Sunday, April 21, 2019

Palley on MMT part 1

I'm going to go through Thomas Palley's What’s Wrong With Modern Money Theory (MMT): A Critical Primer page by page and examine Palley's arguments. I won't bother commenting on his descriptions and background material, which seem unobjectionable. All references are to the above unless specifically noted.

Recently, MMT proponents have begun walking-back the idea that functional finance is central to MMT. The purpose of the walk-back appears to be to deny that taxes are needed at full employment to neutralize inflationary excess demand caused by excessive government spending. Three points follow. First, it is fundamentally dishonest to deny the long-standing central role of functional finance in MMT’s argument (see for instance, Kelton, 1999). Second, removing taxes means MMT has now shifted to the arguing that inflation control should be conducted via rationing, price controls, and other administrative measures (Wray, comments at Eastern Economic Association, March 2019). Third, it illustrates the difficulty of understanding and debating MMT as its proponents constantly change their positions. (footnote 2, p. 4)

This is unwarranted well-poisoning. If Pally wants to ascribe a purpose or motive to a body of writing, he should offer an argument in addition to citing the evidence. If he wants to accuse proponents of dishonesty, he should cite their dishonesty. Do MMT proponents really argue that "inflation control should be conducted via rationing, price controls, and other administrative measures"? If so, a written reference, not a reference to an oral presentation seems required.

MMT’s main macroeconomic claim to fame rests on its declaration regarding government’s ability to finance spending without recourse to taxation by issuing money. In fact, government’s ability to create money to finance spending has long been widely recognized by all economists, who have also long recognized that ability gives government considerable extra financial and policy space. (p. 5)

Damned if you do, damned if you don't. How is it a criticism that MMT scholars advocate a position that is "widely recognized by all economists"? And why should I believe Palley that this apparently obvious proposition is MMT's "main macroeconomic claim to fame"? Again, Palley offers no citation to show that MMT scholars believe they themselves have discovered governments' ability to create money.

As regards injecting state money to pay taxes, MMT is strictly wrong with its claim that the public cannot pay taxes until government has first spent. In fact, the central bank is the source of such money. (p. 6)

The Federal Reserve Bank is part of the government. I do not know of a central bank in any industrialized democracy that does not have authority granted by the legislature.

Palley offers as "evidence" a quotation from Wray:
In principle, then, the government first spends fiat money....Once the government has spent, then the fiat money is available to be transferred to the government to meet tax liabilities. As a matter of logic, the public cannot pay fiat money to the government to meet tax liabilities until the government has paid out fiat money to the public. (qtd. footnote 5, p. 6)
But Wray explicitly makes an in principle argument. It is merely a "terminological objection" (see below) to argue about which organ of the government, the legislature directly through spending or the central bank autonomously exercising spending power granted by the legislature, creates the money.

Palley also asserts that Jo Michell "claims MMT does not say government spending is needed to pay taxes" (footnote 6, p. 7). The cited post does not appear to support this assertion. Michell says, "[G]overnment spending comes before taxation . . . is sort of true but also not particularly interesting." What Michell argues is not part of MMT is that "without [government deficits] the means to make settlement would not exist in our economy."

MMT focuses on accounting and stock-flow relations. . . . [T]hose accounting and stock-flow relations have long been understood by Keynesian and neo-Keynesian economists. (p. 7)

Again, it should not be a criticism that MMT scholars agree with orthodox economists.

MMT objects to [the government budget constraint] being called a constraint as if government were a household. However, that is a terminological objection. (p. 7)

Not all terminological objections are created equal. Terminology should clarify, not obfuscate. Palley's terminological objection above obfuscates that the Fed is a part of the government; MMT's terminological objection clarifies: If government is not actually constrained by a budget, it's disingenuous at best to say the government has a budget constraint.

MMT sees the effects of increasing government financial obligations as entirely benign, and policymakers can use the financial space to costlessly boost demand and push the economy to full employment. There are no negative consequences from increasing government financial obligations; no conflicts with other policy objectives; and no policy implementation problems. (p. 7-8)

[citation needed]

As shown below, MMT’s macroeconomic policy assertions follow from its oversimplified and incomplete Keynesian analysis. The lack of a dynamic economic model with behavioral content is a glaring professional failure. (p. 8)

I don't know about this one. My general training in advanced macro is woefully inadequate. Still, the orthodox dynamic macroeconomic models (DSGE models) seems to attract their share of criticism.

Unfortunately, instead of addressing that failure, MMT proponents have responded by claiming critics either do not understand it or have misrepresented it. (p. 8)

Or it could be that critics don't actually understand MMT and are actually misrepresenting it.

The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. (p. 8)

What? MMT scholars might clarify their positions, correct mistakes, or even, gasp! change their minds?!

[M]oney financed budget deficits drive the economy to full employment by increasing wealth and AD. That makes it critical there be institutional arrangements for closing the deficit once full employment is reached to avoid inflationary excess. However, MMT relies on a highly simplified and implausible political economy in its attempt to address that problem. Thus, it assumes taxes can be abruptly and precisely raised at full employment to contain excess demand, when the reality is taxes are politically contested and difficult to raise. Long ago, Friedman (1961) argued that fiscal policy was impractical for “fine-tuning” stabilization policy owing to inside (decision) and outside (implementation) lags. Those lags mean policy implementation is likely to be poorly timed, so much so that it could amplify the business cycle rather than dampen it. (p. 9)

These criticisms are kinda true, especially the latter concerning lags. However, they really amount to the unobjectionable claim that regardless of one's models, managing a large economy is a Hard Problem. Friedman et al. argued against any kind of fine-tuning, not just via fiscal policy but monetary policy as well.

But yes. MMT does need good models concerning how to raise taxes effectively to address inflation. Maybe they have them. I am not at all confident that Palley has made an exhaustive search of the literature to find them.

Absent budget discipline, spending and deficits would tend to ratchet upward owing to the political attraction of money financed deficit spending and the political aversion to higher taxes. (p. 10)

Maybe, maybe not. I'm not at all convinced that the above political attractions and aversions are anything more than artifacts of our dysfunctional political system exacerbated by inequality. And I'm not at all convinced that an artificial budget discipline, denying truths that have "long been widely recognized by all economists, who have also long recognized that ability gives government considerable extra financial and policy space" (p. 5) is the only alternative.

Regardless, part of economics is not just what is feasible in the immediate present but also what is theoretically possible. Taken in that spirit, yes, MMT needs to come up with institutional mechanisms that can use taxes effectively to control inflation, which does not sound like an impossible task.

Another political economy critique (Lavoie, 2014) is that central banks and fiscal authorities are institutionally separated in most economies, but MMT ignores this and treats them as a unified decision maker. The separation is usually justified on public choice grounds that politicians have an inclination to inflationary monetary populism, and separation of fiscal and monetary powers helps prevent that. (p. 10)

This critique is petty. Institutional separation seems inconsequential, and the Fed and Treasury usually coordinate their actions. Regardless, institutional separation is at best one way of avoiding "inflationary monetary populism", but it's hardly the only possible way.

Palley is making a fundamentally flawed argument, which is at least a step up from the beginning of the paper. Anything can be done poorly — White can lose at chess in two moves — so the argument that X might not work is unintersting. The argument needs to be that X cannot work, or be extraordinarily difficult to make work even under favorable conditions.

And heterodox economics is heterodox. That we currently solve certain problems one way is not an argument that that way is the only way, especially when the current way really seems to be failing badly.

Only a third of the way through, and I'm throughly unimpressed with Palley's critique.

The Job Guarantee

Many Modern Monetary Theory scholars* advocate a Job Guarantee (JG). I like this idea.

*I am not a scholar of MMT. Any errors are my own.

As I understand it, the JG means that the government is the employer of last resort. Any adult citizen (or resident) can walk into the government job office and have a job by the next day. The job will pay a reasonable minimum wage and entail no long term commitment from the job seeker. The job might be matched to the seeker's skills, and common-skilled jobs would be available to anyone. These would still be jobs, and one must actually show up and do the work to get paid. The government pays the JG wages, creating money as needed (taxing it back out later if necessary).

The idea behind the JG is first that if non-disabled working age residents have an obligation to contribute to the social product, there is a corresponding social obligation to provide them a reasonable opportunity to do so.

Second, the JG acts as an automatic stabilizer. Automatic stabilizers avoid the lags inherent in more deliberate government stimulus. When there's a recession, people laid off will immediately seek JG jobs to pay their bills, automatically generating stimulus spending. When the economy recovers, people will eventually leave JG jobs for private-sector jobs, lowering government spending.

I don't think we need to choose between a) the Job Guarantee, b) organized, deliberate stimulus requiring permanent skilled employment, and c) a Universal Basic Income. Why not have all three as needed?

I don't think JG jobs need to be "make-work". They will probably be relatively low-quality jobs, since some (most?) JG jobs have to be available to people with only common skills. But the private sector has no small few shitty jobs, made worse by the fact that employers have little democratic oversight.

We could offer job training jobs: if we are low on welders, it is government money well spent to teach more people how to weld. It might even be a good idea to send some people to college as JG jobs. At the very least, there's always something that needs to be cleaned up, washed, or painted. There's no shortage of useful work to be done, even if it's not profitable.

Although there will probably be some people who can or want to contribute only the simplest, most common-skilled labor, we want to make sure that we don't have a permanent underclass of people fit only for JG jobs. We also want to ensure that JG workers are not oppressed or taken advantage of: by definition, JG workers would be people with relatively few outside options.

These requirements could be fulfilled mostly by prudent and transparent administration. Additionally, we can establish a JG union, so that JG workers can bargain collectively at least over working conditions. We can allow non-profit organizations to employ JG workers, with workers' wages paid for by the government. Non-profits would be required to be non-discriminatory, and we might restrict them to requiring only common skills. Allowing a range of non-profits would give JG workers some choices.

Friday, April 19, 2019

MMT and political economy

One criticism of Modern Monetary Theory* is that raising taxes to control inflation is politically difficult. I think this criticism is correct in a sense, but it's incorrect in a more important sense.

*I am not an academic scholar of MMT. Any mistakes in descriptions and analyses here are my own and should not be attributed to scholars in the discipline.

Politics is a legitimate topic of study by economists, and it's correct to say that raising taxes is difficult given current political institutions. It follows that more abstract, technocratic, and less openly partisan monetary policy is probably a less bad choice today to control inflation. Indeed, I don't think MMT is a particularly valuable economic theory given current political institutions. Of course, I think our current political institutions are terrible. And that's where MMT has real value in my opinion: even if you don't like socialism, MMT is, I think, a better theoretical framework for a much more progressive agenda, an agenda that will require substantial change — a revolution if you like — in our political institutions.

One important aspect of MMT is that it subverts the notion that our capitalist democratic republics are built on apolitical, ahistorical economic truths. They are not. To no small extent, economics is just describes how our political economy in a particular historical social context actually works. A different political economy would work differently.

Simply adopting MMT and changing nothing else would have at best no effect and at worst fuck things up royally. We can't fight fascism with economic theories. We have to rethink and re-implement our whole political economy at a fundamental level. That's not going to be an easy fight, and it won't be economists who do the bulk of the fighting. However, I think having a set of valid progressive economic theories has substantial value, and MMT shows a lot of promise of delivering that value.

Wednesday, April 17, 2019

Taxes and government production

There is a paradox in how we talk about "paying for" what the government produces. Yes, taxes do pay for government production. And no, taxes do not pay for government production. Wait, what?

As best I can tell, Modern Monetary Theory scholars* stress the idea that taxes do not pay for government produces in a "financial" sense: unlike a household or a firm, government does not collect taxes to obtain money to spend on government production. A household or a firm must obtain money, via revenue, borrowing, or theft, before it can spend it. A government need not do so; to the extent that the government says it does need to collect money before it spends it, the government is at best disingenuous and at worst deceptive. Financially — and this qualifier is crucial — the government spends whatever it chooses to spend, regardless of ex ante taxation or borrowing. A household or firm cannot choose to spend money it has not already obtained; a government might choose to spend only the money it has previously obtained, but it can choose not to.

*I will repeat my usual disclaimer: I am not a scholar of MMT; any mistakes in my present description of MMT ideas are my own.

I suspect that MMT scholars stress this financial freedom precisely because not only governments but orthodox economists, while they formally acknowledge government's financial freedom, either don't understand this freedom — a lot of economic theory depends on a financial budget constraint to make any kind of sense — or they don't want people to intuitively grasp the government's financial power. What is to become of the captains of industry, the titans of finance, if their years of hard work accumulating money can be duplicated or undone in seconds by some faceless downclass bureaucrat in a cheap suit? Worse yet, what if the unwashed masses catch on and start, gasp! voting on that basis? No, such nonsense simply will not do.

But of course even that the government has financial freedom, i.e. it can spend as much or as little money as it pleases, the government does not have "real" freedom: it cannot choose to escape opportunity costs. Especially when the economy is at full employment, anything the government creates money to produce means using that money to reallocate real labor and capital away from other production. At full employment, government spending on one thing, regardless of the source of the spending, means giving up something else.

Governments usually produce public goods, and the opportunity costs of public goods are harder to distribute than are the opportunity costs of private goods. Suppose a firm produces a private good, a new and improved widget with extra frobulousness. The firm improves society if and only if individual consumers individually choose to buy its widgets instead of now unfashionable and obsolete doodads and gewgaws. Ideally, the private firm merely poses the option: the individual consumer decides whether the new option is worth the opportunity cost, and what the opportunity cost actually is in real terms. And we know when the firm produces the optimal quantity of new and improved widgets precisely when the marginal consumer is indifferent between the new widget and the next best choice. With apologies to Landseer and à Kempis, the firm proposes, the consumer disposes.

Public goods simply do not work that way, as economists orthodox and heterodox all know: the math is clear and unequivocal. Individual consumers cannot individually choose how much of a public good they receive: all consumers receive benefit from all production of a public good, regardless of their individual preferences. If the government produces clean air, I cannot help but breathe it.

Thus, the government must distribute the opportunity costs. They can do so in two ways: increase or keep constant the supply of money and let everyone's money purchase less stuff per dollar, i.e. no taxation and some inflation, or decrease the supply and let everyone's money retain its purchasing power, i.e. some taxation and no inflation, i.e. price stability.* So in the sense of the distribution of opportunity costs, taxes do in a sense "pay for" government production.

*Strictly speaking, there is a continuum between zero taxation and zero inflation.

On the one hand, government has financial freedom; on the other hand, the government has real constraints. On the gripping hand, there are some circumstances where government spending neither requires taxation nor generates inflation (or at least not nearly as much as it might otherwise do). When government spending promotes short run or long run real economic growth, the economic growth itself "pays for" government spending in both the financial and real sense. In the short run, when real economic output is below potential — i.e. under recessionary conditions of less than full employment, especially when the recession has been caused or exacerbated by collapse of the money supply as during the Great Depression — government spending causes an increase in both financial and real economic activity. The injected money just keeps flowing; it does not (all) need to be leaked back out by taxation, and the increase in real economic activity absorbs the extra spending without causing (too much) inflation.

Similarly too with long run economic growth. Government spending in research and development, especially for the military, initiates much (if not almost all) of the growth of inventive technology. (See e.g. Doing Capitalism in the Innovation Economy by William H. Janeway.) Again, the spending is "paid for" by the increase in real economic activity.

Many critics of MMT argue that the above exposition is just warmed-over bog-standard Keynesian macro. Perhaps. If so, the profession of economics has been trying to at best downplay and at worst obfuscate its importance and relevance not just to the general public but to undergraduate students of economics. I know: I just finished an undergraduate and graduate economics education, and I found the claims of MMT were both shocking and obvious in retrospect.

Even the Holy Bearded One says in his own Macroeconomics textbook that the government should run a balanced budget on average (my copy is in my office; citation to follow). But this cannot be so. In an ideal world where we always have zero inflation and no short-term fluctuations, to preserve perfect price stability, the amount of money flowing through the economy* must increase as long-run potential output increases. Since money cannot flow arbitrarily quickly, the overall supply must increase, so either the banks create it or the government has to create new money.

*Technically the money supply times the velocity of money.

We could, I suppose, allow the private banking system complete control over the flow of money. When unconstrained by government regulation, complete private control of money generally has not worked worked all that well. Seriously. It's a Bad Idea. If we want to make the foundation of economy the government's power to collect taxes, then the government must run a deficit on average.

Sunday, April 14, 2019

MMT, money, and opportunity costs

Often, if we want one thing, there is some other thing we can't have. Economists call this an opportunity cost. We study the things we must choose between, and how people make those choices.

I am an economist. Opportunity costs are my faith, my creed, my dogma, my mantra. I believe. TANSTAAFL!

Money is a socially constructed institution (or collection of institutions) to quantify, manage, and distribute real opportunity costs. But money is not by itself an opportunity cost; to equate money and opportunity costs is to mistake the map for the territory.

I have been reading the "surface" of Modern Monetary Theory — popularizations, blog posts, etc. — for almost all of my career as an economist-in-training. And what I like about MMT is that these theorists make clear the institutional, socially constructed role of money as a mapping of opportunity costs.

Every popularization of MMT that I have read promotes the same message, a message that disturbs my economist's faith not even a little: production is constrained by real resources, i.e. natural resources and human labor; production is not constrained by money by itself.

MMT advocates do say there are things we can have cheap, and in this, yes, they say nothing new, nothing that is not part of bog standard orthodox economics. If there are idle resources, unused factories, unemployed labor, we can put those resources to productive use give up little more than excessive unwanted leisure.

I have never heard any MMT theorist ever say that we can have anything "for free". Never. Not once. Maybe I'm wrong. I will dig into the literature and find out.

But for now, the onus of any critic of MMT, at least if they're trying to convince me personally, is to convince me that MMT advocates really do say that we can have anything for free. As yet, none have done so.

It is a much different thing to say that money by itself should not constrain a society, especially a government. Technically, orthodox economists tepidly agree, but they seem to inexorably conflate money and real opportunity costs. MMT advocates are the only people who absolutely insist on conceptually separating money and opportunity costs. Even if there is nothing else new about MMT, even if all of their economic theories fall short of figuring out precisely how to quantify, and distribute real opportunity costs, MMT is still worthwhile because the orthodox view of money has failed us. We must rethink money.

The neoliberal project to make everything subject to money and markets, even were it undertaken in good faith, has decisively failed. Whatever good it has delivered has come at the cost of economic stagnation, intolerable inequality, nascent fascism, and ecological catastrophe.

Even if MMT has found nothing new, they are at least looking. And we must look, because we cannot keep what we have now.

Saturday, April 13, 2019

Modern Monetary Theory

I don't remember when I first heard about Modern Monetary Theory (MMT). It was either just before or just after I began my academic economics education in 2010. I thought it sounded interesting: mostly standard Keynesian economics, which is good, because Keynes is good. The main reason I like MMT (which should not be confused with what MMT scholars believe to be their most important contributions) is that MMT stands in stark contrast to the balanced budget mania I've been subject to my entire life, before, after, and during my education. I have been told time and again that Government Spending is Very Very Dangerous. Bankruptcy! Default! Runaway Inflation! Bond Vigilantes! Socialism! Cats and Dogs Living Together! The MMT story is completely the opposite: we can't go crazy with it, but government spending by itself is no dig deal if we're reasonably careful about (too much) inflation. On the other hand, nothing about MMT made me want to quit my job, give all my possessions to the poor, and make a holy pilgrimage to Jerusalem UMKC.

Flash back to '99-2000 to around 2005. I started my informal education in philosophy and argument talking about religion on the internet. The nice thing about religion is that they have spent thousands of years developing literally all the shitty fallacious bad-faith arguments for a completely indefensible proposition. I've seen them all, and I can smell bullshit a mile away.

Cut to today. Bernie Sanders hired Dr. Stephanie Kelton, a prominent MMT scholar, as his economic advisor. Alexandria Ocasio-Cortez is rumored* to be hooked up with MMT economists. MMT seems to be gaining prominence on the progressive left.

*relative to my personal knowledge.

In response, I have seen a fair few traditional academic economists, economists that I like and admire, writing polemics against MMT. And with few exceptions, their polemics have reeked of the same sort of bullshit religious arguments I spent the early part of this millennium taking apart. So that makes me curious. Really, it is Krugman, DeLong, and Palley more than Wray and Kelton who have really sparked my interest in MMT.

(So too with Bernie in 2018. Most of the mainstream Democratic party arguments against Bernie and for Clinton also reeked of bullshit. Bernie Bros? Are you fucking kidding me?)

So I'm going to investigate further. I have an MA in economics, so I think I can sort out the primary literature. We'll see how that works out. You can track my progress on my new MMT Page.

There a continuum of possibilities between the extremes of MMT is all that and a bag of chips and MMT is completely full of shit. But even if my evaluation falls toward the latter end of the continuum, I have to ask why MMT opponents are using such lousy arguments. Bad arguments — even against a bad idea — are a sign of either being lazy, ignorant, or stupid or of a hidden agenda.

Of course I suspect a hidden agenda. I maintain that the professional-managerial class, represented by the orthodox Democratic party leadership, are not themselves fascists, but they would prefer fascism to socialism; heck, I think they would prefer fascism to social democracy/welfare capitalism. Even if the technical economics of MMT are bad, I suspect that opponents relatively unconcerned about the technical failings and much more concerned that MMT would legitimize social democracy.

But proving bad intent is very difficult and not really dispositive. So my task for the coming year is to dive into the primary literature, both for and against MMT, come to my own conclusions, and share my analysis and conclusions with you, gentle readers.

Friday, April 12, 2019

Unpleasant Keynsian arithmetic

In "Macroeconomics vs Modern Money Theory: Some unpleasant Keynesian arithmetic," Thomas Palley artfully demolishes a straw man of such egregious flimsiness that it is difficult to avoid concluding bad faith.

Referring to Kelton et al., We Can Pay For A Green New Deal, Palley claims, "Proponents of MMT assert [financing a Green New Deal] is a non-problem and the programs can be financed by “printing” money and without causing higher inflation." However, Kelton et al. add an important condition, arguing that deficit financed programs are not inflationary so long as we are not at full employment. Palley simply repeats Kelton et al. own assertion as if he were correcting their error.

Kelton et al.:
Despite lawmakers’ stated fears, larger public deficits are not inherently inflationary. As long as government spending doesn’t cap out the full productive capacity of the economy ― what economists call “full employment” ― it won’t spin prices out of control. Inflation isn’t triggered by the amount of money the government creates but by the availability of biophysical resources that money tries to go out and buy ― like land, trees, water, minerals and human labor. [emphasis added]

Palley:
As has long been known by Keynesians(Blinder and Solow, 1973), money financed deficits can be used to finance programs when the economy is away from the full employment -vinflation boundary.vHowever, that space will be temporaryvto the extent deficits increase real financial wealth and automatically drive the economy to full employment, at which stage there will be an inflationary gap. . . . There is a money financed free lunch as long as the economy is below full employment, but the free lunch inevitably disappears.

Palley continues to misrepresent MMT scholars. When calculating his "unpleasant Keynesian arithmetic", he includes Medicare for all and free college tuition. However, he does not cite anything to support the implicit assertion that MMT scholars advocate using deficit spending to finance Medicare for all or free college tuition. It seems blindingly obvious that the best way finance Medicare for all is through taxes to replace insurance payments.

It is a core tenet of MMT that spending precedes taxation, but requires subsequent taxation to prevent inflation at full employment. But this reordering is an entirely different position than the position that MMT critics attribute to MMT proponents, i.e. that MMT says that we can have unlimited government spending without inflation.

Tuesday, March 26, 2019

What, me worry?


Should we worry about "the deficit"? Well, what do you mean by "worry"?

Let me ask a similar question: should you worry about the natural gas forced-air heater in your home?

Could the heater burn down your house or kill everyone inside from carbon monoxide poisoning? Well, yeah? I guess? It does happen, but it happens only when you have a pretty serious malfunction in the heater.

If you run the heater non-stop and keep your house at 90°F (32°C), you're going to run up a hell of a gas bill. Perhaps not the best idea, but that's not a reason to worry about your bill if you maintain a more reasonable temperature.

When I hear scholars of Monetary Monetary Theory* argue that "we shouldn't worry about the deficit," I read their arguments in the same sense that we shouldn't worry that the heater might kill us all. I mean, yeah, we should kinda worry, we should make sure our monetary institutions aren't seriously defective. But they're not seriously defective, at least not in the United States. Most importantly, we have effective tax collection institutions: the IRS, state and local governments, etc. They're perhaps not as efficient as we might like, but they're a long way from the dysfunctional institutions in Austria or Zimbabwe. As long as we can credibly collect taxes, deficits won't kill us all.

*I have not studied MMT academically. Any errors here are my own.

Similarly, yes, I suppose we miiiiight run the deficit so high that it would impose substantial economic hardship. But I read MMT scholars as saying that the present deficit is way too low; it seems misplaced to argue by analogy that it would be too expensive to heat the house to 90°F when it's snowing outside and the temperature inside is in the low 50s and dropping fast.

There may be some legitimate bad faith in mainstream economists' polemics against MMT, that MMT ignores real dangers of deficit spending. However, I think a big part of what's going on is that economists tend to internalize blindness to a fundamental political problem: that the capitalist ruling class will destroy the economy rather than give up power. That's the lesson from Venezuela: the capitalist ruling class — theirs and ours — destroyed the economy rather than let poor children have milk. Chavez's failure was not what what he tried, it was that he failed — perhaps from his own hubris or incompetence, or because success was impossible — to defend Venezuela from the capitalists.

Sunday, March 24, 2019

Who's going to pay for it?

We want nice things, right? Medicaid* for all, green energy and transportation systems, "free" college tuition, etc.

*I mean Medicaid for poor people, not Medicare for old people. I've been on Medicaid, and it's fucking awesome, at least in my home state.

But, of course, we have to pay for the nice things, n'est ce pas?

We run into a conceptual problem, though, because paying for things is really two distinct but related ideas.

The first idea is what economists call opportunity cost: if we pick one thing, there's something else we can't have. Everything takes work, and there are only so many people, who can work only so many hours. If we work to make one thing we can't make other things. If we want to train more doctors, we have to make fewer toasters; more solar power plants means fewer couches.

As far as I know, there isn't a single economist anywhere who says that we can have as much stuff as we want. Many, myself included, say we could have more and better stuff than we have now, but literally zero say there is no limit on the stuff we can have.

The other idea is what economists call a budget constraint: if someone wants to get something, they have to get the actual money together to buy it. If a person spends money on lattes, that's less money they have to spend on yoga lessons. If someone wants to buy a house, they have to convince a bank (or their parents) to lend or give them the money.

If we want Medicaid for all, we have to give actual US dollars to doctors. We might have to train more doctors, which means giving actual US dollars to medical schools and their professors. If we want to build solar power plants, we have to give actual US dollars to the workers who make and install solar panels and hook them up to the grid.

Opportunity costs and budget constraints are related. Budgets give traction to opportunity costs; they make opportunity costs immediate and direct. Budgets also distribute opportunity costs: whoever actually coughs up the cash is the one who incurs the opportunity cost.

For most ordinary stuff, private goods, stuff that individuals buy and consume themselves, the mapping of budgets to opportunity costs works reasonably well (not counting structural income and wealth inequality, which is a topic for another day); for public goods, which benefit everyone, not so much. If we spend real labor to keep the air and water clean, we lose whatever else that labor could have produced. But who gives up what? Should we insist that poor families give up some of their food while rich families have to give up their sixth vacation home?

Even for some private goods, there are problems mapping money budgets directly to opportunity costs It's one thing to say that if you can't afford a Ferrari, well, do without. It's quite another thing, at least in my mind, to demand that if a person can't afford the money to see a doctor, they should just do without.

Now, gentle reader, you might say, well, yes: If you can't afford to see a doctor, do without; if you die, too bad. If you can't afford clean air and clean water, breathe the smog and drink the sewage. I mean, if you feel that way, fuck you, but I'm not talking to you here.

I'm talking to the people who agree that it would be a good thing — the inevitable overhead included — to have Medicaid for all, a Green New Deal, free college tuition, etc. but worry, How are we ever to pay for these?

If you think that Medicaid for all would be good to have, then you're saying that having it is better than having the next best thing we would have had. The social benefit is greater than the social opportunity cost. And that's the only decision we really need to make. Is it worth it? Yes? Then find a way to do it.

I'm indebted for the following analysis to the scholars and analysts of Modern Monetary Theory. I have not studied MMT academically; any errors following are my own.

So how do we pay for it? The government creates the money. Boom. Paid for. Done. Congress authorizes the money and the Treasury Department starts writing checks. The Federal Reserve will honor the checks; if they don't, Congress can amend the Federal Reserve Act and make them do so.

We don't need to tax anyone or borrow from anyone to get the money. I think it would be advantageous to tax the rich, because fuck those guys, but we don't need to tax them or anyone. It might be advantageous to "borrow" from people, i.e. sell them government bonds, but we don't need to borrow anyone's money.

This solution might cause other problems (which I discuss below), all but the most trivial solutions do, but the first problem is easy to solve. It looks "too easy" only because we've been trained to not understand how money works.

There are two possible economic problems: inflation and interest rates.

If the government dumps a bunch of money in the economy for any reason, we should worry about inflation, i.e. a general rise in prices. However, inflation is not a big mystery. Inflation might not be a problem at all if new government money and the associated increase in bank lending creates enough new goods and services to absorb the additional money. If we create the money wisely, we can improve economic efficiency or put idle labor to productive work. Even if increased output doesn't absorb all the new money, it will definitely mitigate inflation.

Inflation by itself distributes the opportunity costs: inflation is really just a tax. If there's a general rise in price levels, people will reduce consumption: they might have to pay more for groceries and gasoline in return for getting, for example, universal access to health care or clean air and water. If we don't expect the government to perpetually flood new money into the economy, the irritating* inflationary spiral of the 1970s shouldn't repeat itself.

*The inflation of the 1970s was just irritating. The "cure" was economically devastating.

If we don't like how inflation distributes opportunity costs, we can increase taxes, which directly adjust people's budgets to impose opportunity costs. We would almost certainly do so for Medicaid for All, but we would just be exchanging premiums for less efficient private insurance for taxes for more efficient single-payer or "socialized" medicine.

The other more technical problem is interest rates. Dumping money into the economy lowers interest rates because of the increase in the money supply. If we don't want all the money swamping bank reserves, we can drain some of the money back by selling the banks government bonds (or just paying interest on reserves).

The technical economic problems of the government spending large amounts of new money are actually fairly well understood. Anything can be done poorly, so we would have to go about any large government spending with professionalism and care. But we would by no means be sailing into uncharted waters.

The political problems, however, are quite severe, perhaps intractable. But more on this later.

Saturday, February 09, 2019

Love among the mantises

I often reflect upon the word “morality,” the most troublesome and confusing word of all. There is no single or supreme morality; there are many, each defining the mode by which a system of entities optimally interacts. The eminent entomologist Fabre, observing a mantis in the act of devouring its mate, exclaimed: “What an abominable custom!” The ordinary man, during a day’s time, may be obliged to act by the terms of a half dozen different moralities. Some of these acts, appropriate at one moment, may the next moment be considered obscene or opprobrious in terms of another morality. The person who, let us say, expects generosity from a bank, efficient flexibility from a government agency, open-mindedness from a religious institution will be disappointed. In each purview the notions represent immorality. The poor fool might as quickly discover love among the mantises.

-- Jack Vance, The Book of Dreams