To me, it sure looks like Summers/Delong just riffed off Scott Fullwiler‘s 2006 piece.
Here is a key paragraph from Scott F’s incredible piece “Interest Rates and Fiscal Sustainablility”:
It is entirely possible I may have read that paper by Scott more carefully and more times than anyone else in the world except for Scott. I dove into it with the work I did on the no-Ponzi assumption.
So when I read the Summers/Delong piece, well, it sure seemed like I’d seen much of the work before. It’s so close to what Scott did in his paper. I mean really close and they should have referenced his paper. They do make an assumption which Scott shreds, g < r (long run real growth is less then the long run real rate) when the empirics show the opposite is the quite frequently true and is true right now.
So a quick Summary:
1. Fullwiler 2006 shows as long as g >r, we can run deficits and we’re fine
2. Summers/Delong 2012 even when g <r we’re fine under many, many circumstances.
Then I should point out Godley’s Theorem: We need to run ever increasing deficits for our economy to grow. We need better exposition on how Godley’s theorem relates to Fullwiler 2006 and Summers/Delong 2012.
I suspect this Summers/Delong model will turn out to be useful. I think we’re going to be able to construct a model for government deficits as a percentage of GDP using their math.
following the theory that the economy needs new money when g>r , and it is gov’t monetary role to facilitate the economy & growth; there is justification for making the monetary tool (money) a national public asset by issuing debt-free money. Get rid of the US Treasury bond market, let private sector savors find alternative investments (stocks, CDs, corp bonds, muni bonds, etc). This would also eliminate the front running and backdoor banking subsidies due to the tremendous amount of money sloshing around the UStrsy “market”.
I agree that the Tsy market doesn’t provide all that much value added. But then even if we go to “debt-free money”, the Fed will still have to pay interest on bank reserves (the cost of which is passed through to Tsy) to peg short term interest rates. The IOR cost will come in about the same as what we’d otherwise spend on net interest.
It’d be better to cap interest rates (say at CPI so real 0% is the max rate for T-bonds). And of course if we issue perpetual T-bonds, what the Brits call consols, they wouldn’t fall under the debt ceiling (no principal is guaranteed to ever be repaid, and that happens to be how the public debt is calculated).
I think there is some amount of value from issuing Treasuries. Here’s what I see as the value: Treasuries indicate the level of comfort people have with current private sector investment opportunities. It’s a form of null vote on the private sector.
Yes there is a load of problems with issuing treasuries too. I thought I’d point this out.
I mean, Fullwiler even wrote that this is “well known.” It’d be pretty terrible if they read it and decided not to cite it. I wonder if they read this, http://www.levyinstitute.org/publications/?docid=1379, in which Galbraith cites Fullwiler 2006.
I have issues with such papers.
The conditions rr saying for the opposite) are useful but by no means the only condition.
For example, in a closed economy I can have r>g and still have the public debt/gdp ratio stabilizing in projections.
I can have r<g and public debt/gdp rising forever. For example take a case where the current account deficit keeps rising forever. Since by sectoral balances the fiscal deficit is related to this, and fiscal deficit also keeps rising and as a result, the public debt/gdp also keeps rising.
Oops the comment removed something. I meant this in line 2:
The conditions r (less than) g (or r (greater than) g for saying for the opposite) are useful but by no means the only condition.
Here’s Fullwiler on the money monopolist debate:
http://mikenormaneconomics.blogspot.com/2012/03/joseph-laliberte-and-circuit-careful.html
I am not sure why they’re so keen on using the term money monopolist when even Fullwiler admits that it’s a vague term. Monopoly has a specific meaning. There’s no money monopolist even by their own admission. Scott says the government has a monopoly on certain thing, but then they go and cherry pick when the government will be a price setter and when they won’t. Heck, they don’t even support the government setting the price of its own interest. They think it should just settle at o%.
MMT is filled with so many contradictions and political grabs that it’s amazing it’s gotten this far without anyone calling them out on all of this BS.
Scott’s always crystal clear on this unlike most of his colleagues. My beef was never with anything Scott said because I know he gets this right. It was with the term “money monopolist” and other vague comments that imply the govt is the monopolist on all forms of money. So Scott clarifies that govt is the monopoly supplier of reserves, notes and bonds. I’ve never disagreed with that. But I think they abuse this position and extrapolate it out when it’s convenient to do so. If they were true to this belief they’d be consistent across all forms of money that they’re the monopolist of. Set the price of all govt debt across the whole yield curve. Don’t let the market set it at all. Set the price of net financial assets and everything the govt buys. Hell, Warren says it’s a political choice to allow the horizontal system to set the price of credit so why not take MMT to its logical extreme and just set the price of credit also! Create a true money monopoly!
As I keep saying, the only way there’s a money monopolist is if there’s one vertical component. At least Bill Mitchell has the balls to admit he’s in favor of a nationalized banking system. He knows the state theory renders the horizontal component unnecessary. They all know it. That’s why they rip on the banks endlessly. They hate everything about private banks, but they pretend not to be in favor of nationalization. They all are whether they admit it or not. The state theory renders the horizontal unnecessary. MMT should be in favor of this one vertical component, but they’re not because they know that admitting that would torpedo their movement. They’re just playing politics with this monopolist idea. Nothing more. They use it when it’s convenient to push a policy forward and they don’t use it when they know it would be viewed negatively. So why do they cherry pick when the govt is a monopolist and when it’s not? Because they know the govt isn’t a money monopolist, that this would torpedo their state theory run movement and that the govt isn’t justified in setting the prices of most things because it’s not a money monopolist.
Besides, the whole system is designed to avoid this sort of concentration of power. That’s why the banks wield credit creation control. They’re the buffer between the govt and the non-govt. There is no money monopolist and having monopoly powers on portions of the money supply doesn’t justify them cherry picking when the govt gets to act like a monopolist and when it doesn’t. And it certainly doesn’t justify the govt acting as a NFA monopolist which is about as vague a concept as it gets. If they were actually consistent and true to this whole money monopoly idea then they’d be in favor of the Fed aggressively setting prices (like setting long rates via QE), aggressive price fixing at tsy auctions, aggressive secondary market price setting and the Tsy setting the price of every penny spent through spending. But they’re not in favor of this approach because they know it would be viewed as statist, extremist and would destroy MMT. So they conveniently pick their spots with this idea and it’s all for political purposes. 100% politics. QE and monetarist approaches don’t sit well with them so they don’t support the Fed setting prices. But the JG and fiscal policy. Well that’s Keynesian and in-line with their politics so have at it! And again, they’re inconsistent about things….Not surprisingly.
Cullen, I think you are dead wrong here about the degree to which MMT economists are leftists. Radicals like Peter Cooper of heteconomist.com and myself are much further to the left of MMT, which we often criticize as a compromise with the status quo, making things a tad better for the folks at the bottom but still shoveling the bulk of income and wealth to the top.
For example, while I think that the MMT JG is a step up in the present system, I reject it as a solution since it ratifies the commoditization of labor and implicitly agrees that capital is the significant factor for the economy. I len support MMT as compromise for pragmatic reasons, and, of course, reject MMR as a rightward step from MMT, as I have said before.
I think that accusing the MMT economists of being closet leftists is just unwarranted. I would put the MMT economists as a group at either at the center (Warren) or to center left (Wray and Mitchell) based on their blogging. But none of the them are leftists in the traditional sense (like Chomsky), let alone radical left (like David Graeber).
Moreover, AMI and Stephen Zarlenga are advocates of direct Treasury issuance and the abolition of credit money. The MMT economists have never agreed with Zarlenga or supported AMI, although Michael Hudson has aligned himself with AMI. Michael was Dennis Kucinich’s economic advisor during his presidential run. Dennis Kucinich was a supporter of AMI and Zarlenga’s proposal and submitted it as a bill that went no where, of course. He also sought common ground with Ron Paul on some issues. But Kucinich’s seat was abolished in the recent redistricting and he lost the primary for the remaining seat, so he is out.
I agree that once once understands how the monetary system actually operates a whole lot of things become possible. Radicals want to use this to build an entirely different type of society. The MMT economists are not radicals in their approach, and you have greater knowledge of what they “really” think than I do, but my take is that while they are more toward the left than center, which is already pretty far to the right in recent years in the US, there is no actual left operative in US politics. It just is not viable here at this time and has never been a strong political force in the US historically.
So you don’t even support the JG, but you’ve gone and wasted all this time supporting MMT? You’re not even an MMTer. Why waste your time with all this? You and I both know MMT is dead in the water. It’s a total political non-starter. They poisoned it with the JG. Anyone who can’t see this is blind.
Hi Tom,
Thanks for reaching out. Please don’t take what follows in a mean way. I am not writing it with anger.
We’ve been told over and over again the JG is a central component to MMT. It’s impossible to not support the JG and call yourself an MMTer.
But that’s beside the point you’re making here. The point is about how far to the left MMT is.
MMT is extremely left wing. I didn’t think so when I first saw it because I was exposed to it through Mosler. I was wrong. Mitchell supports nationalizing banks and his primary goal is to get a JG.
Here is my main beef with MMT – and a demonstration as to why it’s very far left. Why is there no EXTREMELY prominent proposal to decide how much to deficit spend to bring everything into balance? If the system is out of whack due to improper levels of NFA issuance, or the horizontal/vertical ratio is out of whack, well doesn’t there need to be some guidance as to what this deficit number should be?
It’s the single most obvious policy proposal you could make from the core MMT framework.
Not only that, but the mainstream economists freak out when you talk fiscal. You might as well just scream “Zimbabwe” at them. Unless you had some reasonable guidance on how fiscal would expand and contract in response to the needs and pressures of the economy.
I was involved with MMT for about 12-18 months before I noticed this obvious lack of addressing the problem. I thought about the TC rule for several months before publishing the first work on it.
They were either so stupid and incompetent (Mosler, Wray, Mitchell, Fullwiler, Kelton – they are not either stupid or incompetent) they didn’t realize the lack of a full fledged rule on fiscal guidance would be necessary, or they had other priorities.
This shows to me they don’t care about the deficit spending as much as they care about the JG.
Now, even if the JG is the most efficient method of hitting effective demand (and I suspect the efficiency improvement isn’t all that substantial- could be wrong as I haven’t gone through the math with a comb yet) ,even if it’s the most efficient, you still need a level of deficit spending to bring the rest of the system into alignment.
Because it’s obvious from just glancing at the suggested sizes of the JG, it’s not enough to bring the economy to full capacity. Not kinda obvious. 2×4 across the face obvious. Obvious enough that I noticed right away without even doing any real complex calculations. It was a few calculations in R that took about 2 minutes.
If the focus of MMT was on making the economy hum, this work would have been done first. This work would be the most prominent.
Wray’s book would have been titled “UMM: The key to economic growth and full employment. ”
That’s what MMT could have provided as well – very high economic growth. Mosler has said several times growth could be 10% plus if you get the policy right.
And guess what, the years of research would have been focused on figuring out how much (and where to focus it!) deficit spending was needed to make it all work, that series of equations would have been frackin’ Nobel Prize winning equations with the “side effect” of making billions of lives materially better far more rapidly than the JG.
Now, you can argue from a social justice perspective full employment is more important that economic growth. It’s entirely possible you might have this structure in mind. I do not agree with this. Maximizing real world growth blows away full employment, because just 2 decades of 5% real growth vs. 2.5% real growth means 2.5 times as much real world wealth. 30 years means well over 3 times as much real world wealth. It’s like going from 1900 to 2000 in 30 years instead of what we normally expect.
Still, we’ve seen in the real world over and over again, when economic growth is high, the lower classes tend to make large material gains in their well-being.
Even better, Godley’s matrix gives us massive insight on how to make this growth work well for all classes. We can “structure” an economy where the lower classes make large gains in their well being. Hell, the workhorse Kaleckian is part of this too.
The flagship policy proposal of MMT is the JG. It is not reducing the payroll taxes as per Moslers proposals. Yet, of those two policy proposals, Molser’s payroll tax reduction would have a far greater real world impact on the number of jobs created and the real world growth. The JG gets special name changes, like from the clunky “employer of last resort” to the “Job Guarantee”
Then, while banks are dangerous institutions which aren’t net profitable over time, banks can be a fantastic way for the private sector to make their priorities known in the real world. Of course we could ban them or neuter them or eviscerate them entirely, but why in the world would we want to deny this channel of expression to humans and to the private sector?
I was entirely surprised not a single MMTer didn’t pick up on the little joke I played in that post about banks not being profitable. I basically argued in support of a non-market reason to support non-profitable institutions. Ya know, like governments are not net profitable over their history. People said it was a good reason to get rid of banks, but they didn’t make the obvious extension to other not-profitable institutions. ha!
What are we to conclude from this strong emphasis on the JG and state money and the corresponding lack of emphasis on economic growth? I am not trying to be mean with this question.
Tom, I am not on the right. I’ve never voted for a republican in my entire life. MMTers are far to the left of me.
I don’t even really mind the JG all that much. I think it’s a decent idea. It has some strengths. It’s not a slam dunk for many, many reasons. In the end, who cares? I don’t care that much. It’s just one proposal of many to get the economy moving and people back to work.
I like the ones we can actually get passed sometime in the next 5 years. Something like, extending and increasing the already existing payroll tax cut. key words: already existing
It might be a good idea to link the amount of the payroll tax holiday to how the economy is performing, as measured by indicators like unemployment. Rules like that would make David Beckworth much more comfortable with fiscal policy.
But someone does care. Always remember when we said we didn’t 100% support the JG and think the private sector interactions are as or more important than the public sector, we were called names.
Moving the focus from public sector issues to looking at how the private sector works and less than 100% support of the JG is enough to get us called names my 4th grader won’t use because he goes to school in my very liberal town of Oak Park, Il, and knows they are offensive.
I agree the U.S. is extremely right wing. I don’t agree the main MMT proponents are centrists.
I think the intellectual provenance of this notion goes back quite a bit further.
https://server1.tepper.cmu.edu/Phd/DCA/samuelson.pdf
Cullen and Mike,
You are bright fellows. But I am a little surprised that it took you this long to figure out that MMT is all about left wing politics.
lol! But, but, but if you just look at core MMT operational observations its not left wing at all!
Well, come on now. They want full employment, which they suggest going about through a particular, extremely and overtly interventionist method. They’re not talking about guns, foreign policy, affirmative action, abortion, the environment, etc., much less annoyingly intrusive local government initiatives.
So long as you come to grips with the reality that a gold standard is stupid and we’re not operationally revenue constrained, and hold (as I see it) the opinion that all unemployment sucks enough to intervene en masse, you could accept MMT and be pretty darn right wing otherwise.
“the opinion that all unemployment sucks enough to intervene en masse”
If you read what the MMT economists have said, they see no need to intervene en masse with an ELR to correct UE. They emphasize that the bulk of the lifting of effective demand that keeps the output gap narrow is fiscal policy. The MMT JG is conceived as limited in size even counter-cyclically.
The notion that MMT address UE chiefly through the MMT JG is simply erroneous and is not borne out by the testimony of the MMT economists, who when asked about it have always explained that MMT is a demand-driven fiscal approach based on Godly, Lerner, and Minsky, which is based on Warren Mosler’s “Soft Currency Economics.” The JG is only key to MMT macro in the sense that it make MMT macro more effective at using available resources, hence more efficient than solutions that resolve the UE issue by redefining UE using, for example, a supposed natural rate.
Just out of interest.
What would it take to get to the right of you guys?
You know for future reference.
You’re joking right? I know Mike and I are super liberal on social issues and in favor of much more govt spending currently. I know center left is right to MMT, but come on. If you guys are ever gonna take MMT anywhere then you need to be a bit more reasonable….
Funny how everyone is the centrist and the other guys are way off on the margins.
So much of politics is positioning relative to whatever conventional opinion is at any point in time. Consider, someone running for President 100 years ago who stated that state laws banning interracial marriage are unconstitutional and should be struck down by the courts would be declared a left-wing radical and would risk being lynched if they campaigned in the South.
And yet today, no candidate, liberal or conservative, Democrat or Republican would dare make the contrary argument. They’d be instantly tagged as a right-wing racist (and to answer your question, THAT would get you to the right of us). Heck, the most conservative member of the Supreme Court is a black man married to a white woman. I wouldn’t be surprised if, in another hundred years, the most conservative Justice will be a gay man married to another man.
Thanks for taking the time, Cullen. As I have said, I support MMT as the most practical way to deal with the challenges facing the country and world, which to me center on distribution effects. MMT has a comprehensive macro package that addresses this when combined with the aspects of Post Keynesianism that they adopt.
As I have also said, when MMR has a comprehensive macro package that challenges MMT, I’ll consider it, too. But from what you folks have stated so far it is a repackaging of moderate Republicanism, which will be its appeal. Good luck with changing the orientation of the GOP to get it considered as policy. Without such a shift the US is headed for some hard times as a deeply divided country and political gridlock.
Tom,
You’re always very pragmatic and rational. I have a huge amount of respect for your perspective. I am surprised, however, that you reject the JG and still support MMT so vehemently. You know full well that you’re not MMT. The JG is their foundational piece. Rejecting it means you’re not MMT. You’re probably closer to what we are. Yet you’ve gone and railed against us at many different occasions and you attacked my positions endlessly without ever disclosing that you don’t even support the JG?
It all seems very inconsistent to me. And this seems to be the growing concern with MMT. They’re not consistent in their positions. They waver when they want and when it’s politically palatable to them. You yourself have said that MMT and the state theory renders the horizontal component unnecessary. You MUST know that my position on one vertical component is the only logical MMT position. If the govt is to be a true money monopolist then it should set prices on all forms of money that it’s the monopolist of. Bonds, reserves, notes, NFAs. But MMT is incredibly inconsistent here. They choose to fix prices when it meshes with their politics. It’s political to the point where you have to be totally blind to not see see what’s being done here. I am very confused by your recent comments and positions….
Best,
Cullen
Cullen
MMT is flying. Haven’t you noticed ?
Put MMR into Google and see what you get.
Some mischievous Brit misstated MR in a post to you and you grabbed it.
You’ve tried to hijack the ideas and failed and you don’t like it so you attack the guys that gave you the insight into whats actually going on in the first place.. That’s childish.
You guys have missed the Boat and are no longer relevant. Sorry but do please keep promoting the ideas. It’s good PR. No doubt about that and I’ve said it before. I’m impressed with your persistence.
Tom. Your’re too nice to these guys.
Nice Andy. Thanks for coming in and perpetuating the MMT reputation as being abrasive, childish and rude. You do yourselves no favors by writing comments like these on other websites.
As for Google. I pretty much have a monopoly on google searches for MMT. Not only does Pragcap show up #2 under a search for “Modern Monetary Theory” (only behind Wikipedia) but it’s the only MMT related website that even shows up on the front page of a MMT search. Who do you think helped get all this publicity for MMT in recent years? Who do you think got John Carney talking about it? Joe Weisenthal at Business Insider? All over Seeking Alpha where I was their #1 contributor for 3 straight years? Pragcap where I generate more page views in a month than all of the MMT blogs combined? My reach is what helped send MMT into the stratosphere in recent years. You think NEP and Mosler Economics did it by generating 1,000 page views a day? Ha. Come on. Pragcap does that in an hour.
But now you’re quick to come back and bite the hand that fed you for so long. A simple thank you would have been enough. Instead, you all are bitter and ranting on other websites like a girlfriend who got dumped. Move on. You guys kicked your largest and most powerful resource out of the club because he didn’t like your political agenda. You chose politics over getting the core message out. That’s fine. But don’t get mad at me now for something that you all did to yourselves.
Oh, and if we’re so insignificant then why do you all waste so much time ranting and raving about us here and on your own websites? It seems that the only thing MMTers care about these days is MMR. You’ve attempted to hijack this website and others abusing us and tearing my name down. Which is so weird considering how insignificant you think we are…..And here again the MMT theme of being “inconsistent” pops up. Amazing really.
Mike, thanks for the detailed response. Obviously we disagree on many key issues and that’s fine. As Chairman Mao said, “Let a hundred flowers bloom.” In fact, from my perspective as a radical, I see practically no daylight between MMT and MMR wrt to what I think actually counts as important. The use of either a policy tool would be better than the status quo, which is driving the global economy over a cliff. I prefer the MMT position more, since it is slightly more to the left than MMR, and that’s about as good as one can expect practically in the current political environment. In fact, both will meet major opposition from TPTB as they gain recognition.
Perhaps you know that Marx had a dual position as philosopher and activist. As a philosopher to contributed to the development of sociology and economics, he recognized as a counter-Hegelian that history proceeds dialectically through a series of moments, one moment leading to the next through complex causal links that were at that time only beginning to be investigated scientifically. Based on this understanding, Marx acknowledged that the world he want to see, which all were free, would have to wait for its moment.
As an activist, Marx attempted to get ahead of the time-sequence and push things forward radically. Bakunin warned him of the obvious consequences of “the dictatorship of the proletariat,” namely, that it would just result in dictatorship, as the strong wrested power. Bakunin was, of course, correct.
My position is similar. I will argue for it while realizing that humanity is still in its adolescence wrt its collective consciousness as revealed by prevailing institutional arrangements and political choices. It is unrealistic to expect a sudden phase transition in collective consciousness lacking a very strong impact that would generate such a shift, such as took place at the time that the New Deal was politically successful.
I do think that barring such an eventually, although I think that the likelihood of it is actually fairly high when the next crisis hits, MMT present policy options what I see as an iteration within the status quo. I think that there is reasonable hope for progressives to get it and introduce it into Democratic politics in the US.
As far as the size of the deficit, it seems clear to me that MMT uses the sectoral balance approach to determine the appropriate fiscal balance to achieve a full employment budget using functional finance, with an MMT JG to mop up residual UE. Looks pretty well thought out to me, but I am not a macroeconomist either. Anyway, it is the most completely worked out option there is on the table that I can get behind. If MMR develops a macro theory that demonstrates better policy options, of course, I will consider it.
OK Fair enough. Its your website so I’ll have to take that.
I guess I’m trying to help make the rift permanent.
You won’t hear from me again.
You guys have done a very nice job of making it clear that the rift is permanent. I am confused why you feel the need to constantly attack our positions if you truly believe we’re insignificant. Sadly for MMT you guys keep nipping at my heels and I keep digging deeper and deeper into the flaws in MMT. All of your sniping and anger is coming back to haunt you. You’ve turned a would-be ally into an enemy. Which is something you all seem to be very good at. You’ve burned bridges with almost everyone who should be an ally. And it’s this abrasive and nasty attitude that’s to blame. I’ll give you a brief tip – try to stick to the facts when commenting online. You represent a fringe movement. And all of your comments matter. So try to be nice, stay on point and stop commenting on other websites in the manner you’ve done here. It’s destroying MMT.
Cullen, reject the JG and you are back to NIARU and Taylor rules as far as I can see. IIRC, Mike said recently that he was fine with a natural rate of 4%. I reject that if it is unnecessary.
A fundamental issue in macro is the trifecta of production, employment and price stability. It’s in the Fed’s congressional mandate. The conventional approach is a trade-off of employment for price stability. The MMT contention is that full employment (full use of resources and no output gap) along with price stability optimizes production, resolving the trifecta more effectively and efficiently than other macro solutions on the table. MMT does this chiefly through the sectoral balance approach and functional finance with the MMT JG mopping up the residual of UE due to the calculation problem. If you have a superior solution for resolving the trifecta, work it up and put it on the table, and I’ll consider it.
Tom, I’d be interested how you view MMT’s ranking of that trifecta. I would proffer that its FE > PS > Production under the MMT perspective seeing as how the JG has been described as their “most important policy”. Would you agree? I think MMR takes a bit different approach with Production > FE > PS. Thoughts?
I too would like to see that ranking.
“Funny how everyone is the centrist and the other guys are way off on the margins. ” Exactly.
At least I admit that I am way off in left field as a radical (anarcho-communitarian), but I am confident that this will be a centrist position some day when humanity matures more and focuses on integrating the Enlightenment ideal of liberty, equality, and community/solidarity as basic to human nature.
The Great Experiment is still being worked out. When asked what he thought of the Great Experiment recently, a Chinese leader said that it was still to early in the game to tell how it would work out. History advances in fits and starts rather than linearly — like sail boat that sometime has the wind behind it and at other times has to tack off course to make progress. But history has demonstrated a liberal bias, so I am optimistic.
Can you cite where MMT economists assert that the JG is their “most important policy”? Scott Fullwiler recently made clear that the JG is ancillary to the sectoral balance approach used to determine the appropriate size of the govt fiscal balance wrt changes in non-govt saving desire and the use of functional finance to implement fiscal policy to supplement automatic stabilization as called for.
Due to the calculation problem that Austrians are so fond of pointing out, it is not possible to fine-tune fiscal policy or automatic stabilization to achieve FE as MMT defines it (transitional only). The MMT as a buffer stock of employed is used to mop up the residual. The MMT also includes a wage floor as price anchor in response to Minsky’s pointing out that even with a minimum wage, if a buffer stock of unemployed is used instead, then the actual floor wage is zero.
The SBA and FF enable fiscal adjustment to a full employment budget, therefore a minimal output gap and idling of productive resources. The horn of the dilemma here in the trifecta is price stability, which MMT claims its approach avoids without resorting to monetary policy determined by an arbitrary natural rate. The floor wage as price anchor plays a role in this, so that the MMT JG does double-duty. That’s different from Minsky’s ELR.
The challenge that MMT macro presents to opponents is twofold, first, to show that MMT claims are untenable, and/or secondly, to put forward a macro solution that is more effective and efficient than competitors in addressing this trifecta — which, of course, is not the only major issue in macro. But it is the big one that MMT has focused on, and which has so far been intractable.
As far as production >FE>PS goes, MMR needs to show how production>FE deals with residual UE above transitional. For example, IIRC Mike said he is OK with the current definition of the natural rate of about 4%. That leaves several million people in the US with a minimum wage of zero, idle resources deteriorating, and social problems compounding.
Tom,
Wray says it in this piece. http://neweconomicperspectives.org/2012/02/mmp-blog-38-mmt-for-austrians.html
And please let’s not obscure that the JG might even be MMT’s most important policy. It’s the “base case” according to Warren. “Crucial” according to Pavlina. And Mitchell can’t go a single post without pushing it. Is there really ANY question at all that the JG is MMT’s silver bullet? No. Personally, I am kind of surprised at how some of you try to hide this. I think some of you know it is the albatross around MMT’s neck (that opens Pandora’s box to the truth about your perspective on the monopolist and state theory) while others don’t think MMT should obscure this point in favor of playing politics (Mitchell is extremely upfront in this regard and he should be applauded for taking that stance).
You didn’t really answer the question. Are you saying that MMT is based on FE>PS>Production or even FE>Production>PS? It appears you are. Correct me if I am wrong.
Wray says, “Perhaps the most important policy pushed by most MMT-ers is the Job Guarantee/Employer of Last Resort proposal. This provides a federal-government funded job to anyone who wants to work, at a uniform, basic compensation (wages plus benefits).”
Here is is talking about public purpose and policy recommendations based on macro conclusion. I would agree that the MMT JG is MMT’s most important policy proposal in that it is justified on the basis of a macro theory that makes MMT unique rather than an elaboration within the existing state of PK. The point here is that the MMT JG is part and parcel of a macro theory that claims to achieve what no theory had attempted successfully before, namely FE (less transitional) along with PS.
The macro theory underlies the policy options it makes available as the rationale for why they can be considered to be viable options in the first place, rather than simply ideological preferences. MMT can argue, for example, that unlike most other macro theories, it builds not a non-empirical assumptions but rather a description of the existing monetary and financial system. One cannot just put forward policy options without showing that there is good reason to think that they will actually work. That’s what the macro does. So the MMT JG as policy prescription is a particular option suggested by MMT macro in which it plays a central and foundational role.
One can attack that theory and policy recommendations based on it by showing the theory to be lacking in some way that would make the policy option not viable, for instance, or one could propose another macro approach that resolves the issues in a way that is more effective and efficient, given policy goals such as the Fed mandate that monetary policy is supposed to use as a guideline.
The sectoral balance approach is from Godley, and functional finance is from Lerner. Nothing new there. However, although the JG/ELR is from Minsky, the MMT JG is an MMT innovation. There are three major factors that distinguishMMT from what had gone before. The first is Warren’s “Soft Currency Economics” that launched MMT initially, and for that Warren is acknowledged to be the founder as well as an original developer.
The second factor is the organization of prior knowledge into a macro theory specifically addressing the trifecta of production, FE and PS. MMT accepts the PK analysis of production, circuit theory, etc, and focuses on reconciling FE and PS. through a PK demand-driven, fiscal approach that is offered as a superior solution to monetarism and monetary policy based on NAIRU.
The third major factor distinguishing MMT from previous PK theory is the MMT JG, derived from Minsky but developing the concept in a unique way. So the MMT JG is part of the macro theory and then is featured as a policy prescription on the basis of the theory. Btw, the MMT economists have said that they regard it as unlikely that the entire set of MMT policy recommendations would be implemented all at once, and that they are fine with an iterative process in which the MMT JG is not implemented initially.
However, they also caution that the entire MMT set of policy options fits together as a comprehensive solution and should be implemented simultaneously for best results. So if there are problems with an iterative approach, don’t blame them for “MMT not working.” They also say that adopting any of the elements would be better than not, even though this would not the integrated solution that the macro offers.
Yes Tom. We’re all familiar with how MMT is structured. What I am asking you is whether you believe MMT’s order of the trifecta would be FE>PS>production? Or how would you order it? You seem to agree that the JG is the foundational piece of MMT and that you can’t have MMT without the JG. Do you agree with all of that?
“What I am asking you is whether you believe MMT’s order of the trifecta would be FE>PS>production?”
I have never heard the MMT economists address this, and I am not well versed enough in macro and the MMT professional lit to give any sort of definitive answer. Basically, the PK-MMT approach is demand-driven and NAD drives production and investment. This is the basis of the sectoral balance approach and FF to adjust NAD to the ability of the economy to expand to meet it at FE while also maintaining PS. Based on this I would say, maintaining NAD at the appropriate level optimizes production (uses of available resources including human resources (FE). Then the issue become maintaining PS as well. But as I say, that is my take, which may not adequately summarize theirs.
“You seem to agree that the JG is the foundational piece of MMT and that you can’t have MMT without the JG.”
I suspect from what I have read that the MMT economists would say that without the MMT JG the macro theory could not claim to deliver what it promises — FE and PS. (Warren: you can implement the rest without the jg, but don’t blame me if you get inflation.) Lacking the MMG JG MMT would be a PK-type demand-driven theory with the add of an description of monetary and financial ops and emphasis on the distinction between horizontal and vertical money as a foundation. So, as I see it, it would still be much more powerful than the current approaches put forward by New Classical and New Keynesian economists who ignore or downplay these factors.
It would be a macro theory that would be based on the Minskian cyclical theory, with horizontal money dominant pro-cyclically with the result that financial instability would set in and bring about a crisis. Vertical money would come more into play counter-cyclically to prevent the collapse of the credit system into debt-deflation resulting from forced liquidation. The sectoral balance approach and FF would still be used to adjust the fiscal balance to non-govt saving desire, but there would be a residual of UE that would result in idle resources and inefficiency, as well as ineffectiveness is meeting the policy goal of FE with PS. So fiscal policy would not be terribly more effective than monetary policy in meeting the Fed mandate. But it would still be an advance over existing solutions, as far as I can see. Again, this is my own view based on limited knowledge, and I don’t know whether any MMT economist would see it this way.
Well it seems pretty clear to me (and many others) that the policy initiatives are built around their “most important policy” which concludes FE as MMT’s primary goal. If they weren’t then MMT would be built around something like the TC Rule and not the JG. But all roads lead from the JG back to the JG. MMT has taken this monopolist argument and the state theory and neglected other potential goals that a society should have. Production is really MMT’s achilles heel. I know they stress production in much of the research, but it doesn’t take much to realize that they take it for granted and in some cases even claim that a society need not produce that which it can import from abroad. This is why they view the CAD as a non-issue and it’s why they think the govt can just always fill the demand void by spending more. Never mind that the quality of production might be on the decline! Just print away! Boy is that misguided….MMT is not balanced in this regard despite what will certainly be claims otherwise. MMT ers will claims that FE is synonymous with optimizing production, but that’s easily proven wrong and I could do it in 10 minutes with their own research. I think they’ve gone all in on the JG and you and I both know it doesn’t do nearly what some proclaim it will. The whole policy agenda is totally baffling to me in all honesty. It just wreaks of politics and not good sound economics. Which is really unfortunate because there’s a lot of great economics in MMT. But it’s all overshadowed by this mythical money monopolist, state theory and job guarantee nonsense.
Not only that, but the mainstream economists freak out when you talk fiscal.
Michael, I know what you’re talking about. But this doesn’t strike me as a particularly powerful reason for backing away from pushing for renewal of activist government which deploys fiscal policy energetically in pursuit of public purpose and macroeconomic goals. Just a few short decades ago fiscalist and Big Government approaches were entirely mainstream. Then we got hit with the monetarist wave and the Chicago-school counterattack. But these things go in cycles.
I’m 52 now and have lived through too many shifts of ideological currents to be intimidated by what trends are currently hot and what trends are not. Ten years ago, only the furthest left activists were defending gay marriage and the majority of Americans freaked even over the suggestion of civil unions. The trends all changed rather rapidly. I personally feel confident the same thing is going to happen in macro. We’ve be living through a bitterly anti-government era in the US, but I don’t think it’s going to last forever. The foundations of the big theoretical stuff we have been saddled with for a while – rational expectations, Ricardian equivalence and crowding out, efficient markets, self-organization and self-regulation – are all crumbling in the continuing aftermath of the financial unraveling and a host of economic pathologies that have been spawned in part by these theorists. Things are going to change.
I personally don’t see why you care so much about appealing to market monetarists and others of that ilk. I like Nick Rowe’s blog very much, and respect the sincerity and commitment of the market monetarists in general. But I just think they are really wrong about the way the monetary system and real economic institutions work – especially their “hot potato” theory and Friedman’s demand for money framework. They have a deep, deep distrust of every part of the government that isn’t run by a central banker. Their attitudes still have a lot of contemporary resonance, but I think it’s all part of what – looking back 10 or 20 years from now – we will regard as an extreme and self-defeating intellectual trend.
Basically, I think the American people are ultimately going to weary of a government that can’t do anything important any more, and has been castrated by decades of libertarian-conservative-laissez faire attack on government capability.
On policy rules like the TC Rule, that is also a matter that I think MMTers are right to treat as of decidedly secondary importance. One thing that attracts me to MMT is its emphasis on institutions and social analysis and understanding, and on general methods and approaches as opposed to highly mathematized technocratic modeling and policy rules. Get the right institutions in place with a commitment to the right general principles and the right articulation of power and responsibilities, and then leave it to the people running those institutions to adapt the mechanisms and rules as needed.
Again, I’ve been around too long to be captivated by these kinds of Fancy Dan policy rules. The monetarists and the New Keynesians who have been influenced by them have been changing their proposed policy rules every 5-10 years since they have been with us. The rules never work as planned, and so they junk them in favor of something else. The economy isn’t a well-ordered machine that can be controlled by adjusting knobs to the right levels. It is a complex, ever-evolving, endlessly creative and metamorphosing human social system. There is no final answer.
Nobody would ever ask some new CEO at a company to present some kind of formulaic rule for guiding the company on the basis of some aggregate quantity measures. You expect the CEO to have a coherent broad strategy, and to constantly stay abreast of dynamic changes in the business world and use some smarts to keep the company growing and thriving. We shouldn’t expect macroeconomic management at the national level to work any differently. I prefer policy flexibility within a coherent framework of social-institutional understanding.
Cullen, in my view, this is an incorrect understanding of the logic of how the MMT approach to macro works. As Scott Fullwiler has said, MMT doesn’t say a lot about production in that it accepts the basic PK demand-driven approach. What adds to this how to maintain effective demand at the optimal level at which the economy can produce using available resources, therebyy maintaining FE.
There is always a residual of UE in a modern economy since productivity increases mean that the private sector will not create enough jobs for all, even in the best of times, so either the actual minimum wage falls to zero or government picks up the slack. The tough nut to crack is FE & PS. This is a central contribution of MMT and so it is featured as an innovation in policy engineering.
The MMT economists have said that if fiscal policy is optimal, there will be a very small UE residual that needs to be mopped up with the MMT JG. Government acts counter-cyclically so this stock will grow and shrink with the cycle.
There are three ways to deal with employment, 1) leave it to the private sector (pure capitalism), 2) leave it to government (pure socialism), and 3) a mixture of the two. MMT economists prefer that the private sector handle most and they would have government assist in this with fiscal policy that maintains efective demand at the optimal level for employment of available resources, with government then picking up the slack where there are more workers then jobs.