Monetary Realism

Understanding The Modern Monetary System…

3 Big Reasons Monetary Realism Matters

Brad DeLong has coffee with Stephanie Kelton:

“As of January 1, 2016, enough time will have passed for us to be able to judge whether the Federal Reserve’s policy shift to the Evans rule plus an open-ended $1 trillion a year of balance sheet has been a success or not.

Stephanie Kelton is almost certain it will not be a success. I think it might well work. Mike Woodford is almost certain that it will work. It seems to me that there is an opportunity here for me to lock in a profit of some sort here…

The first stage of this is crafting a bet that Stephanie Kelton would accept for what states of the economy on January 1, 2016 would qualify as success for the Fed, and what states of the economy would qualify as failure. She does expect a better economy in three years–She expects private sector deleveraging to continue at its slow pace And as a result the forces making for balance sheet recession to ebb. Success would, for her, have to count as stronger than expected improvement in the economy given this positive underlying trend.

How should I phrase the bet? And then what bet should I offer Mike Woodford when I run into him by accident in San Diego?

This would be a bet between monetary policy and fiscal policy, between two people who are very smart, co-ordinated by a person who is also very smart. But the bet is a not a smart setup, because all three of them lose by entering into this wager – and we lose too. They would all become less informed by participating in this wager. Everybody is worse off with this wager.

Here is reason #1 Monetary Realism Matters: Monetary Realism recognize both monetary and fiscal policy will work.

We know a few things. We know Monetary Policy can work. We know Fiscal policy works when we let it. So this is a bet between two things that work, two very different policies we know will work if we do them semi-correctly!

So this bet Brad DeLong proposes, it seems like the wrong bet, or a wrongish bet if you can stand the word “wrongish”.

Monetary policy isn’t perfect, but it can work. It’s worked in the past, when it has promoted or destroyed credit. Monetary Policy will probably work if the fed does $1T of QE for a few consecutive years. It will probably work even though it’s primary channel of influence – that’s real estate – seems broken for a generation.

But here is something else – Fiscal policy works, even though some people deny it works.

Here is where fiscal policy can really, really help. Yes, we could use endless years of trillion dollar QE to end the recession – but why when we have another choice the market is begging us to use?

The Bond Market is begging the U.S. government to spend more money as of 12-18-2012.

Right now, the market is voting – via the bond market – for massively increased government spending. Negative real yields have been going on for years, so it’s not ablip or accident – we can assume the markets are fairly valued at some negative real yield. If we should trust non-existent NGDP futures to tells us how much QE to use, why can’t we trust one of the largest and most liquid markets on the planet to tell us when to spend more money? Why not use fiscal policy when the market is literally begging us to do use fiscal policy?

 We know Fiscal Policy works. Our best indication of the market sentiment on fiscal policy is literally begging us to use more fiscal policy. We should be using fiscal policy right now to fill our output gap, not monetary policy.
Here is reason #2 Monetary Realism Matters: We recognize the limits of monetary policy and fiscal policy.

A good question is “Do we WANT  monetary policy to work in todays economy?” The lending monetary policy helps to stimulate is mostly real estate lending. Real Estate is the channel of monetary policy. If monetary policy works, real estate prices will go up, private credit will increase. Private citizens will leverage their balance sheets further, and we will use more real estate as collateral than we do today.

We want the economic growth that will result from these activities. But do we want to stimulate through credit creation?  No, probably not, because Real estate collateral is fairly valued now.

So even if monetary policy wasn’t having such a hard time getting traction due to the market problems in real estate, we wouldn’t want to use it to stimulate our economy! We don’t really want Monetary Policy to work, considering the other true facts about our current economy!  Expanding credit would mean real estate would go back into overvalued levels! We would further leverage the private sector.

Cullen Roche likes Richard Koo because he talks about balance sheet recessions, even if Mr. Koo doesn’t get about inflation. Here is a good way to think about monetary policy and balance sheet recessions: Don’t use monetary policy to end a balance sheet recession, because it recreates the conditions for another finance-driven crash. 

Here is where the Austrians have a series of good points – the fed can distort the economy by creating too much credit. Making more credit to end the pain caused by too much credit is foolish.

But their cure of reducing credit without any offsetting expansion is worse than the disease. Their plan results in an economy guaranteed to make a significant portion of the population absolutely miserable, and frequently ends up starting shooting wars due to massive unemployment.

This is the kind of thinking that results from not knowing the accounting.

Fiscal policy has limits too. We can’t just spend money forever, without limit, without thinking about the real resources we have available to use. Today, those limits on spending are far beyond our current levels of spending, but that does not mean these limits do not exist. Those limits exist.

Not only do they exist, but there is a point long before we hit the inflation limits where we would no longer want to use fiscal policy to stimulate the economy – even if there was still slack, even if there is still unused capacity. It’s a matter of choice and of balance. We can use also monetary policy to stimulate our economy, because monetary policy works.

Yes, we can make the government spend until we get to full employment – but shouldn’t the private sector be doing some or much of this work when the situation warrants it? Yes – Hell Yes!

Big Reason #3: Monetary Realism Bridges a Gap

There are not many people in the world who are arguing for a reasonable blend of monetary and fiscal policy even when the economy is doing well. There are very few people even thinking about this idea.

In fact, some of the brightest people out there are engaging in wagers where we all end up losing. If Michael Woodford “wins”, yay! We get started on another housing bubble! Great news, right? If Stephanie Kelton wins Yay! We’ve been in a semi-recession for 3 years!

This is why I write for MR, why I spend time on it. We’re doing real work here. We need a pragmatic approach to our world.

Here is a jewel: JKH wrote a paper which goes into detail about a combined Central Bank and Treasury, and it’s a must read paper for people like Brad DeLong.

This Central Treasury Bank structure has some important abilities:

“The entire liability structure of the CTRB is now intra-convertible, in terms of the fluidity with which reserves, currency, bills, and bonds can be issued or redeemed according to a fused and seamless fiscal and monetary machine.”

A fused and seamless fiscal and monetary machine requires a fused and seamless fiscal and monetary policy regime. Here is something to note about todays world – we require fused and seamless fiscal and monetary policy regime today, right now.

We are bridging the gap, slowly but surely here at MR. I made the Strong Economy Rule (aka the TC Rule), and beo has proposed a series of fiscal rules to help guide our fiscal policy. These are not enough – we need a more seamless policy guide than these rules.

 

 

 

 

 

 

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88 Responses

  1. Fed Up says

    “What does this mean?”

    Get it away from Congress and the President.

    “Is this a public entity?”

    Yes. I mean public not federal (meaning away from Congress and the President).

    “How would it be different than a central bank?”

    Imo, the central bank wants all new medium of exchange to come from the “hedge fund” model (including banks). That is actually the problem. Debt and the “hedge fund” model should not be allowed.

    “This seems like a “and a pony” magical thinking.”

    No, it is trying to describe what is actually happening with time, real AD, real AS, and the medium of account (MOA)/medium of exchange (MOE) market(s) (including the retirement market).

  2. Michael Sankowski says

    Not too shabby!

    “Spin the medium of exchange entity off from the federal gov’t into a separate entity. ”

    What does this mean? Is this a public entity? How would it be different than a central bank? This seems like a “and a pony” magical thinking.

  3. Fed Up says

    Doing my best Barney Stinson impression, challenge accepted! Abolish the fed/central bank! Spin the medium of exchange entity off from the federal gov’t into a separate entity. Now the federal gov’t is a currency/medium of exchange user.

    current account deficit = gov’t deficit plus private deficit plus medium of exchange entity deficit

    Assume CA deficit = 0 & gov’t deficit = 0 so…

    0 = 0 plus private deficit plus medium of exchange entity deficit

    Move private deficit to other side of the equation.

    private surplus = medium of exchange entity deficit

    The medium of exchange entity will have no tangible assets. It will probably need intangible assets.

  4. Oilfield Trash says

    Michael

    Looks like the IMF was thinking the same thing. I just start in on this

    http://www.imf.org/external/pubs/ft/sdn/2012/sdn1212.pdf

    But on the first scan it looks like it is putting meat on the the shadow banking bones.

  5. Greg says

    Sorry for the delay in response, I promised my wife no computer time while our holiday guests were here. Actually, it wasnt too bad after a couple days, sometimes we need to step away.

    I wonder if a key to having a “prosperity contract” so to speak is to have EVERYONE participating and trading it. The more people making their predictions the better.

    “This is part of the reason understanding futures markets is so useful to understanding economics. It’s a beautiful system.”

    Agreed, but as in your excellent post about gas prices and oil prices, there needs to be strong mechanisms for preventing capture. Also certain things just shouldnt be permitted to be gambled on, at least not by outsdie third parties.

    “But can there be a contract which does promote a great economy? Nick Rowe proposed trills, kinda modled after Schillers Trills. I have a tough time with any tradeable contract because I don’t think they will really trade.
    I suspect it would be simpler to just give people extra cash, linked to payroll taxes. This would have the same effect, and we already have a extremely efficient delivery system for this extra cash in place for every working person in the United States.”

    Agreed

    “Regarding the guaranteed income – yeah, this would be a ton better than our current system. The uncertainty caused by NGDP is largely caused by the changes in spending by the unemployed.
    The problem is that some (many?) people in the lower income brackets think totally differently than the people who comment on this blog. They really do try to game the system so they don’t have to work, they really do try to take off work.”

    I have to think that gaming the system occurs at every level of the income brackets, but even if not, worrying about whether some guy is “deserving” of his 350$/wk seems a waste of time. If you really think that guy has it better than you, quit and get your increased free time. My guess is you wont really think he has it all that well after a month or so.

    “For example, my dads company employs about 25 people. We have a really, really hard time finding people who just show up for work consistently, and it doesn’t matter the wage we offer. We’ve found over time it is much better to start people at a low wage and see how they do. If they can show up, we bump pay. If they work hard, we bump pay a good amount. If they are smart and work hard, they become a forman in a year or so.”

    I hear many guys give the same story and Im sure its hard to keep a trained and motivated workforce in many areas. Is this a macro problem I wonder? IOW are things not getting done because of this or is it just that your dads company cant do as much as he would like? My sense is that we have a lot of redundant people, according to the system we have developed the last few decades. We are still more than capable with the current work force of producing surpluses in virtually every good demanded on the current market. Some of this is likely the point of some of our policies I fear. Make workers more desperate by needing less and less of them.

    “We like to think we have had a small, but discernable impact in the real world debate, and that our impact will accumulate over time. JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else. He’s ground zero.”

    I dont disagree

    My comment about a “human capital account” at the fed is really just spitballin an alternative to a minimum guaranteed income. We all agree that we have our most potential at birth, its ALL ahead of us, so lets capitalize it, and draw this account down or up based on performance through life. Our participation in the “prosperity futures” markets can come from this, after age 14 or something.

    I really think all people just need to start with something of their own of value, something to trade. Not just be saddled by their daddys debt or rewarded with their daddys incredible luck.

    Merry Christmas

  6. beowulf says

    Cullen, I think the Market Monetarist guys are winning because they’re the only ones who can enter the race. The Fed is free to adjust monetary policy but only Congress can adjust fiscal policy. And since Congress is doing nothing (well, worse than nothing, they keep trying to tighten the fiscal stance), I can’t fault the Fed for trying to do what they can to paddle the raft across the ocean to dry land.

  7. Tom Hickey says

    Maybe why Hudson often just mentions progressive taxes as the way to deal with it and recommends putting the top tax rate back to 90%. He makes a case that the economy did fine under such a tax policy.

  8. JKH says

    I read the Krugman post above. Looks like he’s referring entirely to what amounts to income distribution and/or wealth distribution. Again, I see a lack of coherence in the meaning here.

    In a closed, balanced budget economy, S = I. Krugman is attacking the wealth distribution associated with cumulative S, and designating the upper tier of wealth concentration as “rentiers”. He doesn’t refer to ‘I’ at all.

    Without that S concentration, there would be no issue, at least on that basis. ‘I’ could consist of the most productive investment conceivable, with fully justified saving S. Rentierism depends only on the distribution of cumulative S on that Krugman basis, ignoring the fact that I may be fully productive.

    This issue needs to get far more analytical in order to separate it from issues of income and wealth distribution, indeed if there is any effective separation.

  9. Tom Hickey says

    To amplify on the framing, I just posted this over at MNE in response to a comment by Art Shipman:

    Art, the way I conceive of economic rent the way it is generally is as an aspect of the “free rider” problem. I think that the terms “economic rent” is confusing if only because the term “rent” is used differently there from the ordinary language usage that most people are accustomed to and automatically think of when the they encounter it. So I would frame it as productive contribution with value received proportional to value provided v. free ride due to some “privilege,” subterfuge, market anomaly, govt capture, illegal activity, etc. that is essentially parasitical because the gain is unearned and the exchange is disproportional. In any exchange there may different proportions of earned and unearned between 100% earned (usually wage labor) and 0% unearned (e.g., crime).

  10. Cullen Roche says

    I would have thought this crisis would have changed things a bit more. But the saddest thing is that the biggest development in economics from this crisis is….Market Monetarism. Those guys are far and away the winners of this crisis. So the thing is, it’s going to take 20 more years of failed monetarist focused policy before anyone can actually look at their work and conclude that it doesn’t work as well as some presume. And unfortunately, I doubt the PK economists will make substantial headway until we’re done with this second wave of monetarism. That’s my best guess anyhow.

  11. beowulf says

    “Well, I cannot confirm or deny JKH is or is not Jan Hatzius. :)”

    That’s hilarious! All inquiries about JKH will simply get the Glomar response. :o)

    “In United States law, the term Glomar response refers to a “neither confirm nor deny” response to Freedom of Information Act requests. There are two instances in which Glomarization has been used. The first is in a national security contexts, where to deny a request on national securities grounds would provide information that the documents or programs which the requester is seeking indeed exists. Glomarization is also used in the case of privacy, in which a response as to whether or not a person is or is not mentioned in law enforcement files may have a stigmatizing connotation.”
    http://en.wikipedia.org/wiki/Glomar_response

  12. beowulf says

    It finds me, Mike, it finds me.
    :o)

  13. beowulf says

    As you know Tom, I’m a fan of Richard Nixon not least because he understood that in this country, the more progressive the reform, the more reactionary and angry the terms in which it must be framed.

    For example, the gun control folks should be including in their bills a federal requirement that every high school student pass a marksmanship class to graduate; or even better, a federal concealed carry law for revolvers (6 shots is plenty to stop a lunatic but not enough to wipe out a classroom).
    Stress that the Supremacy Clause would mean Americans could walk around Times Square and see the Broadway lights with a wheelgun under their shirt… and there’s nothing Mayor Bloomberg can do to stop them. Why? Because this is America, that’s why! (remember, reactionary and angry). Add that to a gun control bill and it would have a prayer of passing.

    Its sort of distressing that so few politicians understand this country well enough to get this point (Newt Gingrich does, he’s actually a Job Guarantee supporter but he’s smart enough to pitch it as attacking the poor).

  14. Michael Sankowski says

    Good luck making that work. I think a gold standard can fake something close to this accounting. And you get all the positives of the gold standard too!

  15. Michael Sankowski says

    First I saw the quote, then the link, and knew it could only be you. How do you find this stuff? :)

  16. Michael Sankowski says

    “Mike it’s never too late to become our Joe the Plumber or Congressman Gopher (of Loveboat fame)!” I want to frame this! lol

  17. Tom Hickey says

    1. Mike: “JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else.

    Agree. I had been encouraging JKH to blog himself rather than scatter comments all over the blogosphere, which is very hard to track. Glad to see he is posing his wisdom.

    No doubt that Cullen has made sectoral balances well-known in finance. Financial types seem more open to it than economists, who seem to resist having to recognize a factor that would result in their having to revise their thinking, teaching and textbooks. They are heavily invested in the status quo. Financial types know that the need to use feedback to stay abreast. Huge difference in methodological orientation. But for political change some major economists are going to have to move, too. Politicians won’t move without the blessing of “experts.”

    2. As far as a comprehensive vision of institutions goes, I think that Jamie Galbraith is the guy. As his father’s son, he is carrying forward the great Galbraithian tradition. While he considers himself a Galbraithian, he is closer PKE than anything else and is an ardent opponent of neoliberalism. I would say that he is the progressive Krugman (who remains a liberal as his blog advertises).

  18. Tom Hickey says

    I agree that “rent” is bad framing. “Economic rent” has a different meaning than “rent” in ordinary language and that invites confusion. So one spends too much time explaining the explanation. That is not a good place to be.

    I do think that a lot of what the PKE economists talk about has to do with economic rent without using that terminology. But framing-wise there is a lot of work to be done here.

    A big problem is that the present framing is strongly biased toward the neoliberal social, political and economic paradigm, and the way the game is now set up, any serious opposition is tarred as “socialism,” “communism,” “class warfare,” etc.

    Randy has realized that the framing is not working, too, and he recently put up a series about fixing it over at NEP.

    The major point about framing is using rhetoric in conjunction with logic to tap into feeling as well as to appeal to reason. Neoliberal apologists have this down pat. The disorganized opposition not so much. There is a lot of rage building over the current mess, and those who are able to harness it are getting exposure, on the PKE side people like Steve Keen, Michael Hudson, and Bill Black. Others, not so much.

  19. Tom Hickey says

    Yeah, I think that is probably correct, Cullen. It’s going to take either charisma or celebrity or both.

    However, when the next crisis hits, I suspect that the game will change significantly, and new opportunities will develop in unforeseeable ways. The best thing we can do now is work to put good plans on the floor where they can be picked up if we can’t yet get them on the table.

    This is not say that the “person a white horse” during the next crisis will be wearing a white hat through. For example, the US got an FDR and the UK a Churchill, but Germany got Hitler and Italy Mussolini. This is no longer an isolated situation affecting the US. It’s gone global with the transnationals, global finance, and global neoliberal elite. So really hope we can attend to this sooner rather than later. But so far I don’t see it happening. The momentum seems to be in the opposite direction, and the far right is gaining strength in many places.

  20. jt26 says

    “I do this as a hobby. I am not a professor, or anything like that.”
    Don’t sell yourself short, passion is more important than anything. Even in the hard sciences, you’ll find amateur astronomers discovering new stars, comets. Mountain biking, snowboarding, jazz, hip hop, personal computers were all just hobbies as well, at one time. Mike it’s never too late to become our Joe the Plumber or Congressman Gopher (of Loveboat fame)!

  21. Michael Sankowski says

    Well, I cannot confirm or deny JKH is or is not Jan Hatzius. :)

    This is a good idea:

    “I know the Mike Sankowski of the world can figure out a way to design a futures contract, we just need some that when people are betting on them we are getting broad based growth and not just casino activity.”

    Why not make a futures contract which is designed around prosperity? Well, the problem with most contracts is they need to be traded. “Traded” to some people sounds like something which happens only on a stock exchange, but it’s really not like that at all.

    Imagine the market for 20oz bottles of pepsi, how it works, why it works, who participates from the producers of the product and packaging all the way to the end consumer, the delivery process.

    This is what happens in the futures world, too. Exchange based markets are simply markets almost exactly like the broad market for 20oz bottles of pepsi. It’s just that every single part of the delivery process for an exchange has been streamlined to near perfection.

    This is part of the reason understanding futures markets is so useful to understanding economics. It’s a beautiful system.

    This is why NGDP futures are doomed to failure – there is no economic reason for people to need NGDP hedging. The relationship between NGDP and personal income is extremely variable. For most people, NGDP does not impact their personal income much. but if you lose your job, It’s a frackin’ gigantic impact! hedging a 2% fall in NGDP growth is stupid on an individual level. Once you start thinking like this, you’ll quickly see why there are no groups which will use NGDP futures, except perhaps, maybe, possibly in a dream world large defined benefit pension funds.

    Frankly, this makes me question how well Scott Sumner understands the economy and markets, and therefore how the models he uses to describe the real world could be flawed. He makes such simple mistakes in thinking about NGDP futures – how can he understand what’s going on enough to make a model of monetary policy if he cannot see why NGDP futures have a nearly insurmountable indifference hurdle?

    But can there be a contract which does promote a great economy? Nick Rowe proposed trills, kinda modled after Schillers Trills. I have a tough time with any tradeable contract because I don’t think they will really trade.

    I suspect it would be simpler to just give people extra cash, linked to payroll taxes. This would have the same effect, and we already have a extremely efficient delivery system for this extra cash in place for every working person in the United States.

    Re: DeLongs bet – well, I doubt SK will foot a $300 lunch, because she has kids and works for UMKC, not berkerly or Princeton. ;)

    STF made a good point SK didn’t say this at all. What would be a good bet, STF?

    Economic prediction: Imagine using Godley’s matrix, plus Silvers methodology. All he has to do is read that paper by Godley, and our GDP forecasting just got a ton better.

    You have to figure Hatzius spent like 4 hours mastering the techniques of Nate Silver – thats how long it would take him. He’s probably already done some spreadsheet models.

    Regarding the guaranteed income – yeah, this would be a ton better than our current system. The uncertainty caused by NGDP is largely caused by the changes in spending by the unemployed.

    The problem is that some (many?) people in the lower income brackets think totally differently than the people who comment on this blog. They really do try to game the system so they don’t have to work, they really do try to take off work.

    For example, my dads company employs about 25 people. We have a really, really hard time finding people who just show up for work consistently, and it doesn’t matter the wage we offer. We’ve found over time it is much better to start people at a low wage and see how they do. If they can show up, we bump pay. If they work hard, we bump pay a good amount. If they are smart and work hard, they become a forman in a year or so.

    It’s weird how this is so different than what I am used to. In many of the places I’ve been, people would beg for extra work and extra responsibility. It was a fight to get a project or task, because you had to compete with others to get put into the project.

    Tom made a good point when he said we here at MR aren’t addressing the institutions enough. We don’t. On the other hand, just slightly improving the understanding of the monetary system would be a world changing accomplishment. We like to think we have had a small, but discernable impact in the real world debate, and that our impact will accumulate over time. JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else. He’s ground zero.

    We haven’t started to address the trade deficit much here, but that’s a whole field which could have a dramatic impact for the better…but we can’t do everything.

    When jt26 asked for more information/opinions on other topics, it was flattering! I do this as a hobby. I am not a professor, or anything like that.

    “Beowulfs numbers of our human capital why doesnt every child come with an account at the Fed that starts with 250,000 credits.”

    There is a guy who works for my dad. He’s really, really smart. He’s also a huge drunk. The guy with the highest IQ is a construction worker. In a way, he was forced to go Galt by our system. How much human capital gets thrown away by the system? I don’t know.

  22. Greg says

    Excellent Post Mike and great conversation everyone.

    Much to respond to but a few initial thoughts.

    Just finished Nate Silvers new book “Signal and Noise” and it is a must read for all who post and comment here. It describes the practice of forecasting/predicting and how to do it correctly/better. He would very much endorse Delongs IDEA to formulate a bet, although not necessarily the design of the bet as proposed. He thinks more and more betting on things will encourage faster movements towards “truths”, because the science of good betting requires constant updating of odds based on new facts on the ground.

    He has a chapter on sports betting, weather forecasting, earthquake prediction, epidemiology and economic forecasting amongst others. His econ chapter was centered around talks with non other than Jan Hatzius of Goldman (JKH???)

    To me the problem with Delongs bet is that its simply between three people and is likely just for a 300$ lunch or something. Design a contract that expresses the parameters you think are important and put a value to them. Come up with ways to continue to monitor the parameters so you can decide who is “winning”
    and have at it, but get as many people involved as possible not just three economists. I think, like the NGDP idea, that even attempts to do this will be informative and add to the signal and reduce noise.

    The downside of a Nate Silver revolution could lead to more things like the peasant insurance problem, or buying fire insurance on your neighbors house but no efforts to maximize the utility of our human markets are risk free.

    Finally, in my view the first thing that needs to happen before any of these policies will be more than just bandaids is that citizens need to be guaranteed an income. I see no added value to setting the floor at absolute destitution for any one and I see great upside in stability when everyone knows that they can at the very least service X amount of debt payments. How many trillions would have been spared in bank bailouts if people who were facing job loss would have at least known they could continue to make 60% of their mortgage payment without selling all their possessions? How many jobs would have been saved if businesses had not seen so many of their customer go from 2000-2500/month to ZERO in known monthly income?

    How about we not only encourage more Nate Silver type speculation on more important things, but why dont we go the “Full Monetization” with people. Using Beowulfs numbers of our human capital why doesnt every child come with an account at the Fed that starts with 250,000 credits. These can go up or down based on his performance through life. Private banks can still try and help someone maximize their potential and take a portion of their future credits but no one can be stripped to zero by another private entity. Only our elected bodies can do that as part of our justice system.

    I know the Mike Sankowski of the world can figure out a way to design a futures contract, we just need some that when people are betting on them we are getting broad based growth and not just casino activity. I also know that some people have already put a value on our lives……… Well, give it to us …… NOW!!

  23. JKH says

    “Much of what goes on in the financial sector is this kind of rent-seeking. The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top…”

    Those are abuses to be sure. But if that’s what is meant by rent, then the term is even more amorphous than I thought. It seems archaic and diffusive to the point of not being particularly useful, except as a display of loaded language. Those who use it might make a better case by abandoning it for more specific categories.

  24. Cullen Roche says

    As much as I’d love to think you’re right, all of the PKers are still in some rain puddle somewhere between the fresh water and salt water economists. The PK economists haven’t even made a splash worth noting thus far. There isn’t just a long way to go here. There are probably lifetimes. If real progress is to be made we’re going to need someone with a media presence that is similar to a Krugman or a Friedman. Someone who can make that splash. I don’t think that person exists in the PK world, unfortunately….At least not as far as I can tell.

  25. beowulf says

    However any additional money issued (maybe by using a TDC) above the value of this output is only backed by the government ability to cover this increase of money with future governmental surpluses if you want to avoid inflation.

    Right, that was Edison’s point. It would be American taxpayers who’d fund these “future governmental surpluses” (if necessary, running a surplus sounds a lot like overtaxing). :o)
    I really don’t have any disagreement with what you’re saying, Oilfield. I just like throwing out those human capital stock numbers because the sums are so cartoonishly large compared to the public debt total– I don’t think I’ve used “quadrillion” before for anything else. :o)

  26. Tom Hickey says

    Yes, there are some major voices coming online now, including Joe Stiglitz and Jamie Galbraith. Jeff Sachs is also getting excited although he hasn’t figured out just where he is coming from yet. Neil Barofsky is also making waves.

    The focus is turning to inequality, cronyism, and corruption, and this is a lead into the rent-seeking v. productive contribution issues that underlie. It seems that Andy Haldane gets this, for example. I suspect it won’t be long before we hear a lot more about Schumpeter and Minsky, for instance. Post Keynesians should have a leg up here.

  27. beowulf says

    OK guys we’re sort of going into the weeds on this. Let’s all listen to the stylings of Joe Stiglitz on this topic.

    “Rent is a return on income that you get not as a result of your contribution but because of your ownership of land. It was a notion that income does not have to rise out of effort or making a contribution…. But economists have generalized that to a much broader usage, which really includes any kind of activity, which is more directed at redistributing the existing pie nationally rather than enhancing national income. Much of what goes on in the financial sector is this kind of rent-seeking. The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top…

    There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives…. and workers and everybody else has to swallow their losses… At the same time, they pushed for laws that made it more difficult for ordinary Americans to discharge their debt”.
    http://www.foxbusiness.com/personal-finance/2012/07/03/is-wealth-gap-hurting-all-us/

    I realize Tom offered the duel and JKH was the one who chose the weapons but why are we talking about the T-bond> If there is a financial market that is more efficient or serves a more valuable public purpose (Borrowing on the Credit of the United States, as the courts say, “is a power vital to the government, upon which in an extremity its very life may depend.”)., I’ve never heard of it.

    I’m not saying bond traders are heroes, but their job does provide value to society. Making them the exemplar of what’s wrong with the Finance sector only leaves off the hook the “Man is The Prey of Man”-style capitalism Stiglitz is talking about. THAT is rent seeking, not whatever it is that JKH does in Miami with his team of hot female detectives.

  28. Tom Hickey says

    I am far from well acquainted with the literature on this, but my impression is that there are two views on this. First is the Keynesian one that seeks to reduce saving to the level reasonably necessary in order to reduce demand leakage without increasing public debt, which Keynes didn’t like. Second is the view that non-productive behaviors should be discouraged by tax policy as leading to negative externalities.

    Those adhering to the first view would tax all saving above a certain level in order to encourage consumption and primary investment. Those adhering to the second would institute a sharper line between what is productive and non-productive, taxing what is non-productive at a higher rate.

    Let’s take a corporate bond as you suggest. The most conservative approach would the position that investment is to better from savings rather than debt, so firm indebtedness should be discouraged through tax policy, especially leveraged buyout and other financial engineering. The more liberal approach would be tax revenue from “rent” in excess of gain resulting from productive contribution, which would vary by individual. Coupon clippers would pay a higher rate than workers and those receiving a return on primary investment. As a practical matter when it comes to writing tax policy, if it does, there will be an intense debate over these issues “at the margin” like this. Fixing the boundaries will be the overriding issue, and it will be decided by who holds the stronger hand after all sides make their case.

    There would be considerable debate over the margins when this gets legs, and I think it will at some point barring a return a degree of equality and prosperity that I don’t see in the cards they way things are aligned now. It’s been a lesson in disaster capitalism in the UK and EZ and to some degree also in the US, although the impact is huge in the US due to the relative size of the economy,

    I don’t think that such issues will be come clear until there is greater awareness of economic rent and rent-seeking to the degree that there is debate around it. But it is coming to the fore as the push grows to “broaden the tax base,” which means to tax work more, and to provide relief to corporations that “pay the highest tax rates in the world,” as well as the push to exempt dividends from “double taxation,” capital gains to “encourage investment,” and to repeal the “death tax.”

    Where I see this going is toward a more progressive approach to taxation with higher tax rates at the upper echelons since a great deal of that comes from interest, dividends, capital gains, including land value appreciation, and inheritance. It is very difficult to accumulate great wealth otherwise. There are Horatio Alger stories that are trundled out as a smokescreen to hide growing income and wealth inequality and immobility in the US, for example.

  29. Oilfield Trash says

    Beowulf

    Human capital is an asset which derives its value from output that can be monetized. In this context I would agree that increasing the supply of money to the value of this output would not be inflationary.

    However any additional money issued (maybe by using a TDC) above the value of this output is only backed by the government ability to cover this increase of money with future governmental surpluses if you want to avoid inflation.

  30. Tom Hickey says

    But remember the sharp point of the spear is Michael Hudson, who was a Wall Street economist who left when he figured out what it was all about. And it is not only about economic rent, as he writes in Super-Imperialism. This is all of the piece called “neoliberalism” which is a political POV based on an economic one based on “competitiveness,” which is really social Darwinism. In the institutionalist view to look at this as an economic or financial issue independently of the social and political issues involved, as well as wrt the professed agenda v. the hidden agenda, is to miss the forest for the trees and be taken in.

  31. Fed Up says

    beowulf, I want to assume CA deficit = 0, gov’t deficit = 0, and private deficit is a positive number (meaning in surplus).

  32. Tom Hickey says

    JKH wrote: “How can the productive activity that covers the cost of the bond qualify as non rent activity while at the same time the holder of the bond is a rentier? And if somebody who holds the bond qualifies as a a rentier while somebody else doesn’t, surely that particular criterion boils down to an issue of income distribution.

    It seems to me that issues of ‘qualifying productivity’ are being confused with issues of income distribution, when categorizing rent and rentiers.
    So the term seems to be sufficiently vague as to be ambiguous and even self-contradictory in this way.”

    This sort of issue involving vagueness is generally brought up in discussions of economic rent and formulating tax policy that I have seen. The general answer is to tax all revenue as income progressively, assuming that in the higher brackets the gains are saved, resulting in demand leakage and accumulation of political power at the top.

    Michael Hudson sometimes articulates that view. At other times, he draws the line between establishing the distinction in the tax code between productive and non-productive gain, but I haven’t seen him be specific about cases. I assume that this would be a matter for experts in the areas in question to determine. He seems to think that it is a not a big issue. This kind of thing happens all the time in an IRS audit where one has to justify deductions at the margin of the code. Some you win, some you lose and some you compromise on a settlement. Change in tax policy would have to be sorted out in congressional committees and get past the legislative process since it is fiscal, and there would be a lot of haggling over where to draw the lines. But at least there would be recognition of a design flaw and motion toward addressing it. Now we are moving in the opposite direction.

    My impression from what Hudson has said is that this is not about going after the small fish but rather the big rent-seekers that are generating distortion. His thrust is against the push to tax income from work and un-tax revenue that is not related to work, that is, to make taxation more regressive, while also reducing social benefits, to “make room” for un-taxing the “producers,” mos of whom are not producers at all, but rent-seekers. In this he is countering the neoliberal push that we are seeing today, and the resistance of the financial sector to reform and accountability, along with insistence on a double standard of law and justice for “finance capital,” who are acting like the industrial robber barons that culminated in the anti-trust legislation in the Progressive Era.

    The more nuanced answer from the MMT vantage is Warren’s point of view. Taxation is chiefly to control inflation and secondarily to discourage negative behaviors such as lead to negative externalities. Land rent is not too difficult to establish, but monopoly rent and financial rent are more difficult to deal with, for reasons similar to the ones you bring up. But it’s not necessary to go for the margins here.

    In Warren’s view as I understand it, taxing land rent corrects a large part of the problem, and monopoly rent and financial rent are better approached through legislation, regulation and accountability, along with institutional change through reform, e.g., that puts banks back in the business of plain vanilla banking instead of financial engineering, which would return a lot of engineers and technically savvy people to productive work in industry.

    Again in Warren’s view as I understand it, this would eliminate the need to get into grey areas regarding productive and non-productive when the objective is really to address the obvious excesses that are leading to extreme inequality, economic underperformance, and incentivizing negative behaviors such as led to the crisis and are preventing it from being resolved expeditiously.

  33. Cullen Roche says

    This looks like another case of people confusing the role of primary and secondary markets and the law of securities that all securities issued must be held. These securities further represent money that has been “put to work” in some form of productive use. They are only outstanding so long as that productive need has a lifetime.

    I am surprised Mosler didn’t squash this “rentier” mantra years ago. Of all people he should know that it’s built on a neat sounding political premise that falls apart once you start to dive a little deeper. I get the money manager capitalism argument to some degree, but the generalizations that occur within this “rentier” debate or the idea that “I don’t agree that the financial sector produces real value. at least I’ve never seen any come out of it in the last 40 years” (yes, that’s actually a Mosler quote) are extremist positions that sound nice in theory, but largely fall apart upon closer inspection.

  34. JKH says

    Thanks for that reply, Tom.

    Turning to one specific example that I suggested – a corporate bond:

    Presumably economic rent when discovered is found in the form of income of some type.

    A corporate bond earns income for the bond holder. So it is income of some type.

    Suppose the issuer of a corporate bond is engaged in “productive” activity, defined in such a way that no rent is earned in the activity that is generating income on the bond. It is an ‘MMT approved’ activity insofar as rent is concerned. Fine.

    Now suppose the bond is held by an agent whose income consists entirely of income on financial assets. Suppose the judgement by those who judge these rent issues is made that this is simply excessive – that agent is contributing nothing directly to productive activity, particularly as it relates to that kind of financial asset income. In effect, his crime is that he has saved too much. It seems to me that this is an example of what is often being described as the situation of the ‘rentier’ in modern terms.

    The dilemma is that somebody will hold that bond.

    How can the productive activity that covers the cost of the bond qualify as non rent activity while at the same time the holder of the bond is a rentier? And if somebody who holds the bond qualifies as a a rentier while somebody else doesn’t, surely that particular criterion boils down to an issue of income distribution.

    It seems to me that issues of ‘qualifying productivity’ are being confused with issues of income distribution, when categorizing rent and rentiers.

    So the term seems to be sufficiently vague as to be ambiguous and even self-contradictory in this way.

  35. Tom Hickey says

    Good one. Duly Evernoted. Usually monopoly rent is not even mentioned.

  36. Tom Hickey says

    JKH, I don’t know of any papers of MMT economists that address economic rent. The guy at UMKC that writes about economic rent is Michael Hudson, but he is an MMT “ally” rather than an MMT economists, and some of the MMT economists don’t agree with everything he says. So I don’t know what their position on rent is. What I have said is based on chiefly Hudson.

    When I asked Warren about financial rent, he basically said that his reform proposal would take care of most of it that is problematic if enacted, so taxation would not be needed to discourage rent-seeking in the financial sector. He agrees about taxing land rent, which not rent received from renting RE but rather land value appreciation in excess of owners’ contribution.

    There are in general different views of economic rent, largely because it is a distinction that is ignored by most economists. As Michael Hudson points out, it was central to classical economics, which was a reaction to the landowners living off the “rent” they received without contributing anything to production or productive capacity. Of course, it is central to Marx, too, who saw capital substituted for land but the same “feudal” system applying.

    Analysis of economic rent disappeared when neoclassical economics presumed that money is a veil and markets reflect circular flow which supply and demand maintain at equilibrium. In fact, discussion of economic rent was avoided as “Marxist,” and even Keynesians did not want to get tarred with that brush after what happened to Lorie Tarshis. So the discussion of economic rent has disappeared.

    It was not really until Fisher and Minsky’s focus on financial instability that this came into focus again with the crisis that economic rent is even being talked about in the periphery. Here, some of the MMT like Wray and Mitchell economists have joined with allies like Hudson and Black to attack what they perceive as “excesses” of both the cb and the financial sector, focusing on crime, which is an egregious form of rent extraction. They just call it crime rather than than rent though. :o

    Basically, Hudson’ criterion is that the classical economists. If gains are from production, then they are not rent. If they are not, then they are rent. Hudson’s program is to tax rent and not gains from production.

    It’s not the case that rent is unnoticed in the mainstream. Krugman wrote a blog on it, but it is meager. Who Are The Rentiers? What economists are noticing through is that when rent-seeking becomes more profitable than productive investment then productive investment falls, and the economy gets “hollowed out.” This is a concern with the US and UK economies with manufacturing contracting and being replaced by FIRE as a % of GDP.

  37. beowulf says

    “My view is that modern paper currencies, which we normally think of as unbacked fiat money, are actually backed by the assets of the central bank.”

    “Its like Thomas Edison said (and every instinct tells me Tesla would agree),
    “Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit.”

    Ultimately the value of our currency is backed by the human capital of the Nation. Hmm, wish somrone had worked out a valuation of that– oh yes, some organization (or, who knows, one guy with a website) calling itself the “US Department of Commerce” issued this report a couple years ago, estimating America’s human capital stock at approx $750 trillion (2% inflation alone increases it $15T a year and there’s also the growth in population and labor productivity to consider).
    http://www.bea.gov/scb/pdf/2010/06%20June/0610_christian.pdf

    Now those numbers could be way off— after all the EPA and OMB’s $10 million per statistical life saved estimate (multiplied by 310 million) puts our human capital stock at $3.1 quadrillion. Reasonable minds can differ on this I guess, my point is simply that $3.009 quadrillion of human capital + $1 trillion in US Coinage = $3.1 quadrillion (that equation also work for $749T + $1T = $750T), its an asset swap! :o)
    Inflation is something to guard against, to be sure. We have to be vigilant that aggregate demand doesn’t outrun aggregate supply but with our trillion dollar output gap, I wouldn’t stay up late worrying about it.

  38. Joe Franzone says

    http://www.zerohedge.com/contributed/2012-12-20/why-it-not-possible-be-moral-and-work-bank

    Economic rent seekers is a compliment compared to what this loon is labeling anyone that works in banking.