Why the TC Rule (and Nearly All Fiscal Rules) are Less Political than Monetary Policy

Hey, we’re making some progress over here at MR.

Steve Waldman had a great post up a few days ago about fiscal rules. Down in the comments about the TC rule, I got some intelligent push back from people about how this blog was supposed to be less political and more descriptive.

People were rightly concerned when they see me coming out the door here at Modern Monetary Realism, swinging with a fiscal policy rule, which is seemingly…political.

But let’s step back a bit. Let’s take into account Godley’s point:

“Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate.”

Now I think we could (?) broaden this theorem a bit, but for now, let’s just accept Godley’s statement at face value.

In plain english, he’s saying:

We must deficit spend if we want the economy to grow.

This isn’t a political statement, or if it is, it’s an extremely mild one. I guess there are some people out there who would  want something like Keynes said was insane:

The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom (Tyler Cowen, I am looking at you)

but only a few crazy people who literally hate civilization want the economy to stagnate permanently and even contract.

What this means is we need to spend. Need to spend. We can’t avoid spending if we like growth. The question switches from “Should we deficit spend?” to “How much should we deficit spend?”

The TC rule is just one of many possible fiscal rules. Clonal pointed out we should use frictional unemployment as the U target.  We can and should have a political discussion about how much to spend.

It seems like the TC rule will point out to us how much deficit spending the economy demands to come to full capacity. There are other ways to decide how much to spend.

But the level of spending is beside the point. The point is we need to spend, we need a government deficit if we want growth. 

This need for spending isn’t political. This is observational.

We should take into account too, the brilliant formulation of S = I + (S – I). This must be – must be – related to the deficits of the TC rule. It’s accounting for Net Financial Assets, and the TC rule gives a suggested government deficit. This Government Deficit (G- T) is definitionally part of Net Financial Assets, which is part of (S – I).

Every fiscal rule proposed is part of S = I + (S -I), because it is a statement in the accounting of NFA.

So how is Fiscal Policy less Political than Monetary Policy? (Excuse the Ben Franklin capitalizations of Important words.)

Well, if my slight expansion of Godley’s observation turns out to be accurate, well, it should be obvious. Because Monetary Policy forces some part of the private sector to become indebted to some other part of the private sector to achieve long term growth.

In other words, Monetary Policy forces there to be winners and losers in our world, and helps to choose them by giving the banking sector special access to the distribution of this policy throughout the economy.

That’s political, very political.

Comments

  1. So what is the best way for govt to deficit spend without causing excessive inflation? What form of deficit spending is the least inflationary?

  2. Dan Kervick says:

    It is evident from abundant historical evidence, backed up by theory, that the private sector cannot generate full employment on it’s own. So I think it follows that:

    The government must hire a lot of people and buy a lot of stuff if we want full employment.

    That is not a political statement. Or if it is, it is only a mild one. Cullen Roche, for example, says he supports full employment.

    I also think that there is abundant historical and theoretical evidence that unregulated or weakly regulated private sector market activity generates ever-widening income gaps over time, and the social pathologies and economic pathologies and downturns which result from severe inequality. So I think we can conclude:

    The government must pursue redistributive policies if we want to avoid damaging income inequality.

    That’s not a political statement, it’s just a statement of fact.

    For a discussion of some of the empirical evidence on the damage wrought by income inequality, see this TED talk by Richard Wilkinson.

    http://blog.ted.com/2011/10/24/how-economic-inequality-harms-societies-richard-wilkinson-on-ted-com/

    It’s just not true that the only people who have advocated moving to a no-growth economy are all “crazy people who literally hate civilization want the economy to stagnate permanently and even contract.”

    Some of them in fact love civilization so much that they want to develop a stable version of civilization, and then maintain that version in perpetuity. I don’t actually agree with this approach, but the idea that the current modern period of persistent growth is a temporary stage in world civilization that would ultimately end in some kind of “steady state” was defended both by Adam Smith and John Stuart Mill, two giants of the classical tradition.

    So I tend to think what we have here in MMR/MMT dispute is a purely political dispute over which political ends ought to be accorded high priority and which political ends are either less important or shouldn’t be pursued at all, with no really important differences over how the economy and its monetary system are actually put together. It is also a classic case of people whose political views match what currently happens to be the mainstream or middle of the road mistakenly assuming that their political views are therefore “apolitical” while the political views of others whose views happen not to be in the mainstream at the present time are “political”.

    Unfortunately, I have yet to see any clearly articulated, non-vaguely stated account of how MMR and MMT are supposed to differ in their understanding of fundamental operational realities and institutional underpinnings of the modern monetary system. The difference appears to be entirely political. So far, I think MMR is just MMT without the “dangerous” and currently unpopular politics – in other words, a politically sanitized version of MMT crafted to be more palatable to political moderates. So I’m going to continue with my general approach of thinking “It’s all just MMT.”

    By the way, I wrote an essay recently in which I defended a full employment economy on a variety of grounds. While I believe the approach I took is fully consistent with the MMT understanding of our monetary system, I did not appeal to buffer stock reasoning or price stability motivations to make my case. You can find the essay here:

    http://www.neweconomicperspectives.org/2012/02/doing-what-needs-to-be-done-facing.html

    The basic idea I defended is that the public sector has unique capacities and responsibilities to spearhead socially vital economic activities, and to achieve a level of social and economic potential that the private sector will not and cannot deliver on its own. I claim that our civilization will continue to fall well short of its potential if we do not meet these responsibilities, and that our failure to address these challenges is due more to stubborn ideology than common sense or clear reasoning.

    I also suggested that mass unemployment is a moral plague, and so a democratic society animated by a pursuit of the public good will use its government to cure that plague.

    • Cullen Roche says:

      Dan,

      MMTers need to stop changing definitions of things to meet their own alternate reality and then claiming everyone else is wrong. If you want to change definitions then fine. But don’t go around saying that everyone who disagrees with you is then wrong. For instance, almost all mainstream economists agree that full employment is the use of all available labor resources used in the most economically efficient manner. But MMT just goes and changes this to mean 100% employment. This is NOT the accepted mainstream definition. So yes, maybe we don’t meet the precise MMT definition of FE, but almost every single other mainstream economist agrees with our definition. Changing definitions doesn’t make everyone else wrong. It just means you’ve moved the goal posts and changed the way people score points. That’s fine in the very small world which applies to MMT, but it doesn’t always apply to the rest of reality. And it certainly doesn’t mean everyone else is wrong.

      Frankly, I am a little tired of MMTers always saying “they just don’t understand our point”. Scott F makes this argument in his latest condescending post on Heteconomist. It’s a common retort. “Oh, that situation didn’t apply because it wasn’t true MMT”. We hear that all the time. For instance, I am certain that if we deficit spend like crazy in the next few years and inflation surges to the high single digits the MMTers will all say “not our fault, the JG wasn’t in place as an inflation anchor!!!” They do the same thing with Zimbabwe and many other examples. The truth is, there’s only one real country that even applies to MMT and even the USA is not fully MMT because we’re not following the MMT policies so they’ve given themselves an out in every situation just in case their theory blows up in their faces….

      But MMTers love moving the goal posts like this because it makes it look like they’re never wrong and instead everyone is misunderstanding their points. It’s misleading at best and detracts from the entire thinking….Fortunately, for those who have seen this from the inside over the years it’s easily debunked and communicated to the lay person. MMTers should be more careful in these vague definitions and even more vague refutations of historical events….

      • Dan Kervick says:

        Cullen, economists have offered various changing definitions of “full employment” since the time of the Great Depression. The one I’m using is basically “everyone willing and able to work has a job.” I don’t claim that is the mainstream view. I just claim its a goal worth aiming for.

        That’s a value judgement, and when I recommend it be pursued by government I’m making a political recommendation. If someone claims that my suggested goal should not be pursued by government, and that some other goal should be pursued by government instead, they are also making a value judgement and a political recommendation. There is nothing wrong with this at all. I just don’t think it is helpful when people who disagree with one kind of politics because they have alternative politics try to represent that disagreement as between some people whose approach is political and others whose approach is apolitical or politics-free, or “without the politics”.

        This whole recent dispute has been political from the beginning. John Carney came along and said that he liked some of MMT, but found parts of it too politically extreme for his tastes. That discussion seemed to catalyze an outpouring from a whole bunch of other people who also found some of the policy proposals favored by MMT too extreme for their tastes.

        The very first post here was not a “Here’s something MMT says about how our economic system works that we think is wrong” post. It was a post recommending an alternative policy proposal.

        I really don’t understand your point about MMT on inflation. When I was fist learning MMT, I asked constantly what MMTers meant when they said government spending is not “constrained”, since that sounded crazy to me. They set me straight constantly. They didn’t mean that there are never any policy reasons to limit or diminish spending, or that too much spending might not under some circumstances result in inflation. What they meant was that taxing and spending are operationally distinct, that taxation doesn’t fund spending, and that the primary macroeconomic goal in deciding on spending and taxing levels is the regulation of aggregate demand. They explained that there are certainly circumstances in which increased taxation might have to be used to drain net financial assets from the economy, and relive inflationary pressures.

        But what they also said was that those were not the circumstances we were actually in, and that the circumstances we were actually in were ones in which government deficits needed to be maintained or expanded, and the production of goods and services fell well below capacity. They said that these recessionary circumstances call for the government sector to expand its deficit – the gap between its spending and its tax revenues – to deliver more net financial assets to the economy, raise demand, and raise production in response to the increase in demand. They claim – following Godley I believe – that there is almost always a shortfall in demand absent a government deficit, given the usual level of private sector savings desires, that the private sector thus needs a continual injection of money from the government, and that surpluses are almost always bad.

        But there definitely is an MMT theory of inflation and price stability. The JG is one key tool they recommend for the maintenance of price stability, but they recognize other methods of regulating the quantity of net financial assets and prices as well.

        So MMTers have never said that the government can always spend without limit or fear of bad consequences. If we ever get serious inflation as a result of out-of-control spending and too much net money creation in a more highly performing economy, and some critics were to say, “you MMTers said we could always spend without limit,” it would be the critics who have moved the goalposts.

        • Cullen Roche says:

          The difference between MMT and MMR is that MMT is a set of policy solutions masquerading as an explanation of the monetary system. Thats the result of embedding the JG in it. I am not here to claim those policies wrong or right, but you’ll NEVER see one of us say a policy option is “central” to our work. Our policies are and will be distnctly separate from our operational explanations. Thats why we’ve set up a webpage with an additional blog. They are separate. Front page 100% educational. Blog for opinions and other stuff….

          • Tom Hickey says:

            Cullen, that is not my understanding of what MMT economists have said. They distinguished the different aspects of MMT quite clearly and hold that MMT as a whole is a macro theory built on a correct understanding of monetary operations in a non-convertible floating rate system.

          • “MMT is a set of policy solutions masquerading as an explanation of the monetary system” (Roche 2012).

            Disagree with you on this, Mr. Roche.

            Actually, so stronger, you are just wrong (respectfully, as always).

      • Clonal Antibody says:

        Cullen wrote:

        For instance, almost all mainstream economists agree that full employment is the use of all available labor resources used in the most economically efficient manner.

        From wikipedi Economic efficiency

        In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.[1] An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:

        * No one can be made better off without making someone else worse off (commonly referred to as Pareto efficiency).
        * No additional output can be obtained without increasing the amount of inputs.
        * Production proceeds at the lowest possible per-unit cost.

        Also from the US Declaration of Independence

        We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

        If I was to take these two together and interpret them, if the economic system had been efficient, then there could be no economic inequality. So from this I gather that most economists when they talk of economic efficiency, they mean the maintenance of the status quo.

        However, if we were to assume, as is implied by the US Constitution, that everybody was at one time in the past at total economic equality. So obviously, in the interim period economic systems must have been highly inefficient to have made so many people so much worse off than other people. It can very very easily be said that happiness is not an absolute state, but a comparative one. If it was an absolute state, then consumerism would never have been possible. As an example, if in a room containing 100 people, 10 people were randomly given a million dollars, then comparatively speaking, 90 people are actually worse off because it breeds comparative envy.

    • “Unfortunately, I have yet to see any clearly articulated, non-vaguely stated account of how MMR and MMT are supposed to differ in their understanding of fundamental operational realities and institutional underpinnings of the modern monetary system. The difference appears to be entirely political. So far, I think MMR is just MMT without the “dangerous” and currently unpopular politics – in other words, a politically sanitized version of MMT crafted to be more palatable to political moderates. So I’m going to continue with my general approach of thinking “It’s all just MMT.””

      It’s early days.

      But the orderly logical development of MMR looks promising.

      At this stage, I find it rather easy to envisage a future scenario in which MMT is interpreted as a particular conceptual derivation of MMR.

      • …easy to envisage a future scenario in which MMT is interpreted as a particular conceptual derivation of MMR.
        Which in turn will be a part of MMJKH. :o)

        The way I look at it is MMR focuses on sectoral balance economics and is pragmatic about which fiscal/monetary/exchange rate policies the govt uses to achieve its goals. I think MMT is certainly on the right track but prematurely pigeonholes a single solution (which, I suspect, predated MMT) to eliminate unemployment, relieve poverty, reduce income inequality, regulate both AD and price stability and who knows what else. As John Connolly would tell you (a great Secretary of the Treasury by the way), “magic bullets” that can hit multiple targets with one shot are a rare thing in this world. Sure, the Dept of Labor should run small JG pilot programs. If they’re a success, scale it up. If they’re a dud, then try something else, but its crazy to go all in with one bet.

        • Dan Kervick says:

          Everyone wants to be pragmatic in the pursuit of their goals, but there is a lot of disagreement about what government goals ought to be.

          The reason MMT writers have attached so much importance to JG or ELR policies, I believe, is because they believe full employment is itself an extremely important social goal, and not just a subsidiary tool that is arguably useful for the attainment of other social or economic goals such as price stability or high productivity.

          The ideal of full employment is an expression of a conception of justice and human dignity in the context of a democratic order based on shared responsibilities and balanced liberties.

          One version of this ideal is expressed by Hyman Minsky in the Introduction to his book Stabilizing and Unstable Economy:

          Social justice rests on individual dignity and independence from both private and political powers. Dignity and independence are best served by an economic order in which income is received either by right or through a fair remuneration. Dependence on expanding systems of transfer payments that have not been earned is alienating to the recipient and destructive of the social fabric. Social justice and individual liberty demand interventions to create an economy of opportunity in which everyone, except certain categories of the population, e.g. the handicapped, earns his or her life through the exchange of income for work. Full employment is a social as well as an economic goal.

          To be pragmatic means that one’e means are well-proportioned to one’s ends. But an appeal to pragmatism doesn’t help much in the debate about ultimate social ends.

          • MMT mixes accounting facts and policy proposal opinions in such a way they are nearly impossible to separate. The debate over the that which I will not name is due to this. It’s like bad journalism.

            We’re very much trying to keep the accounting facts and the policy proposal opinions separate. On the front page, you won’t see the spending suggestions. On the blog, you will.

            If people see the front page and then figure they want to spend it all on the military, well, there you go. If they read Godley’s Theorem and say, well, I don’t want society to grow, I want it to contract, that’s their choice.

            On the blog, we’re going to discuss how to use what we know must be accurate from the front page in a variety of ways. Some of these discussions about how to think about those ideas in good ways, like the post on JKH’s very deep observation(I think that observation will get moved up to the front page). Other posts and discussions will be overtly political discussions about how to use these front page ideas ideas. Other posts will be about random ideas we have.

            But you’ll see very little opinion on the front page. You’ll see as little opinion as we can manage.

  3. The Neochartalists have done this: “Mettre de l’eau dans son vin”.

    Agree about changing definitions.

    There was some concession on the balance of payments constraint at Heteconomist (such as oil imports).

    My guess is that they will gradually shift their opinions around this and they say “we never said …”

    • If the dollar depreciates to the extent that oil prices become a genuine problem, this can incentivise investment in alternative energy sources and fuel efficiency.

  4. ‘King dollar’ simply exacerbates the status quo vis a vis inefficient use of oil and energy consumption

  5. “To be pragmatic means that one’s means are well-proportioned to one’s ends. But an appeal to pragmatism doesn’t help much in the debate about ultimate social ends.”

    That’s fine, but in saying that you position MMT according to a paradigm in which any purported objective presentation of economics must inherently first conform to that that goal and those ends. Furthermore, you’ve positioned “that which shall not be named” as a necessary condition to meet those ends. And that’s OK for MMT’s purpose.

    But it removes MMT from any legitimate claim to a position that represents a clear and objective window from monetary operations into policy optionality.

    On the other hand, MMR has already positioned itself as the presentation that is open to policy optionality.

    That’s the implication of a conceptualization approach that has started out with a differentiated “front page”/open blog structure, as the founders have already described innumerable times, even at this early stage.

    Regarding the nature of policy optionality, a good comparison is that between the necessary MMT condition of “that which shall not be named” implementation, versus the optional MMR condition of the TC Rule implementation.

    MMR is starting out its life with the implicit aim of policy optionality, thereby separating eventual policy choices from objective economic description.

    By contrast, MMT has progressively developed into a more rigidly defined, policy constrained identity.

    My earlier suggestion, while seemingly over the top perhaps, acknowledges which approach inherently has greater degrees of freedom with regard to future policy formulation and implementation, although presumably starting from the same objective facts (and similar description?) as to how the monetary system actually operates right now.

    I see MMT operating with a clenched fist. MMR might operate more with an open hand, so I’d recommend, and expect it will do so by comparison, with flexibility and pragmatism. Goodness, it might even give Krugman a tiny tip of the hat from time to time for saying something useful, instead of fundamentally equating him to destroyer of worlds, as is MMT’s wont. I could see borrowing some of the better notions from mainstream schools, and incorporating those into a descriptive MMR economics (E.g. some monetarist notions, while de minimus and falling short of fully coherent ideas, can constitute useful descriptive points on occasion). But I digress, for it’s not right for me to speak on behalf of MMR in this regard. However, that’s roughly how I’d approach it.

    • Dan Kervick says:

      That’s fine, but in saying that you position MMT according to a paradigm in which any purported objective presentation of economics must inherently first conform to that that goal and those ends.

      I don’t think that’s really true. MMT economists say “By implementing a job guarantee program, it is possible to have genuine full employment without causing inflation.” That is not a policy prescription. It’s a statement of pure economic analysis that is in conflict with a lot of mainstream thinking based on the NAIRU framework. It seems to me that the defense of that single statement is the central purpose of Randall Wray’s book Understanding Modern Money. The statement is either true or false; the analysis that entails it is either correct or incorrect.

      Warren Mosler also has a paper aimed at defending the very same claim: that it is possible, through the use of a job guarantee program, to have full employment and price stability.

      Call this statement MMX. MMX says that a certain kind of policy, achieving certain kinds of macroeconomic results, is possible. People who agree with the statement are nevertheless free not to endorse the policy in question. They can always say, “While I agree that one can have full employment and price stability by implementing a job guarantee, there are other good ways to achieve full employment and price stability without instituting a job guarantee.”

      Or they could say something like, “While I agree that one can have full employment and price stability by implementing a job guarantee, a job guarantee would have other costs or harmful effects, and achieving full employment is not a valuable enough goal to justify these additional costs.”

      I would like to know if MMR agrees with MMX or not. That is not a request for a declaration of policy preferences. It is a separate question from the question of whether the JG policy proposal should actually be pursued or implemented. It is instead a question about economic analysis. I’m trying to figure out whether MMR disagrees with the economic analysis offered by MMT, or whether they agree with it but just refrain from making the policy recommendation.

      • Tom Hickey says:

        Dan: I would like to know if MMR agrees with MMX or not. That is not a request for a declaration of policy preferences. It is a separate question from the question of whether the JG policy proposal should actually be pursued or implemented. It is instead a question about economic analysis. I’m trying to figure out whether MMR disagrees with the economic analysis offered by MMT, or whether they agree with it but just refrain from making the policy recommendation.

        Yes, there are two claims that seem to be conflated. 1) the MMT JG is prescriptive. 2) the MMT JG won’t work. I understand from what Cullen has written he subscribes to both.

        No one has shown that the JG won’t work or do what it says, other than through what academics regard as ranting. As far as being prescriptive, all macro is “prescriptive” in that it address the trifecta of upper-most policy issues — production, FE & PS. You can’t do credible macro without addressing these issues as priorities and prioritization entails preference criteria that function as norms for evaluating success.

        • Cullen Roche says:

          Tom, I quite clearly showed that the JG is a price buoy and not a price anchor. Warren and Scott have both admitted that the JG wouldn’t contain inflation and Warren even admitted that it was never created to contain inflation and might not even increase demand. So there’s a lot of disagreement and misleading commentary regarding the inflation side of the JG. It is not what it’s advertised to be….It will provide FE, but the PS component is totally bogus.

          And this isn’t just “ranting” – I’m getting really tired of those kinds of insults trying to undermine our work because we’re not “academics” (as if it helps to be an academic!!). I find it humorous how MMT economists spend so much time ranting about the flaws of the academic community, but seem to hold themselves in some ivory tower where no one is ever at fault. As if we should trust their opinions infinitely more than the other ivory tower economists who have never created a business in their life. Yet we seem to hold these academics on a pedestal as if they have some unique insight into the ways the world functions. The old saying is, those that do, do, those that can’t teach….

          Outside of the world of economics, we seem to favor experts who have excelled in that which they teach. Great sports coaches tended to be great athletes with unique insights into their area of expertise. Great CEO’s tend to be experts in their specific business or management of others. But in economic academia, it’s very rare to find an “expert” who has excelled in building a company or managing an economy even at a micro level. And then we wonder why these people are perpetually wrong!!!! Could it have to do with the fact that they’ve never lived through the things they believe??? That they have no real world experience in any of this???

          Also, the price buoy argument started with one of Mitchell’s colleagues, Robert LaJeunesse, an academic!!!!!! So if you want to read his “rant” then have a look at his 300+ page “rant”. http://www.amazon.com/Regulation-Sustainable-Employment-Strategy-ebook/dp/B0025CTGMY

          • Tom Hickey says:

            Cullen, I am sorry, but you did not demonstrate that the JG is not a price anchor but a a price buoy. That exists only your own mind.

            • Cullen Roche says:

              I didn’t need to establish it. Warren says he created the JG only to establish the liquid buffer stock. It was never even intended to be a price anchor. Other higher ups have explicitly stated to us in private that the JG does not serve as a price anchor and that other policies would be needed, but I won’t blow up their spot just to make you look bad. :-)

              http://moslereconomics.com/2012/01/09/politics-shifting-towards-jg/:

              “I didn’t design the JG to raise demand. It might even lower it, which would be a good thing, as that would mean lower taxes for the rest of us.

              It’s designed to get keep the unemployed shovel ready to go to work in the private sector, and at the same time reduce the real costs of sustaining an army of unemployed.”

          • Tom Hickey says:

            If that is the case, then MMT as a macro theory that addressed FE & PS has been retracted by the founder. I don’t know who else since you don’t mention names, but if other MMT economists, especially co-developers Randy and Bill, hold this then they should come forth and say that the JG is purely a policy option subject to choice and not an integral aspect of their macro.

            It may be that I am misunderstanding what they were saying, but none of the them ever mentioned it to me, and I have stated my understanding of their position on many occasions.

            If that is the case, then they should just take take down the papers about this and repudiate the position in order to remove confusion.

        • Hi Tom,

          Let’s be clear about the claims. And to be 100000000% clear – the JG is not going to be our focus here. I’d be surprised if we don’t put out some sort of ban on JG comments soon. It’s too much.

          But for the moment, I’ll bite.

          There is also a third claim 3) The MMT JG is politically strangling adoption of many other worthwhile policies in today’s United States

          And a 4th claim 4) The JG is not enough stimulus to get the economy to frictional unemployment.

          For me,

          1) The JG is prescriptive. The TC rule is prescriptive (it chooses to target unemployment and inflation instead of some other demand measures) in a way JKH’s S = I + (S-I) is not. The Godley-Christ Theorem is not prescriptive. The choice of a buffer stock makes the JG prescriptive. Yes, we need a buffer stock, but last time I checked, algebra doesn’t do recommendations on that choice.

          2) The MMT JG could work or could not work. We don’t know. There are lots of problems in implementation. For clarity, I’d separate this into two different ideas: a) Q: Does the MMT JG work in theory? A: it seems to work. b) Does the MMT JG work in practice? A: Wow. Who knows?

          My focus with #2 has been the 2b, Does the MMT JG work in practice? I won’t go into the argument, because it doesn’t matter. I have bigger fish to fry.

          3) The MMT JG is politically strangling other worthwhile programs: This is a slam dunk. The JG is less popular than foreign aid. It’s insanely unpopular. Advocating for the JG insures any advocate is the equivalent of an Austrian gold bug.

          4) The JG is not enough to stimulate the economy down to frictional unemployment: This too is a slam dunk. Imagine we had a balanced budget except for JG spending.

          Three million people in the JG give us 3M * 20K a year = $60bn. This is less than 5% of what the TC rule recommends in deficit spending. In short, the JG is nowhere near enough. How about 15m people in the JG? 15* 20K a year = 300bn. Still, not even close to enough to get the economy moving today.

          This is the hole to fill in bad times. Still there are other times to be considered. Let’s see how it fares with the variance in normal recessions.

          Then how about in good times? A business cycle happens, and 3 million people lose their jobs at 40K a year. This is 60K a year in total for the economy once benefits and employer costs are considered. They all sign up for the JG, and make 16K plus 4K = 20K. This is 1/3 of the amount lost in the economy.

          Where will the other 2/3rds come from? Note, this 2/3rds remains no matter how many people lose their jobs. Y

          Note, this is being extremely generous with the JG costs. Most people in support of the JG have been adamant about the low cost of the program, not the high cost. I gave it 25% costs to help it put it’s best foot forward, to help it add more to the economy! And clearly, it’s still not enough.

          In short, back of the envelope math gives us an estimate of the effectiveness of the JG in impacting effective demand. We can see it’s fantastically under powered for the task at hand. It’s a 15 horse motor strapped to an ocean liner.

          The JG requires something like the TC rule to work correctly. It cannot work as designed without a fiscal rule deciding additional deficits to power aggregate demand. And this does not even take into account Godley’s Growth Theorem!

          In fact, this is part of the point my going to MMR. It was clear to me the JG simply isn’t enough juice to power a growing economy over a long period of time. It must be equally as clear to the founders. MUST BE. As long as MMT decided it needed to sink or swim with the JG as perhaps the central component of demand stabilization, I felt they are missing the big picture and basically advocating poverty on a massive scale which beggars the imagination.

          Now, any of these critiques is enough to be skeptical of the JG. But all together? Come on.

          At this point, remind me why we are talking about the JG. It’s a waste of breath and thought cycles.

          • Dan Kervick says:

            Michael, I don’t see how the JG proposal is strangling anything. Ideas don’t spread as monolithic packages. People tend to read presentations of ideas and take what they like from them. Keynes had massive influence, for example, despite the fact that he called for various things at various times, like the euthanasia of the rentier and the socialization of investment that were never adopted.

            All this concern with marketing and branding and creating new initials and new schisms and divisions strikes be as a tremendous diversion and needless drain of intellectual energy that would have been better spent elsewhere.

            We are talking about the JG because MMR has made it clear that it’s chief motive for developing a splinter version of MMT was to to come up with something that was almost MMT, but without the job guarantee. If you think that people are now going to stop debating you on important public policy issues about which you disagree with them, you might be disappointed.

          • Tom Hickey says:

            Mike, it’s “clear” to you. But reason we do science is make sure that what seems clear really is clear.

            For both you and Cullen, publishing academic work is not some sort of thing that isolates academics from the rest of the world, IN the professional world of science, things are tightly argued and submitted to peers. The MMT economics have produced a raft of work on the JG and you think that you can just dismiss as “clearly” unfounded by a back of the hand dismissal? I’m sorry, but that is a ridiculous claim on the face of it. Assertions on blogs are just that. If you want to address the JG issue, go through the professional lit and write a professional papers saying where you find weaknesses and demonstrating why. Otherwise, professionals will not take you seriously. If you don’t want to do what it takes to address a matter professionally, you never should have brought this up in the first place. It make you look bad.

          • Hi Tom,

            Oh Come on! It’s me, TC! Do you think I’d actually fold?! ;)

            I just founded a school of economic thought! Appeals to authority won’t go very far with me. If they did, I would have joined some other school, with the appropriate authority.

            Part I:

            There is roughly 70 years of academic papers on how monetary policy works, why it works, and just about every permutation of claims you can make about MP.

            I’ve read some small amount of those 70 years of papers. Not many of them accurately describe the world I live in.

            Economists have made many, many major mistakes before today. We have entire schools of economic thought based on ideas which contradict grade school math.

            It’s tough for me to trust academics at this point because of this.

            Being a published academic isn’t something entirely reliable. It can be a decent start, but nowhere near the end of the discussion.

            The MMT economists might be more careful in their work. It seems that way to me. But at some point, the JG is a theory which does not have 50 years of empirical evidence for us to dissect.

            Part II:

            Now here is a very bold claim, and one that I have only my envelope and my wit and my gut to tell me is true.

            But I’d wager if you plug in the JG and then the TC rule to a widely used P-K macro model and evaluate their impact separately, you’d get far more demand and jobs with more stability from the TC rule.

            You’ll get a better economy, and with higher long term growth and lower average unemployment.

            Now, there are many other possible fiscal rules, and combined fiscal and monetary rules, which could be effective. The TC rule is just one of many that could work within the MMR paradigm.

          • Tom Hickey says:

            I just founded a school of economic thought!

            Great, and I sincerely mean that.

            Now I hope you will develop it with some papers and some books, as Steve Keen has done with his approach — which has gone him remarkable exposure rather quickly, although that’s a matter of years of hard work.

            • Tom,

              I’m sure we’ll have a book out at some point. For now, blogs only. And keep in mind we prefer to be published in the U.S. legal code, as beowulf pointed out. We don’t need a bunch of academic papers on MMR to be published there.

      • I think MMT has presented some analysis that it claims is proof that MMX is correct.

        MMT then takes the second step of recommending implementation of MMX.

        The logic there is that MMT takes the analysis of MMX, which is a statement of possibility, as sufficient evidence to recommend it unambiguously as policy. There seems to be no question about this as a feature of MMT.

        And it does this in a way that is much more forceful than is the case, say, for zero rates or no bonds.

        Cullen has spoken for the MMR view on this. I think he is pretty forceful on rejecting MMX, in part I take it because the evidence that it is possible just isn’t strong enough to make it unambiguously desirable, the latter which is the MMT position.

        At the same time, MMX to the degree it is debated at all within MMR (and there are meaningful votes that it shouldn’t be), should be placed in a separate policy analysis hopper that is quite separate from an MMR descriptive component. The analysis of MMX as the basis for a possible policy change should not be inextricably commingled with the analysis of the monetary system we have.

        • Tom Hickey says:

          Again, you are ignoring my point that MMT is a macro theory, The developers of MMR say that MMR is not.

          Scientific theories have explanatory power and predictive power. The explanatory power is based on showing causal links among general descriptions. This allows for predictions of expected events, which then permit empirical testing on one hand, and on the other engineering application.

          Macro is scientific theory with explanatory and predictive power that allow the theory to function as a policy instrument. The question then is managerial, having to do with efficiency and effectiveness. The theory will show this.

          • Cullen Roche says:

            So you’re proving our point. MMT is a theory. MMR is more operational in nature and open and flexible to policy implementation. MMT is a rigid theory that is tightly bound and constructed with the goal of one primary policy….the JG.

          • Yeah, I’m not sure where you’re going with that, Tom.

            MMT is on record with the view that mainstream macro theory is irrelevant, if not reprehensible.

            Yet MMT is a theory.

            So I’m not sure why I should genuflect to a theory that is the gold standard for theory debunking.

            Something about expectations there seems inconsistent. Gullibility would appear to be a useful requirement.

            Also, I think you may be underestimating the role of the blogosphere in opening up linked academic papers to sensible questioning.

            After all, if the Queen can question the academy, why can’t I?

          • Tom,

            I wrote my 12:50 before seeing your 12:37, with gracious reference. Thanks.

            12:50 remains UNCH’D though.

            :)

          • Tom Hickey says:

            @ JKH

            JKH: MMT is on record with the view that mainstream macro theory is irrelevant, if not reprehensible. Yet MMT is a theory.

            MMT is a subset of Post Keynesianism, which is a heterodox macro theory that opposes the orthodox theories, namely, Newclassicalism (neoliberalism) and New Keynesianism. All this theory address the issues with which macroeconomics deals, which is something that all macroeconomists agree on — you know, things like aggregate production, distribution, consumption, employment, prices, trade, etc., that is, all the aggregate stuff that shows up in the national accounting record.

            They just disagree over the assumptions, methodology, and conclusions; therefore, they disagree over policy application, or “economic engineering,”

            A theory is a causal explanation that underlies predictive capacity. Newclassicalism, New Keynesianism, Post Keynesianism, Austrian school, Marxian economics are all competing theories. If you want to do causal explanation, you are in one or other of the existing schools, or you form a new school.

          • Tom Hickey says:

            Let me clarify this further. Description and articulation are different from causal explanation-prediction. That means that describing monetary operations and articulating accounting identities is fundamentally different from theory as explanation-prediction. (Bill Mitchell has make this clear at billy blog and all the MMT economists are well aware of the distinction and carefully respect it.)

            What this means is that description is simply state facts without drawing implications, and articulating accounting identities is simply doing transformations of tautologies. No explanation or prediction here yet.

            As soon as the accounting identities or monetary operations are used to make causal claims then the area of theory is entered. The way theoretical statement are assessed is through testable hypotheses. The way descriptions are tested is comparing state of affairs modeled by descriptive propositions with the facts that they assert to be true or false. The way articulations are assessed is by looking at the formation and transformation rules of the system of signs. These are all very different and should not be conflated.

      • I’d associate MMT with the JG as strongly as I’d associated Market Monetarism with NGDP targeting through quantitative easing.

        Those are both specific policy choices and policy marquees for those respective schools.

        If I were to compare MMR to those two different cases, at this stage, I’d say:

        a) MMR rejects the MM quantitative easing monetary technique, because of a flawed underlying analysis of the monetary system. The QE technique is MM’s purported “X factor”.

        b) MMR rejects the MMT JG policy emphasis, at least for its prominent position as an unnecessary distraction from a more stand alone analysis of the monetary system, quite separate from particular policy initiatives. It also rejects its validity as an effective “X factor” or “magic bullet”.

        • Cullen Roche says:

          That’s a good way to explain it JKH. The JG and MMT are synonymous in the same way that NGDP targeting and market monetarism are synonymous. I would argue that the flaw in both is that they argue backwards not from an established understanding of the way the system works, but instead start with a policy approach and fill in the holes as is necessary around it (though MMT does an infinitely better job of this). In the case of MM and NGDP they start with an ideological belief that the Fed can influence markets best through monetary policy and they work backwards from there to fill in the holes. The MMTers start with the govt and fiscal policy via the JG (and the goal of FE & PS) or the monopolist creating unemployment as the “base case” (as Warren says) and fill in the holes around it. This is why I keep arguing that the state theory that they use is misleading because they’ve created a myth of an authoritarian govt that necessarily needs to create FE & PS through a govt program.

          The problem is, taxation does not establish the value of the currency. The available resources to a society establish the value of any money they use, whether it be barter or fiat. Taxes merely establish the govt’s monopolist nature on state money and allow the govt to bring resources from the pvt sector into the public domain. This monopolist can set the price of its money, but that doesn’t mean it’s worth what the govt says it’s worth. Steve W showed a similar myth the other day when he commented on the “to the penny” quote by some MMTers on sectoral balances. Govt cannot just establish currency viability by imposing taxes on the public or by transferring net financial assets. But they use this argument to establish the myth that taxes drive money and that the monopolist must necessarily intervene in the pvt sector through a price setting program like the JG.

          MMT needs this monopolist argument to show that we are dependent on the govt for certain things (like full employment) and they exploit this misleading argument to try to show that only the govt can achieve FE & PS hence resulting in optimized living standards. Clearly, we are not entirely dependent on the govt to increase our living standards though the govt can help in certain ways. And in fact, govt can often be the problem in improving our living standards.

          This is all easily proven when one understands the UMKC Buckaroo system and how MMT forms their argument around it. They create a coercive monopolist that forces the students to do certain things. And then they argue that the students can ONLY achieve full employment and price stability by obtaining these Buckaroos. Except, the whole argument is bunk because the students at UMKC have lower living standards than other college students who don’t have to waste their time obtaining Buckaroos due to a currency regime they didn’t choose to form in the first place! The whole argument is fallacious, misleading and inapplicable to the way a modern fiat currency works. In fact, it proves how a coercive monopolist regime can reduce potential living standards!!! If UMKC students understood this they’d reject the currency and prove MMT’s position entirely wrong.

          Separate MMT from the JG and you have something else because it means you don’t believe in the coercive monopolist argument and the idea that “there is no alternative” than govt establishing FE & PS via a price setting JG program….

        • Tom Hickey says:

          Yo are not wandering into macro theory. Write up a paper on it.

    • Cullen Roche says:

      Exactly JKH. MMT is actually only applicable in a very rigid circumstance. MMTers are always making excuses for why past historical events don’t apply to MMT or don’t debunk it. And they’re always right because MMT is so rigid that it doesn’t technically apply anywhere currently. For instance, if we saw deficit spending cause double digit inflation today MMTers would say that it’s not their fault because the JG isn’t in place to serve as a price anchor (even though it wouldn’t do that anyhow, but that’s a different story) or they’d find some other explanation that shows how the environment doesn’t apply. They always explain away certain experiences by saying that that nation doesn’t apply for this reason or that. Ramanan subtly nails them on this all the time, but it gets shrugged off.

      MMR is much more open. We’re willing to admit that policy is never going to be perfect and that finding an economic utopia is as fallacious as finding permanent alpha in the equity markets. In fact, that’s our big beef with the JG. It almost sounds too good to be true. And the MMTers are entirely unwilling to admit that there could be substantial problems that arise from this utopian dream of FE & PS. But no one will ever be able to say they’re wrong because not even the USA is running a fully MMT platform. So ironically, MMT is SO rigid that it’s not even applicable in its entirety and even in a less rigid sense, it only applies to a handful of countries. MMR would take each circumstance as its own with the understanding that different economies and different monetary systems are dynamic and different. There is no one size fits all approach….

    • Tom Hickey says:

      JKH, this is the first time I have found you making a mistake, but it is an understandable mistake since you are not speaking in your field.

      MMT began using Mosler’s soft currency economics into a macroeconomy theory for application as a policy instrument. It was a macro approach from the outset. Warren contributed significantly to its development as a thought-leader, although most of the heavy lifting was done by academics in their publication, where such debates are carried out professionally.

      What is less known is that Warren also significantly funded this endeavor to develop a new approach to macro, without which the project would have been much more difficult to accomplish in the time frame. He also supported wider dissemination of the work by underwriting publication costs.

      The purpose and orientation of MMT and MMR are completely different. MMT did not at some point “veer off course” into the prescriptive as some seem to think. That is contradicted by the history. It was developed from the outset as a macroeconomic theory to address the trifecta of production, FE & PS. Other Post-Keynesians had already addressed key aspects of the macro, and MMT relies on this work. However, the elusive part was FE & PS. The MMT cohort came up with an original approach to resolving a problem that was previously considered intractable without redefining unemployment to justify idle resources in excess of frictional unemployment, which is seriously inefficient and a blot on the whole macro enterprise. I think a lot of people here just don’t get the significance of the MMT contribution, if it withstands scrutiny. If it is applied and works, the leap in economic efficiency would be enormous, both in putting otherwise idel resources to use and in reducing the many other costs involved in maintaining a buffer stock of unemployed unnecessarily.

      It was Abba Lerner who laid the groundwork for NAIRU as subsequently articulated by Friedman and Phelps. He concluded that functional finance could only proceed so far in achieving FE & PS. Lerner later developed MAP with David Colander (1980) as a fourth thesis of FF to address that issue.

      The MMT economists adopted a different approach using a BSE and price anchor, which became the MMT JG. It is not prescriptive. It is part and parcel of a macro explanatory theory that purports to be the most efficient macro approach and therefore merits most serious consideration for adoption as a policy instrument.

      • Apologies to jump in the middle. JKH sounds fine to me.

        “MMT began using Mosler’s soft currency economics into a macroeconomy theory for application as a policy instrument.”

        Well Mosler’s SFE was SFE.

        “MMT” seems to have been born in 2008. Right or wrong?

        • Sorry SCE not SFE

        • Tom Hickey says:

          Yes, SCE stood alone in 1994, but shortly after writing that Warren met Randy and then Bill, and that was the beginning of MMT, although it was not called anything at the time.

          Warren provided the financial space for Randy to take time to write Understanding Modern Money: The Key to FE & PS (1998), and he also funded distribution of it. Warren was intimately connected from the outset with the development of what was later assigned the label “MMT”.

          Warren created SCE and then quickly saw its macro implications after talking with Randy and Bill, and he ran with it. He was the founder, financial backer, and also one of the early developers. Warren also funded study of MMT and centers dedicated to it.

          As far as development goes, Warren was the financial guy who provided the understanding of monetary operations. Randy was working in the area of monetary theory at the time. The academics introduced him to the economic literature that was relevant to it, about which Warren knew virtually nothing at the time. but then he jumped in with both feet.

          BTW, where does the 2008 come from?

          • Nice question. Where does 2008 come from? Go back to literature and see how the outlook of “MMT” has changed ever since it started naming itself MMT.

          • Tom Hickey says:

            @ R

            I don’t get your point. The MMT JG was initiated at the outset. Warren SCE was published in 1994. Randy’s bood, which contains the MMT JG as a central theme was published in 1998.

            MMT has “changed.” I would hope so. That is what the expansion of knowledge is about!

      • Cullen Roche says:

        Yes Tom, but the point is that it is a THEORY. It is not merely an explanation of the way things work as MMR is. MMT essentially states that there is a one size fits all solution to economic prosperity. MMR essentially states that economies are more dynamic than that and can’t be fixed with a simple govt program that achieves FE & PS (even though the JG doesn’t achieve PS). JKH is quite right in stating that MMT is a rigid and specific policy approach. MMR is flexible and open to change given the dynamic reality of economies….If the MMTers came to me with a presentation of their approach I’d likely laugh them out of the room and joke to my partners about how we just sent the next Bernie Madoff packing. There’s an element of too good to be true in MMT as it is packaged and I think it is largely due to the lack of risk assessment with regards to the JG.

        • Tom Hickey says:

          @ R

          Yes, SCE stood alone in 1994, but shortly after writing that Warren met Randy and then Bill, and that was the beginning of MMT, although it was not called anything at the time.

          Warren provided the financial space for Randy to take time to write Understanding Modern Money: The Key to FE & PS (1998), and he also funded distribution of it. Warren was intimately connected from the outset with the development of what was later assigned the label “MMT”.

          Warren created SCE and then quickly saw its macro implications after talking with Randy and Bill, and he ran with it. He was the founder, financial backer, and also one of the early developers. Warren also funded study of MMT and centers dedicated to it.

          As far as development goes, Warren was the financial guy who provided the understanding of monetary operations. Randy was working in the area of monetary theory at the time. The academics introduced him to the economic literature that was relevant to it, about which Warren knew virtually nothing at the time. but then he jumped in with both feet.

          BTW, where does the 2008 come from?

          • Tom Hickey says:

            Oops the above is out of place. Should be a reply to Ramanan, not Cullen

          • Tom Hickey says:

            Wrong, Cullen. MMT is a macroeconomic theory. A scientific theory is an explanation containing generalized descriptions that can be used to formulate hypotheses that can be tested,

            Part of the MMT explanation involves employment and price stability. This explanation is predictive. It says that if this happens (JG as BSE * price anchor), then this will result (FE & PS). That is to say, the antecedent is a sufficient condition for the consequent. That is a claim that can be test through simulation, which the MMT economists have done and published. That work is either correct or not.

            The point is these things are not in the field of you and your partners, Mike, Carlos, or even the magesterial JKH. They are the field of macro professionals and only their peers are qualified to assess their work. This must be done in professional papers, where such debates are carried out, e.g., between the MMT people and the Circuitists.

            What happens on the blogs is essentially irrelevant in the field of economics. It is basically popularization and idea-floating, although there are also some pretty intense pissing matches among professionals that are fun to watch. But in the end, academics only take peer publications seriously.

            • Cullen Roche says:

              That’s your opinion Tom. Personally, I don’t give much credence to that which cannot be tested in the real world. Even MMTers seem intent on justifying their findings through (flawed) real life work. That’s why they went to Argentina to study the Jefes program. Dismal science indeed. You seem to justify their conclusions because they ran some simulations. If that’s the basis of the JG position then it’s even weaker than I originally thought.

              Also, you might think blogs don’t matter, but the MMT academics clearly don’t think that or they wouldn’t invest so much time in their own blogs. Hell, I reach 1MM people every single month on Pragcap. The MMT academics couldn’t reach that many people in a decade without blogs. And not surprisingly, this all seems to mesh with the MMT idea of authoritarian rule, as if one select group of people knows better than the rest….Also, it’s not a coincidence that MMT started to gain big time popularity when I got on my megaphone and started blasting it all over Seeking Alpha, Pragcap and Business Insider (where Joe W adopted it, where Jon Carney adopted it, etc). You can try to downplay our influence, but you can’t ignore it because it is very very real.

              Personally, I find it absurd to think that that no one except a group of people without any actual economic experience are the only ones qualified to drive policy…..And if you really believe that then you guys are even further disconnected with reality than I thought….

      • Thanks, Tom.

        I assume that because my mistake was understandable, it is forgivable?

        :)

        Seriously, I’m roughly familiar with the historic development trajectory of MMT, so I’m not sure that has too much to do with any difference of views.

        Another way of thinking about the “descriptive” / “prescriptive” distinction is that of operations / policy. Policy prescription involves policy analysis, according to various future policy possibilities and scenarios.

        (Scott Fullwiler has branded his own meaning of “operations” for MMT purposes specifically. But I don’t think adherence to that specialized definition should be a price of entry to an objective discussion about MMT. I think the generic meanings of policy and operations are pretty straight forward, in terms of normal management parlance.)

        But either way – I can certainly follow the descriptive/prescription classification. The important thing is that analysis of the situation precedes analysis for potential change to that situation. And the situation here requires an understanding of the rather complex monetary system that we have.

        So one might ask the question as to what policies if any should be assumed as mandatory out of the gate, based on an analysis of monetary operations alone?. And I don’t think any policies are mandatory from a common sense understanding perspective, or from an MMT branding of that understanding. I don’t think zero rates, no bonds, or the TC rule, or anything else is absolutely mandatory, based on any reasonable analysis of monetary system flexibility. And if you make it mandatory, you shut the door on any further flexibility in that regard. And surely there must be a portfolio effect in the consequent constricted arrangement of the full policy set, as a result of insisting on such a rigid policy path in one significant element.

        In the case of employment, government has policy options. There is no reason to treat the MMT prescription as mandatory, purely on the basis of understanding how the monetary system works. No more reason than there is for zero rates, or no bonds. There is no reason for such strong asymmetry in the treatment of policy optionality. Not unless the objective is something other than the analysis of monetary operations at the outset – unless the objective itself is one strongly favored policy objective in particular.

        MMR by contrast has stated upfront that it wants to bifurcate this potential confusion between groundwork operational analysis and policy formulation.

        “MMT did not at some point “veer off course” into the prescriptive as some seem to think.”

        I quite agree with that first part. I think it was there at the beginning, as an intended policy prescription, and that the long term course setting was deliberately slanted toward the full adoption and implementation of that particular idea. And it was directed so quite possibly at the cost of diluting other ideas that MMT must have been attracted to at the same time – such as zero rates and no bonds.

        I’ve tended to view the employment piece as the seductive product of an infatuation with the general idea of open market stabilization in monetary operations – or buffer stock management, if you will. But analytic seduction is not bullet proof. In this case, it’s opened up some pretty material questioning lately about the effectiveness and overall reliability of the MMT marginal pricing argument (monopoly coercion and monopoly pricing), as Cullen has pointed to in earlier discussions.

        The original timing of this policy initiative relative to the MMT development path would be somewhat analogous to adopting the TC rule right now as the price of admission to the MMR site. But I don’t think Mike and co. have positioned that policy option in quite this way – although they might have if they’d really wanted to. But they don’t. They don’t want to be that rigid.

        Cullen’s point, “MMT is a set of policy solutions masquerading as an explanation of the monetary system”, while seemingly harsh, cuts fairly close to how I have come to perceive MMT’s positioning of policy and operations, or prescription and description. I think quite often the prescriptive cart is pulling the descriptive horse, as much as the opposite. And perception is reality, or so a lot of people think. After all, there must be a reason why we’re all having this discussion.

        “I think a lot of people here just don’t get the significance of the MMT contribution, if it withstands scrutiny.”

        I think it’s very significant. But I think there’s a big difference between understanding modern monetary operations, and developing an imaginative employment policy that extends the logic of understanding monetary operations to an analogous application of “open market operations” in “human capital”. That is after all the nature of the analytical extension. The contribution in developing that sort of model is significant. I quite like it from a purely analytical perspective, at least for its intrigue, apart from any possible operational imperfections.

        But it’s an employment policy option, not a part of a description of modern monetary operations – no more than existing employment policy is considered to be a fixed and unalterable feature of modern monetary operations. To the degree that it is considered as a policy option, the analytics that MMT purports to be its strength can be considered in the context of associated monetary operations. But the buffer stock analytics are comparable as between existing and proposed. It is a question of policy as to which one, or something else. They are policy options, dials on the bigger dashboard, just like zero rates and no bonds and the TC rule. There should be debate about ultimate effectiveness of such policy choices, relative to a broad foundation for understanding the various operational levers available to the modern monetary system.

        This is all about logical positioning of the elements of a very broad subject, Tom.

        Which positioning is going to end up with the most liberating and fruitful debate – the clenched fist or the open hand?

        I just don’t see how it’s possible to argue that it is essential to embrace a particular employment policy option in order to understand modern monetary options. The converse of that is that it most clarifying in the attempt to understand modern monetary operations, that one should jettison and be allowed to jettison preconceived notions for dramatic policy change, however strongly justified, at the door. The way I see it, MMR is trying to open that door to as broad an audience as possible, at the outset. It is a door to a house that is separate from and prior to a second house, where there is a separate door that opens up to vigorous policy debate.

        • Tom Hickey says:

          JKH, I was teasing you about making a mistake being out of your field. :)

          I agree with what you say to a great degree, but it misses the point I was making. The question is a macro question, and what is going on here (blogs) is not macroeconomics the way economists do it, as I understand the field anyway. As an academic, I understand how this game is played, and the reason it requires a PhD in a field is the amount of background required. Issues don’t just pop up. Most significant issues involve an enormous amount of prior thought. Someone with a terminal degree is expected to have a thorough grasp of the entire field and deep knowledge of a specialty. None other than specialists have the time to acquire in depth comprehensive knowledge of their specialty.

          One of the difficulties in economics has been that most economists don’t have deep understanding of banking, especially central banking. Post Keynesians set about rectifying this, and MMT is an extension of that endeavor.

          Understanding monetary operations doesn’t just open up a range of policy options where one picks some that one prefers. These options have to be integrated into a macro explanation of the economy that hits all the bases and satisfies critics that it is both comprehensive and rigorous, so that at least there will be minimal unintended consequences. That endeavor ranges across a spectrum that has an enormous number of gears and levers, especially when it is integrated with micro analysis.

          MMT was presented originally as a macro theory that extends Post-Keynesianism based on Warren’s SCE. It is built on an operational foundation, which is then used to show how nearly full employment can be reached with Lerner’s FF. Post-Keynesians already knew that. MMT extends that further.

          The problem that Lerner himself recognized was that the next issue was to address the residual inefficiency of policy based on FF. Due to the imprecision in calculating sectoral balances and targeting precisely the right deficit is difficult to impossible. Owing to the imprecision of data and factors like uncertainty rather than the math, there will almost always be a residual of unemployment that is unnecessary mathematically if the (moving) targets could always be hit accurately. But it cannot.

          Lerner and Colander proposed MAP to address that issue. See David Colander, Was Vickrey 10 Years Ahead of the Profession in Macro?by David Colander.

          Instead, the MMT economists proposed a JG as BSE and price anchor. I assume that they preferred this because it was more efficient instead of just being novel.

          In assessing these approaches, the macro questions are whether the economic analysis holds up and then if both pass this test, which alternative demonstrates greater efficiency.

          So as far as the MMT economists are concerned MMT is doing something very different from MMR, which is chiefly concerned with explicating monetary operations for popular consumption. Certainly this is a worth endeavor and I applaud it. However, I would add that in my view it would have been more elegant to just go and do this without making offhanded comments about the perceived flaws in the JG without addressing the extensive MMT lit on this rigorously. That, I believe, was a faux pas that has led to unnecessary controversy that cannot be resolved in blogging about it.

          Moreover, MMR needs to recognize that as soon as one interprets the operational analysis with respect to policy options, one runs up against macro. Then one is entering the world of theory, modeling, and corroboration in terms of a field that has been doing this professionally for a long time. That is to say, a policy proposal needs to be grounded in a rigorous macro analysis because it will be analyzed rigorously by macro people if anyone takes it seriously.

          Zanon actually had it right about MMT (and now MMR) wrt policy. The way policy happens in the US is through the approval of the academy, which means the major economists of the day, and the TPTB, especially the heads of Goldman, Chase, and Citi. Without getting an economic proposal though this needle’s eye, it is going nowhere. These people are not going to get on board with anything unless they see it is their class interest to do so. This is the real reason that the JG is problematic. Just look at the firestorm of opposition FDR got, and then the immediate push to repeal it that is still going on.

          Getting to specifics that you mention above, JKH, I don’t see the JG as being “mandatory” in that sense, and I don’t think that the MMT economists see it that way either. Rather, once one understands that macro is actually based on monetary economics then certain things follow necessarily as policy options. Then the question becomes how to choose among them, and the criteria are efficiency as tools, and effectiveness given policy objectives.

          From the macro perspective, all policies interact and influence each other. One doesn’t just look at employment alone, but one aslo has to consider how it impacts price stability, the external sector, and so forth. So what is needed a comprehensive approach that can be articulated rigorously within a particular macro framework, be it Newclassical, New Keynesian, Post Keynesian, Austrian or Marxian (did I miss any).

          The ideal is run a perfectly efficient system that is effective in delivering on policy objectives. That is only possible in abstract modeling however, due to pesky matters like complexity, reflexivity, uncertainty, as well as the limitations regarding actual data.

          What the MMT economists have attempted to do, and no one has yet undermined it to my knowledge, is present a model in which the residual inefficiency of the sectoral balance approach and FF is reduced to the point of being virtually eliminated. I have said that I don’t like the approach for philosophical reasons, but as far as I can tell it would work economically. I will continue to think this way until someone comes up with a paper taking the MMT lit into account that rigorously demonstrates a hole in the reasoning.

          So when you say, “I just don’t see how it’s possible to argue that it is essential to embrace a particular employment policy option in order to understand modern monetary options,” that is attacking a straw man. That is not the claim of the MMT economists have I have understood them. I see it as entirely a macro issue. This is a claim about the ostensibly the most efficient way to deal with the residual after the sectoral balance approach and application of FF, not about the monetary operations that illuminate the sectoral balance approach and FF.

          As far as the other issues you bring up like zero rates, no bonds, etc. there is disagreement among MMT economists over this, so I take it that these things are policy options not integral to MMT as a macro theory.

          But even here, there are economic consequences of various policy options and a macro analysis requires assessing them wrt efficiency as policy tools and effectiveness given policy objectives. These choices are not simply preferences. They have to be grounded in rigorous comprehensive economic reasoning. This is what macroeconomists do professionally, and that is what the MMT economists are doing. They are not just pushing policy. So I take some of the things said rather off-handedly on the blogs are rather up in the air until they are advanced in a paper that argues the specifics.

          • Lerner and Colander proposed MAP to address that issue. See David Colander, Was Vickrey 10 Years Ahead of the Profession in Macro?by David Colander.

            Instead, the MMT economists proposed a JG as BSE and price anchor. I assume that they preferred this because it was more efficient instead of just being novel.

            That’s about the time they went off the rails.
            I suspect the JG came first, then Warren’s SCE and then MMT. interestingly, it was Vickrey who encouraged Warren to look up the Post-Keynesians, which is how he met Wray and Mitchell). It’d have been better perhaps if Vickrey had encouraged Warren to go see the musical Cats instead. Who’s to say? :o)

          • Tom Hickey says:

            @ Beowulf

            As I understand it, While Warren was developing SCE, Randy was working on monetary theory in a PK context, and he was, of course, already familiar with the JG from Minsky. Bill had developed his ideas in his Phd thesis. When they came together they melded these ideas and Warren funded Randy’s sabbatical to write it up as a book that would be accessible to non-economists. Then the MMT economists set about backing it up with academic papers and were subsequently joined by others.

  6. 1. “JKH, this is the first time I have found you making a mistake, but it is an understandable mistake since you are not speaking in your field.”
    JKH’s area of expertise is mankind, I believe this issue falls within that field :o)

    2. Since Congress hasn’t enacted a JG, any claim or description (or criticism) of it must remain in people’s heads. You’re asking Cullen to prove a negative in a notional world. I can’t imagine how he could begin to do that.

    3. If MMT is going to play the academia “appeal to authority” card, they should make progress with the members of the AEA sometime, oh, in the 23rd century. Riddle me this, how many peer review Econ articles did Art Laffer publish before Congress began enacting supply side tax cuts? As I’ve said before, the only publication that counts is in the United States Code.

    4. Lerner and Colander developed a fourth rule of Functional Finance AND came up with an innovative policy tool, the MAP (later adapted by Bill Vickrey) to deal with inflation with a cap and trade market. It’d be a sleight of hand to conflate their proposal with the JG.

    • Tom Hickey says:

      Beowulf,

      Since Congress hasn’t enacted a JG, any claim or description (or criticism) of it must remain in people’s head You’re asking Cullen to prove a negative in a notional world. I can’t imagine how he could begin to do that.

      As Scott has explained, it is a move in macro theory that at this point can only be substantiated by simulation, which the MMT economists have provided.

      BTW, things that do not yet exist (counterfactuals) can be described. That is to say, they can be asserted as propositions that model states of affairs. The truth or falsity of such props is the existence or non-existence of corresponding facts. That’s how hypotheses get formulated and tested in science.

      If MMT is going to play the academia “appeal to authority” card, they should make progress with the members of the AEA sometime, oh, in the 23rd century. Riddle me this, how many peer review Econ articles did Art Laffer publish before Congress passed spply side tax cuts? As I’ve said before, the publication that counts is t he United States Code.

      I don’t that anyone is playing the academic card. That is just where the debate about such things is conducted by professionals in the field. I would not want to be judged on any rigorous points of philosophy based on what I say on the blogs, for example, because that is not a venue for rigorous analysis. That’s what papers were developed to do.

      Having the ear of the president, Laffer is a special case. Unfortunately none of our cohort is so blest. That is usually the only way that policy gets considered, and only the well-connected get that ea — “senior” academics and TPTB like heads of the big banks and other major donors. Zanon explained this pretty clearly at Warren’s on several occasions.

      Lerner and Colander developed a fourth rule of Functional Finance AND came up with an innovative policy tool,MAP (later adapted by Bill Vickrey) to deal It’d be a sleight of hand to conflate their proposal with the JG.

      I see MAP and the MMT JG as being alternative options for addressing inflation and employment. I assume that the MMT economists were aware of it and I have not heard them explain why they rejected MAP in favor the BSE-price anchor. The macro question is which is more efficient in dealing with the residual unemployment that the imprecision of applying the sectoral balance approach and FF involves due to a variety of factors, not the least of which is that the target is moving.

      • “Having the ear of the president, Laffer is a special case. Unfortunately none of our cohort is so blest.”

        The first supply side tax cut (1978 Kemp-Roth Act) was during the presidency of Jimmy Carter. Laffer’s allies were on Capitol Hill. Besides, you never know if someone with the ear of a president (or a vice president) will someday read this. They’ll follow your advice they want to know what to think, and perhaps they’ll follow ours if they want to know what to do.
        :o)

        • Tom Hickey says:

          At this point it’s a matter of luck.

          But it’s not as though a lot of people at the top don’t know about SCE. Warren has already explained it to a lot of them on both sides of the aisle. They just don’t want to go there.

  7. ““magic bullets” that can hit multiple targets with one shot are a rare thing in this world.”

    Good one!

  8. Tom Hickey says:

    Let me clarify some things and bring my criticism together to make it as constructive as I can. First. I want to say that I think that what you are doing is potentially significant and can make a positive contribution both to popular understanding and the professional debate. I regard you as my friends and offer this as friendly advice.

    What I see so far is a good deal of shooting from the hip, which is shy I say to write it. What I mean is to think it through rigorously instead of putting it out apparently as an intuition.

    There are a lot of potentially good ideas here, but they need to be worked up. The danger of surfacing ideas prematurely is the risk of coming across as a “loose cannon.”

    There is reason for scholarship. It has been developed as a powerful methodology for communicating ideas in a professional manner. In every field, learning the scholarly methodology of the field is at least as important as earning the substance of the field. Without meeting standards one’s work will not be taken seriously by other professionals. This is important if you are interested in building credibility instead of coming across as cranks, which is a danger of just blogging. Resist the temptation to get confrontational. You want to make friends not enemies.

    Look at some professional papers on the particular topic you are addressing and see how they are constructed. One must carefully separate original contributions from prior ones, being very rigorous about providing references to prior work. Citations should be of original sources insofar as possible. Failure to do this properly is a major faux pas. Many people even provide documentation in their blogs.

    Be very clear about the division between describing and explaining, e.g., between describing monetary operations and macroeconomic explanation involving causality. This is key and it’s where a lot of illogical jumps are made. Establishing causality is not an easy thing to demonstrate, even though it may seem intuitively obvious. This encompasses much of what scientific reasoning is about, and it is what separates professionalism from shooting at the hip.

    This means that original claims have to rigorously argued and premises based on prior claims carefully documented. Intuition does not cut it. The idea is to make it simple for other to understand the basis of the argument so that it can be evaluated and critiqued. It is not up to standard, professionals won’t even bother to consider it. In my field, I can usually tell whether something is garbage in the first paragraph. Saves a lot of time reading.

    Again, I want to emphasize that this is friendly advice. If I have offended anyone, I apologize.

    I am speaking here chiefly to Cullen, MIke, and Carlos, as developers of MMR and MMT critics. I would also include Ramanan among the later, since I don’t think he has put his hand up for getting on board with MMR.

    When criticizing some point of another school or theory, it is especially important to be clear and comprehensive. You and the Circuitists are the only ones seriously engaging MMT so far, and if that is to be taken seriously it needs to be properly couched. Hopefully, that would spark a debate that would advance knowledge.

    I understand that JKH wishes to remain anonymous for personal and likely professional reasons, so publication or even a personal blog doesn’t seem to be in the cards. That is a shame, since obviously JKH is recognized as a unique resource, and his bits of wisdom are scattered all over the blogs instead of gathered together and organized for use. Perhaps he will find some way to fit in to MMR. Or perhaps he could devise some suitable workaround that lets him present his ideas in a comprehensive fashion in a more available venue. Hint, hint.

    Anyway, I have learned a lot from all of you and thank you for sharing your time and knowledge. I wish you all the best in our common endeavor to make this knowledge of monetary economics more accessible.

    • Hi Tom,

      I am convinced you’re a nice person. I’ve said I appreciate your consideration in public and private. And thanks for the genuine help you’re providing at MR, over at Norman’s place, and in the comments.

      Thanks for pointing out we’re walking in the same direction. Lots of people forget that. I don’t, which is why I don’t want to spend so much time talking about the JG. :)

      Then, we’re just getting started here, and we’re getting compared with ideas and movements with 15+ year histories. We’ll make mistakes, we’ll be laughably wrong about some things. But we’re right about many parts of how to think about the major economic questions, like long term growth, how start thinking about the economy, and where we can increase demand quickly and efficiently.

      Tom, I trust my gut. I trust it because I think through stuff in detail, and then let my gut give me something useful from that thought. I don’t know yet if everything on MMR is correct. I do not care, because real work involves getting out into the world and acting, which involves doing the wrong things sometimes.

      Let me assure you 90% of the things I write on Traders Crucible started with a gut feeling about how things work. Then I put in hours/days/months of thinking about little parts of it all and sometimes even taking notes. For example, both the TC rule and the no-Ponzi take down first drafts were written in about 10 minutes, after weeks or months of thinking about and investigating those issues. The TC rule started with nagging feelings in my gut when I read through Wray’s book of “it’s not enough!”, and the no-ponzi when reading one of Scott F’s economic papers when he explained the conventional view of the ITGBC and felt “hmmm. something’s weird about that no-ponzi…”.

      To me, It looks like JKH did something similar with S = I + (S – I) He knew something was wrong but not exactly what, then did some mind-boggling research, then viola! We’ve got a winner.

      My mind tells me I am doing the right thing, and my gut confirms it. Creating MMR with Cullen, Carlos, JKH, and others who want to contribute in different ways is the right thing. I’d been thinking about how I think of things differently than the core MMT group for a while, and well, it appears I had some company in thinking that way.

      We are creating a flexible, pragmatic set of policies based on a core of economic arithmetic theorems. We’re doing it in a public manner in an attempt to get laws passed which use these theorems. It’s what a logical person would do. It’s what a pragmatic person would do. It’s what I am doing. And this feels right.

      One thing I’ll say: I personally don’t need to do the academic verification for everything I state. At some point, someone will do it for us. Plus, I’m old school Keynes who only uses equations every now and then. He didn’t use many equations in GT or really anywhere. Yet, somehow, he made a difference.

      On JKH, agreed.

      Mr. JKH, sir, you’ve got a platform here, sir. You can reach me at michael *dot* sankowski *at* gmail dot com 100% security guaranteed. Create a fake gmail address and use that to communicate with me. I’ll never spill the beans!! If that is too much, just post in the commments, let me know to post it, and I’ll be happy to move it up to the front page or to a post.

      So Tom, please take it all in stride. ;)

      • Tom Hickey says:

        Mike, I don’t see any problem with exploring ideas though blogging. That is different from shooting from the hip, i.,e., making intuitive assertions without adequate substantiation.

        There is also not problem with developing ideas in blog format. beowulf’s platinum coin gambit got some traction, for example. But this is pretty much a one off approach. Of course, the various ideas can later be link up, so developing them independently is no waste of time and getting feedback in comments can be helpful in alerting one to objections.

        But if you are going to go after the MMT economists, or any others, then you have do it correctly or they will ignore you as a crank. “Correctly” is demonstrating how their position is insufficient through a detailed argument based on demonstrated understanding of their corpus of work. It is then an option to offer a more suitable solution of your own, but that too has to be strongly put so that opponents have something to address. This is somewhat tedious work.

        If I were in your place, I would simply leave the MMT thing alone, and other economic positions, too, unless you want to spend the necessary time and effort to criticize properly. I would just focus on developing my own position and be concerned about others criticizing me by anticipating objections.

        • Tom,

          We haven’t gone after the MMT economists with a pitchfork. The first time I brought up the JG here it was “the program which shall not be named”. We were forced into a response by the complete over the top reaction to our disagreements from MMT people.

          I don’t feel a need to go after the MMT guys, and I respect much of their work. I would have been happy to putz along over at TC as long as people on the MMT side would approach it with live and let live.

          But they didn’t, and some of them brought the fight onto our home turf, and then said we couldn’t use any name we wanted. Then, simply making our points of disagreement clear was met with calling me – me! – in favor of mass starvation, or an idiot for thinking possibly the JG wasn’t politically possible or it might have implementation problems.

          My observations aren’t even remotely controversial observations. Every large program (public and private) in human history has had massive problems, and some of them have failed miserably due to those problems. The JG can’t even gain easy traction among moderates like me and Cullen, or even my wife!

          Cullen’s observation that striving during times of unemployment isn’t 100% bad and may have some positives was met with howls of outrage, as though he was advocating eating babies after roasting them spitted live above a fire. My struggles during tough times helped me become a better person. What’s controversial about that feeling? Are we the only ones in human history who feel struggle can sometimes make you do things better and help to make yourself a better person? No.

          It’s not like I am making wild claims like “The JG would result in all first born sons dying of the Ebola virus and a massive recession” or “The JG will not get a single supporter in the world and causes cancer in lab rats.” I’m making the most obvious observations you can make about the JG.

          Forgive me, I’m ranting at this point. Tom, you know I am not an evil person. Please understand we were shocked by the insistence the JG is a central part of MMT, and further shocked by the froth-at-the-mouth reaction to our disagreements with the JG, and then knocked over with by shock by people literally calling Cullen evil, stupid, and a jackass in public forums.

          Anyway, take care, and hope you aren’t offended by this! smiles!

          • Tom Hickey says:

            No problem, MIke.

            you write:

            Forgive me, I’m ranting at this point. Tom, you know I am not an evil person. Please understand we were shocked by the insistence the JG is a central part of MMT,

            I think that this may be the root of the problem. Some people equate MMT with the monetary description and don’t realize that it is a subset of Post Keynesian macroeconomics. The MMT economists carry on the debate in those terms.

            From that perspective, the MMT JG is a key component, as Randy makes clear in his 1998 book, in the title actually, Understanding Modern Money: The Key to Full Employment and Price Stability. From this perspective the MMT JG was a key piece in the MMT macroeconomic model that is based on an understanding of monetary economics.

            What MMT added to this was clarifying the horizontal-vertical distinction. The MMT economists didn’t go deeply into the horizontal component because other Post Keynesians had already done and the MMT economists were in agreement with them.

            The MMT economists have not articulated the other aspects of Post Keynesianism that are integral to their macro either, since it is understood that they are working in this tradition and won’t need to bring up established points unless they wish to alter or contest them.

            So I think that a great deal of the kerfuffle involves a misunderstanding of that the MMT economists are actually doing as macroeconomists. For them, the monetary economics is one foundation stone on which the theoretical superstructure rests. It functions as an assumption. The beauty of it as an assumption is that it is descriptive rather than hypothetical, posited, or asserted apriori as “self-evident.

  9. “But if you are going to go after the MMT economists, or any others, then you have do it correctly or they will ignore you as a crank.”

    Tom, all we’re trying to do is build a bridge between MMT and the rest of
    world which, I hate to tell you shattering news, thinks MMT economists are a bunch of cranks.

    • Tom Hickey says:

      beowulf, that may be so, but no other non-PK economists that I know of have addressed the MMT professional literature, other than Jamie Galbraith.

      Moreover, Wynne Godley remains out in the cold, too, as are the other Post Keynesians, all of whom are regard as “heterodox,” which is econo-speak for cranks. Hyman Minsky was just discovered when the GFC hit, but so far no orthodox economists have really done anything with this.

      • Tom,

        I really think the idea in this paragraph has legs if we talk about it correctly:

        “It is thirty years since Carl Christ, of Johns Hopkins University, had the brilliant insight that should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments. It would then follow that if the economy were moving toward stock-flow equilibrium and if taxes were levied as a proportion of income, the GDP of a (closed) economy would always be tracking, perhaps with a long lag, government outlays divided by the average tax rate – the very same concept that we call fiscal stance. Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate. If the tax rate were held constant, government expenditure would have to rise absolutely for output to grow; if government expenditure were held constant, the tax rate would have to fall.”

        What do you think?

        • Tom Hickey says:

          econo-speak for the sectoral balance approach in which saving (taxation = govt saving) constitutes demand leakage. This is why Warren continually reiterates that taxes are too high for the size of govt.

          Other MMT economists explain this as the existing tax rate is such that govt
          “saves” too much, ie. collects too much in taxes so that nascent demand gets sapped the recovery proceeds. As long as the country is running a CAD and domestic private sector is saving, then the deficit has to offset. The political choice is between expenditure and taxation in dialing in the right size deficit to offset non-govt. saving. For automatic stabilization, a variable tax rate would be a better solution than a constant one. There would have to be a fiscal rule for changing the rate as appropriate.

    • Tom Hickey says:

      Tom, all we’re trying to do is build a bridge between MMT and the rest of world

      I am just sayin’ that if you want to enter the debate, you have look like you are doing it the way it is done. It’s sort of like putting on suit to do business. Unless you have the stature of someone like Steve Jobs, you had better show up in the right paraphernalia, or you will be considered as someone who is not in the game.

  10. I’m having a very hard time with the notion that government spending has any necessary relevance to economic growth. It’s just too easy to posit an anarchy with a growing economy. All it would need are good people volunteering to handle some common concerns as the need arises. Meanwhile, a single bank’s notes would become a common currency by consensus, in the way that Facebook became the common social network. Banks would lend with zero reserves, but with capital consisting of thing people value, and with a pooled liquidity facility operated by a central bank with no other function.

    I’m not suggesting that such a thing is possible. I am, however, saying that its theoretical possibility makes the necessity of government spending as a logical matter difficult to grasp. In short, I guess I don’t believe in “high-powered money” as a necessary feature of an economy.

  11. Steve Waldman had a great post up a few days ago about fiscal rules

    What post is that?? Link?