using commodities such as gold and oil as a 'hedge' against potential future inflation. High commodities prices are having a disastrous effect on aggregate demand.

"We should also see money freed up from mortgage refinancing. This amounts to a shift of income flows from creditors to debtors. That should lead to some additional consumption under the assumption that the propensity to consume for people with mortgages is somewhat greater than the propensity to consume among people who own mortgages or mortgage backed securities. (Many people have over-estimated this effect, but it certainly is not zero. If we can get $4 trillion in mortgages refinanced at interest rates that average 1.5 percentage points less than their prior mortgage, it would reduce annual payments by $60 billion. If we assume that one third of this translates into additional consumption, it amounts to $20 billion a year in added demand."

This is a thorny one. I agree, you probably would see increased AD in short-run (you'd also see some 'can-kicking' of inevitable bankruptcies down the road), but the effects on investor confidence and capitalist consumption might be perverse.


Then there's pension funds etc.


"The National Association of Pension Funds [in Britain] has warned that the recent round of quantitative easing (QE) will increase retirement funds' deficits by £45billion."

Still, the main objection is rising commodity prices. These are almost definitely due mainly to hedging against perceived inflation. Any time rates go down, hedging in commodities should increase.
Job Guarantee.
written by Ralph Musgrave, February 29, 2012 4:10

Dean, Re Job Guarantee, I don’t regard JG as being an essential ingredient in MMT, and nor does Warren Mosler. It’s an optional extra.

As to whether some sort of subsidised temporary employment something like JG is beneficial in non-recessionary times, most MMTers would say “yes”. I’ve set out some detailed reasons for thinking that such a system brings a permanent reduction in NAIRU here:


Work sharing.
written by Ralph Musgrave, February 29, 2012 4:41
Dean, That’s a thoughtful article, but I’m appalled to see you advocate work sharing. It’s possibly OK as a temporary palliative in a recession, but as a long term policy (as was the case in France) the idea is the idea is rubbish. See under the heading “Labour supply reduction is no cure..” here:


Also you say “If it ends up being the case that increased use of work sharing leads to changes in the standard work week or work year, that would be great in my view.” Who are you to suggest what hours anyone else should work? If someone wants to work 60 hours a week, let them. If they want to work 25 hours a week and live a simpler life, let them.

Re your claim that MMTers don’t take account of the fact that politicians are idiots, you make a good point. That is, MMTers tend to advocate the IDEAL system. But as an MMTer, I don’t make much an apology for that.

Likewise I’ll continue to argue for what I think is the ideal banking system, even though the system is currently dominated by crooks and fraudsters and may well continue to be dominated by them for decades. Keep pushing against a rotten door and sometimes it collapses quicker than you expected.

written by Dan Kervick, February 29, 2012 5:26
So few people seem to be able to conceive of a job guarantee that is anything other than a make-work program for deadbeats. They seem to imagine it as little different than the government sending all of the currently unemployed a weekly check, a certificate of employment, and a letter that says, "Congratulations, you now work for Uncle Sam."

I believe MMT defenders should take up the challenge of designing a national employment program that aims high and strives to employ everyone who wants to work in a high-calibre program that is more productive on average than the average private sector job. It should be called something like the "Citizens Corps of Public Enterprise and Development", and be something anyone would be proud to work for in the same way they are proud to be soldiers. It could be involved in infrastructure, education, and other aspects of human development and national capital development.

Although the program should accept anyone willing and able to work, including people who come in with poor skills and background, the aim should be to turn everyone who joins and who needs skills development into a competent, disciplined and motivated public servant.

And forget this business of not "interfering" with the private sector. The program should aim to give the private sector a run for it's money and compete aggressively for employees with quality work and a decent wage for its employees. A program like this would add to the private sector's incentives to provide good wages and work conditions in order to compete with the government alternative. This would be a huge shot in the arm on the side of America's workers.
Well Said, Dan Kervick
written by Detroit Dan, February 29, 2012 6:29
Dan Kervick makes an excellent point in that government incompetence should not be assumed. That can become a self fulfilling prophecy, as the last 30 years of Republican rule have demonstrated. Sarah Palin is the logical culmination -- the epitome -- of this phenomenon. While trashing the government in her speeches, she rips off the government in her personal behavior. This has to stop.

streeteye seems like an honest and intellectually open commenter. Where he speaks of "conflation" of monetary and fiscal policy, I think he misunderstands. Monetary policy is just the setting of the risk free short term interest rate. It's very minor in affecting the macro economy. If you want the money supply to grow, you need deficit spending. Interest rates have little to do with money supply...
Monetary policy alone is hopeless.
written by Ralph Musgrave, February 29, 2012 10:54

Dean, You are mistaken in claiming at the start of your article that MMTers oppose monetary policy. MMTers tend to advocate simply creating extra money and spending it in a recession (and doing the opposite if inflation looms). That policy involves COMBINING fiscal and monetary.

You also claim “I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit.” I can see numerous “dis-benefits”. See:

written by Neil Wilson, March 01, 2012 1:49
"I believe MMT defenders should take up the challenge of designing a national employment program that aims high and strives to employ everyone who wants to work in a high-calibre program that is more productive on average than the average private sector job."

Although that would be ideal, it would have the private sector foaming at the mouth and would lead to a larger Job Guarantee pool that otherwise.

The idea of the Job Guarantee is that, although it sets the minimum standard of job, it is largely a transition job, where the private sector bids away individuals once the private sector gets its mojo back.

One of the ways it does it is via efficiency improvements.

It is often said that if the public sector was realy efficient then there would be no private sector - after all the cost of capital to the public sector is zero.

The public sector is about being effective. Leave the private sector with efficiency and set the two at tension with each other. The public sector driving effective policy and the private sector pushing for efficiency.

The problem in both sectors is the build up of institutional entropy. The difference with the private sector is that entities tend to be destroyed and reconstructed more regularly - which is about the only way of dissipating that entropy.
Why are technocrats assumed to be competent
written by Neil Wilson, March 01, 2012 1:55
"Dan Kervick makes an excellent point in that government incompetence should not be assumed."

Why is central bank competence assumed? Why is private operation competence assumed?

All are capable of incompetence that destroys people's standard of living. We're in the middle of one of those bursts of incompetence now.

Having said that it is still much better to put the countercyclical measures into an automatic structure, since that saves all the arguments amongst egos while Rome literally burns.

Which is why JG is such a good idea.

The deal with the private sector is that they employ everybody and provide them with an income. That is why they are allowed to profit.

If they refuse to do that then the government should pay the wages of the unemployed and, if necessary for inflation control, charge that cost back to the private sector.

The result is a major increase in the power of the automatic stabilisers.
Where MMT emphasis is different
written by Neil Wilson, March 01, 2012 2:31
"I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit."

MMT generally advocates no bond issue and interest rates at zero - permanently.

That is pushing monetary policy as far as it will go.

"Another benefit from more expansionary monetary policy is a decline in the value of the dollar, which would have the benefit of boosting net exports."

And yet there is no economic theory backed by evidence that supports that view.

It is just as likely that the value of the dollar will go up - as those attracted by an increase in the value of business assets replace those attracted by government freebies.

Have you read the work of John T Harvey? Exchange rates are 'complicated'.

MMT's view is generally don't worry about it. Imports are a benefit and the net saving of foreigners in your currency should just be accommodated.

After all once you have dropped interest rates to near zero, they are getting nothing free for their money.

At that point a trade imbalance in your favour can only be a hedge against uncertainty in the rest of the world.

There is certainly no need to push exports and lose real resources when pushing the domestic economy allows you to engage everybody and keep those real resources.

Exports should just be left to the market to decide.

"Alternatively, we can go the tax cut route. "

Alternatively still you can implement an improvement to the automatic stabilisers - the JG - which ensures everybody has something to do and an income.

(And incidentally allows you to set the minimum standard for a job - including work hours and benefits).

*and then* once that is in place you tune the taxation system to maximum output.

And if necessary you do with taxation what you did with interest rates. Outsource the ability to change them within a set range to some committee.

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