Comments for Quick Thoughts on Modern Monetary Theory at http://www.cepr.net , comment 1 to 20 out of 20 comments http://www.cepr.net Sat, 25 May 2013 02:35:06 +0100 FeedCreator 1.7.3 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15109 "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. - Neil Wilson Wed, 29 Feb 2012 21:31:39 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15108 "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. - Neil Wilson Wed, 29 Feb 2012 20:55:20 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15107 "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. - Neil Wilson Wed, 29 Feb 2012 20:49:31 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15105 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: http://ralphanomics.blogspot.com/2012/02/twelve-reasons-why-mmt-is-right-on.html - Ralph Musgrave Wed, 29 Feb 2012 17:54:46 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15103 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... - Detroit Dan Wed, 29 Feb 2012 13:29:08 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15102 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 [i]more[/i] 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. - Dan Kervick Wed, 29 Feb 2012 12:26:01 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15101 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: http://ralphanomics.blogspot.com/2012/02/as-full-employment-of-labour-is.html 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. - Ralph Musgrave Wed, 29 Feb 2012 11:41:49 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15099 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: http://mpra.ub.uni-muenchen.de/19094/ - Ralph Musgrave Wed, 29 Feb 2012 11:10:02 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15041 [quote]"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."[/quote] 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. [quote]"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."[/quote] 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. http://www.nakedcapitalism.com/2012/01/philip-pilkington-is-qezirp-killing-demand.html Then there's pension funds etc. http://www.telegraph.co.uk/finance/financialcrisis/8835706/QE-printing-money-swells-pensions-black-hole-by-3750-a-head.html [quote]"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."[/quote] 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. - Philip Pilkington Mon, 27 Feb 2012 02:18:01 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15024 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. - streeteye Sun, 26 Feb 2012 07:08:05 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15022 Jesse, 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. - dean Sun, 26 Feb 2012 05:52:58 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15014 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? - Dan Kervick Sun, 26 Feb 2012 03:32:12 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15011 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. - streeteye Sat, 25 Feb 2012 19:19:34 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15010 [i]The private sector financing balance is still zero. [/i] 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? - Dan Kervick Sat, 25 Feb 2012 17:23:55 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15007 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. - streeteye Sat, 25 Feb 2012 13:22:36 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15005 [i]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.[/i] 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: http://www.neweconomicperspectives.org/2012/02/doing-what-needs-to-be-done-facing.html Paradigms change; world-views change. It happens. This is no time for defeatism. - Dan Kervick Sat, 25 Feb 2012 10:07:00 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15004 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. - JSeydl Sat, 25 Feb 2012 09:37:45 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15003 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 [i]price[/i] not [i]quantity[/i]. 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 [i]quantitative[/i] 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. - Dan Kervick Sat, 25 Feb 2012 09:21:04 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15002 This was very thoughtful Dean. Just wondering, what's your opinion on the Job Guarantee proposal? - Jesse Frederik Sat, 25 Feb 2012 09:03:12 +0100 http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory#comment-15001 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. - Dan Lynch Sat, 25 Feb 2012 08:21:43 +0100