Monetary Realism

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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.



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75 Responses

  1. Steve Roth says

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

    What post is that?? Link?

  2. Lawrence Jay Kramer says

    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.

  3. 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.

  4. Michael Sankowski says


    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?

  5. 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.

  6. 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.

  7. 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.

  8. beowulf says

    “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.

  9. Michael Sankowski says


    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!

  10. 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.

  11. 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.

  12. Michael Sankowski says

    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. 😉

  13. 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.

  14. JKH says


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

    12:50 remains UNCH’D though.


  15. JKH says

    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?

  16. 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.

  17. 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.

  18. Tom Hickey says

    YOu are wandering into macro theory. Write it up.

  19. Tom Hickey says

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

  20. 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.

  21. Michael Sankowski says


    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.

  22. 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….

  23. 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.

  24. JKH says

    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”.

  25. JKH says

    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.