Sunday, June 16, 2019

Heterodox economics is heterodox

Is the British Labour Party's Fiscal Credibility Rule [pdf] (FCR) neoliberal? I dunno: what's a "neoliberal"?

The FCR might or might not be politically advantageous, but I'm not a politician or political advisor — nor am I a member of the British Labour party — so I have nothing to say about the politics. I do, however, have something to say as an economist: the FCR isn't all bad — it's better than a poke in the eye with a sharp stick austerity — but it doesn't seem very good.

Simon Wren-Lewis put up an unconvincing defense of the FCR against MMT critics of the rule.

Wren-Lewis first undermines his credibility by not linking to the criticism he's rebutting. Presumably, he's referring to Bill Mitchell's extensive criticism of the FCR. Briefly, Mitchell asserts that the FCR "reinforces the narrative that deficits and public debt are in some way ‘bad’", and this narrative "will not turn out well."

The first part is undoubtedly true. The FCR states, "Labour will close the deficit on day-to-day spending over five years. Labour make sure government debt is falling at the end of five years. Labour will borrow only to invest. [emphasis added]" The substantive question, then is how this narrative will turn out.

Instead, Wren-Lewis's chief complaint is that MMT scholars have a gasp! horror! political agenda: "MMT is also a political movement of the left." The political agendas of many economists are irrelevant: they ask questions about politically-independent reality. But macroeconomics, at least the kind of macroeconomics that seeks to inform public policy, must have a political agenda. Value judgements are bound up in the very fabric of macro. We talk about employment and unemployment, for example, precisely because we value employment. According to Wren-Lewis, MMT scholars "are therefore naturally indignant that a Corbyn led government has adopted a rule that is derived from mainstream economics rather than adopting MMT." Yes, and? MMT scholars believe that the rule itself — a rule that derives from mainstream economics — is bad, and that a policy derived from MMT would be better. That's the whole point of disagreeing with mainstream economics.

Wren-Lewis offers only the most tepid defense of the FCR:
Why the need for a fiscal rule at all? . . . The answer is provided by something called deficit bias. . . . In the 30 years before this crisis, the ratio of OECD government debt to GDP almost doubled for no justifiable reason.

Deficit bias happens because politicians like cutting taxes or raising spending through borrowing, because it puts off any obvious economic pain. . . . But if deficit bias does substantially raise the debt to GDP ratio, as it did before the GFC, then more debt requires paying more interest which in turn requires higher taxes or lower spending. Deficit bias does not avoid the downside of cutting taxes or increasing spending, it just puts it off until a later date.

But Wren-Lewis simply begs the question here. MMT scholars do not argue that a fiscal rule is not the correct way to limit deficit spending. They argue that deficit spending is the generally correct way to implement government policy. (They do not argue that deficit spending is good by definition: any tool can be used poorly. But the problem is not in the tool itself but the application.)

I do not see "neoliberal" as an insult: Brad DeLong classifies himself as a (left-)neoliberal, I would classify Keynes as a left-neoliberal, and I would classify Wren-Lewis as a left-neoliberal. Neoliberalism is just an philosophy in political economy that holds that private market solutions are almost always preferable to government policy, i.e. provisioning public goods as well as using non-market activity to achieve efficient social allocation of resources. And government policy is inferior precisely because the government is not budget constrained: if the government is not actually budget constrained, it must pretend it has a budget constraint.

In contrast to right-neoliberals, left-neoliberals usually agree that government must rescue markets when they face the danger of collapse. (Most left-neoliberals also advocate greater prudential economic regulation, in agreement with MMT, but that's not the issue here.)

In this sense, the FCR is clearly neoliberal. The message is clear: When not at the zero lower bound, government should sharply restrict its economic impact, especially use of deficits. The FCR treats deficits like dynamiting houses during an out-of-control fire, a desperate measure justified only when used to avert total catastrophe.

MMT scholars and I myself hold almost the opposite opinion: Deficits by themselves are just no big deal. In just the same sense, a tyrant can make any number of horribly oppressive laws, but the idea of law itself is not the problem. The government must act economically, and it must act beyond just the necessity to fix the inevitable periodic catastrophic failures of the market system. And when it is expedient to print money to do so, then print the damn money without worrying about the effect on the capitalist class.

Additionally, the FCR calls for closing the deficit and lowering public debt over five years. MMT is clear on the implications of this policy: lowering net private wealth.* Again, if net private wealth decreases, I would be shocked! shocked, I say! to find that the decline came not from rentiers' but workers' wealth.

*Alternatively, increasing net private wealth with reduced public debt would require a huge current account surplus (increased net exports), which is probably worse.

So is the FCR neoliberal? I dunno. I don't really care. Is it bad macro? By orthodox macro, it's fine; MMT macro, it's dumb. It would be nice if Wren-Lewis and other economists, all of whom are way smarter than me, would actually address the issues instead of slinging around insults and butthurt, but I'm not holding my breath.

Tuesday, May 07, 2019

the condescending tone

Ed Burmila observes
the condescending tone natural to the mediocre white guy who doesn’t know what he’s talking about but is certain of its accuracy
in the vacuous invocation that the US is a republic, not a democracy, but I've seen it in so many other contexts. Not always white, not always a guy, but usually.

Sunday, May 05, 2019

Historical materialism and the calculation problem

Over at A Trivial Knot, the socialism dicussion has turned to the calculation problem and the problem of incentives. I think looking too closely at mechanisms and analytic optimality is at best a red herring.

The economic calculation problem is intractable. Given a sufficiently complex economy, it is not possible in real time to determine even approximately the optimal production, distribution, and consumption of tradable goods and services. Worse yet, even if we have a well-defined and universally agreed-upon objective function, we can tell which of two outcomes is better or worse, but we cannot tell which of two outcomes is "closer to" or "farther away from" the optimum — it is not necessarily the case that the better outcome is closer to the optimum. As any student of calculus knows, a local maximum might be far away from the global maximum.

The calculation problem is intractable even given an objective function; the calculation problem becomes completely irrelevant if we do not have such an objective function, when, as Hayek asserts, "society cannot agree on its most basic ends."

But chasing such an intractable, ill-defined optimum is a fool's errand. People and societies do not actually agree upon some ideal outcome and then define, calculate, and then implement the means to achieve that outcome. What we really do is resolve immediate, concrete conflicts in specific contingent, historical, material contexts. Individuals do this, societies do this, and both an individual and a society is just the accumulated outcomes of all the conflicts thus resolved. It might be fun to speculate on some theoretical ideal and invent castles in the air to exemplify that ideal, and there's no harm and perhaps some value to doing so. But actual social change over time necessarily becomes dominated by the resolution of real conflicts.

The fundamental problem with capitalism is not its mechanisms — money, the price system, the profit motive, income and wealth inequality — and the solution is not some alternative mechanisms — social credit, central planning, the altruistic motive, enforced equality. Solving the fundamental problems will certainly entail new sets of mechanisms, but the specific mechanisms are not the real issue.

We get closer to the fundamental problem of capitalism by observing that rich people make all the important decisions, influenced only slightly if at all by the general welfare. Naturally, their first priority is always that they retain decision-making power.

Closer still, rich people took over decision-making power because 18th and 19th century industrialization favored rich people making decisions. The wealthy capitalists were able to resolve conflicts that the feudal/monarchical ruling class of that era was unable to resolve.

We know from empirical evidence, e.g. the Great Depression and the Global Financial Crisis, that the capitalist class is unable to resolve certain conflicts within capitalism. The professional-managerial class (PMC) temporarily took over decision-making power because the economic conditions of mid-20th century financial capitalism favored them making decisions. The PMC was able to resolve conflicts that the capitalist class was unable to resolve. The PMC did not, however, decisively resolve those conflicts in the same way the capitalists were able to decisively resolve the conflicts of feudalism, and their own inability to resolve conflicts led to a capitalist resurgence.

Now we face a new set of conflicts, conflicts that neither the PMC nor the capitalist class seem able to address, including but not limited to global warming, wealth and income inequality, the precarious economic state of the working and lower professional classes which seems destined to descend into outright immiseration.

Assuming humanity does not simply become extinct, we will resolve these conflicts, because we must. The specific way we resolve these conflicts, the institutions we adapt or create to systematize these resolutions, and the historically contingent path we take to a systematic resolution, will be our future society.

I want to emphasize that we (should) resist capitalism not because we do not want capitalist resolutions to these conflicts, but because capitalists cannot resolve these conflicts and still remain capitalists. (And if the capitalists can resolve these conflicts, they had better get busy, because their time is running out.)

The issue is not what we might do a 1000 years from now in a communist utopia. The question is what we do today to solve the conflicts of today. Theory is useful, but only insofar as it informs our resolutions of today's conflicts, and how we use the resolutions to advance the cause of human liberty.

Some specific advice, seems warranted. Modern Monetary Theory is interesting not because it is some groundbreaking revolution in economic thought (it's not, but that's OK; even Marx was just a "third-rate Ricardian"), but because it brings front and center a truth economists push to the background and that capitalists must fight with every fiber of their beings to deny, that money is a creation of the people, it belongs to the people, and it is a tool for the people — not the capitalists — to get what they want. Nobody can have everything, and very little is obtainable without effort, but there is a vast difference between "we cannot have this or that," and "with sufficient effort, we can have it."

We can, for more concrete examples, have the Green New Deal, Medicare for All, zero involuntary unemployment etc. We will have to work for it, just like we have to work for everything. Indeed, the idea that we can have these things for "free" is not only untrue, but undermines these programs. Hence the assertion that these are "free" comes from opponents, not supporters. All supporters say is that they are possible, which they are. As Stephanie Kelton says, "If it's technically feasible, it's financially feasible."

Money is just the social permission to act. When opponents complain that we cannot afford this or that, they are saying that those who presently have the money forbid us from working for it. And our response must be, "Fuck you. We don't need your permission." The only question is when we will develop the will and power to take what we need; eventually we must, if only out of desperate immiseration.

Saturday, May 04, 2019

The exploitation of labor

Siggy at A Trivial Knot has started a discussion about economics, starting with labor exploitation. Hop on over and join the conversation. Siggy is a seriously intelligent person (waaaay smarter than I am) and a good moderator.

Thursday, May 02, 2019

A ringing anti-endorsement

I like it when stupid people come out against something I like!

Trump Fed Pick Stephen Moore Calls MMT Among ‘Stupidest’ Ideas He’s Heard

Brad DeLong thinks Stephen Moore might not be the sharpest tool in the shed.

Following some links from DeLong, we can add Yael T. Abouhalkah, Jonathan Chait, Kevin Drum, Craig Harrington, and Deron Lee to the list of people who have... concerns about Moore's qualifications.

Of course, just because someone dumb is against something doesn't make that thing good. But I would be more worried if an ignoramus like Moore actually liked MMT.

Wednesday, May 01, 2019

MMT link roundup


Bank on the People Instead of Wall Street Parasites

According to Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, the prohibition against allowing the government to borrow from its own central bank was written into the Banking Act of 1935 at the behest of the securities dealers. A historical review on the website of the New York Federal Reserve quotes Eccles as stating, “I think the real reasons for writing the prohibition into the [Banking Act] … can be traced to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted.”

It’s Time to Look More Carefully at “Monetary Policy 3 (MP3)” and “Modern Monetary Theory (MMT)” (via Bloomberg)

[M]oney and credit created can be better targeted to fund the desired uses than the process of having the central bank buy financial assets from those who have financial assets and use the money they get from the central bank to buy the financial assets they want to buy.


Entering A World Of (Hyper)Inflation
Add Carl Icahn to the List Opposing MMT (Good. I don't want Ichahn on my side.)
Modern Monetary Theory Is Supply Side Economics—but for the Left
The ostrich approach to our debt
There’s a bill collector at the door!

Monday, April 29, 2019

A technocratic apolitical presentation (not!)

MMT: new wine in old bottles or ‘voodoo economics’? by Russell Jones and John Llewellyn

Much likeearly-1980s Laffer Curve ‘supply-siders’, MMT’s disciples are often near-messianic in tone, while somewhat vague in exposition. They are prone to presenting their ideas as a pathbreaking, revolutionary, approach to economic analysis and management, that can free policymakers from the shackles of fiscal and monetary orthodoxy.

First, cite your fucking sources. Second, this is a pure ad hominem argument. Third, this is how every critic describes every advocate: how creationists describe evolutionary biologists, religious people describe atheists, capitalists describe socialists, anti-vaxxers describe medical professionals, etc. ad nauseam.

[I]n this piece we seek to present, in a technocratic, apolitical way, a guide to the analytic content of MMT, and the conditions under which it could, or could not, be usefully applied in policymaking.

I would take this disclaimer a little more seriously if you hadn't just shat in the well two paragraphs previously. But whatever, let's push on.

The essential elements of MMT can be summarised as follows:
  • A government that creates its own money generally need not, and will not, default on debt denominated in its own currency.
  • A government deficit is necessarily mirrored by an equivalent private sector surplus.
  • Monetary policy is relatively ineffective in a slump: fiscal policy is more powerful.
  • A government can buy goods and services without the need to collect taxes or issue debt.
  • Through money creation, interest costs can be constrained. Indeed, a substantial and persistent budget deficit can be financed at low, if not near-zero, cost.
  • Government spending and money creation need be limited only to the extent that employment becomes ‘over-full’ and encourages inflation.
  • Inflation, should it arise, can readily be controlled by higher taxation and bond issuance to remove excess liquidity.

I might tweak this a little, but it's not too bad a description. But again, cite your sources, please.

Thus, the core inference and contention of MMT is that the budget deficit and public sector indebtedness should be allowed to adjust to the level necessary to secure full employment. In turn it is suggested that this goal should be achieved through a government-sponsored blanket jobs guarantee, which would act as an utomatic stabiliser. When private sector jobs were plentiful, government spending on the guarantee would be lower, and vice versa. Alternatively, full employment could be achieved by large-scale spending on infrastructure, climate change, and the environment, such as via a ‘Green New Deal’–all financed, if necessary, by the central bank.

The jobs guarantee and large-scale government spending here are not alternatives. MMT advocates argue for both. Other than that, a fair summary.

The truth about MMT is more complicated and less trailblazing than its supporters suggest.

Not a criticism, just another lazy ad hominem. Let's push on to Jones and Llewellyn's actual criticism.

Indeed, it looks very much like the ‘Functional Finance(FF)’gospel preached by Abba Lernerin the late 1930s and 1940s.

What?! MMT Scholars, who have PhDs in economics, have, gasp! read Abba Lerner?! Say it ain't so!

For example (since I actually will cite sources), Here's L. Randall Wray in MMT Responds to Brad DeLong’s Challenge:
What [MMT scholars] really like was Lerner’s application of Functional Finance to the budgeting process. The budget should be functional, not sound. That is, to achieve a functional purpose rather than to balance taxes and spending.

Or just search for Lerner on NEP.

Furthermore, Lerner isn't the first. He has predecessors.

Back to Jones and Llewellyn.

[Keynes] considered that Lerner lacked practical judgement and intuition, and paid insufficient heed to what he described as the public’s ‘allergy to extremes’.

Yet another ad hominem. Is this how you do technocratic apolitical examination? I think I was doing it wrong all those years in college and grad school studying economics.

[T]he policy inferences of MMT need to be considered seriously. At the very least, they do not compare unfavourably with calls for fiscal and monetary rectitude that are grounded either in narrow accounting logic or myopic adherence to the quantity theory of money.

I concur! Given that "calls for fiscal and monetary rectitude" have dominated the conversation over government spending since I've been alive, MMT sound pretty trailblazing just on that point alone.

MMT, like FF (and in common wit hmuch US-led analysis) is based implicitly on a closed-economy model. It makes no allowance for the possibility of monetary expansion causing the exchange rate to fall rapidly.

No it isn't and yes it does. See MMP #34 Functional Finance and Exchange Rate Regimes: The Twin Deficits Debate. Y'all have heard of Google, right?

Also, for a large country such as the US, exchange rate problems are relatively trivial. MMT scholars have given a lot of thought to the applications of MMT for smaller, outside-debt constrained countries.

Jones and Llewellyn:

MMT overlooks the potential for monetary expansion and an extended period of low interest rates to create the conditions for domestic financial instability, excess, and perhaps disaster.

Surprisingly, MMT scholars have heard of Hyman Minsky. Google is your friend.

MMT’s disciples pay little attention to the structural component of unemployment, which is unlikely to prove responsive to stimulus of demand and, more likely, raise inflation.

What. The. Fuck. The whole point of the Jobs Guarantee is that ordinary stimulus will not cure structural unemployment. Seriously, guys, you have to at least read the textbook, or you'll fail the class.

For example, from the MMT Primer:

OK, explain to me how pumping up the demand for higher skilled and educated workers—setting off a bidding war for them—will cause jobs to trickle down to the less skilled and less educated workers WITHOUT causing wages and prices to rise.

Jones and Llewellyn:

They say little about the effects on wealth distribution of a reliance on monetary finance.

Why should they? They talk about the salutatory effects on wealth distribution of fiscal policy, i.e. taxing the shit out of the rich because, you know, fuck those guys.

They ignore the vexed issue of moral hazard. The disruption of the connection between government decisions on the size of its budget deficit and the willingness of the private sector to fund that deficit at interest rates that it deems reasonable destroys at a stroke one of the most important disciplines the market imposes on politicians.

This statement requires a little more depth of response. First of all, no economist ever just ignores moral hazard; however, we might have different opinions on where and how much there is. And we already know Jones and Llewellyn have not read the textbook, so we have little confidence that they have read comprehensively enough to find out what isn't there.

I can't nail down a specific quotation, but the whole point of MMT, at least as I read it, is that MMT scholars don't want the "private sector" (i.e. the billionaires) to discipline the government, they want the government to discipline the billionaires.

Where's the real moral hazard? In elected politicians who have to maintain legitimacy and popular support to gain reelection? Or in a bunch of rich people who will do anything to retain their power?

Finally,it is inescapable that debt accumulation cannot go on indefinitely

This is just flat-out not true. Or, more precisely, debt accumulation can go on as long as economic growth goes on or until we move away from a money-based economic system entirely, in which case debt becomes meaningless.

Saturday, April 27, 2019

Free speech and academia, yet again

I will say this yet again, because it's important.

Academia is (among other things) a place where we separate good ideas from bad. This function requires that academics openly discuss questionable subjects and ideas with a as much dispassion and "objectivity" as we can manage.

However, at some point, academics should and actually do make some decisions: we find some ideas to be legitimately good, and promote those ideas, and we find some ideas legitimately bad, and we deprecate those ideas. And if you want to discuss a bad idea on a college campus, the burden of proof is on the claimant to show that there's something so novel and compelling about the idea that the previous judgement should be suspended.

The idea that women are in any way inherently inferior to or even very different from men (other than reproductive biology and trivial aspects of athletics and heavy manual labor) is one such legitimately Bad Idea. The idea that people of some races are inherently inferior to other races is another such Bad Idea. The idea that people with atypical sexual or gender orientation are in any way inferior to those with typical orientation is yet another. This list is not exhaustive: There are any number of completely discredited ideas that have no place in a university.

With apologies to Monty Python, sexism, racism, etc. are not pining for more critical investigation. They are dead. They've passed on. These ideas are no more. They have ceased to be. They've expired and gone to meet their maker. They are bereft of life, they rest in peace. If racists hadn't nailed these ideas to the perch they'd be pushing up the daisies. They're metabolic processes are now history. They're off the twig. Kicked the bucket, shuffled off their mortal coil, run down the curtain and joined the bleedin' choir invisible. They are ex-ideas.

Do I make myself clear?

No one gives a fuck if some dumbass student writes a stupid sexist paper in Comp I or if some mossbacked tenured professor publishes reactionary racist drivel in an obscure journal. De minimus non curat lex.

But it's an intolerable affront not just to the sensibilities of minority students but also to those who take seriously the academic pursuit of truth for an actual university to invite a dumbfuck racist like Charles Murray or a narcissistic poseur like Milo Yiannopoulos to speak, as if these morons could breathe any sort of intellectual life into long dead ideas. The only possible reason to invite people like this is that the university wishes to promote racism, sexism, or some other long-discredited idea.

The history of the most brutal violence to control and oppress women, people of color, etc. ad nauseam means that universities must take bullying and hostility with the utmost seriousness. A campus is not 8chan; it is a professional environment. It should require literally zero thought to hold that the right of Black students to fully participate in academia squashes the right of some Aryan Brotherhood frat-boy jerk to yell "n****r" in the quad.

Good fucking grief. Why is this still an issue?

MMT link roundup


U.S. professor: Japan shatters notion of deficit boogeyman
2020 Democrats have embraced seemingly every big left-wing economic idea — except this one (WaPo)


Five myths about federal debt (WaPo) (People have to actually believe something for it to be a myth)

the stupid! it burns!Stupid

MMT: The Latest Liberal Economic Fantasy
The Huge Fallacy Of The Modern Monetary Theory: Money Is Not Free
Dire warnings for entitlement program viability

Wednesday, April 24, 2019


Modern Monetary Theory continues to gain traction in the US

MMT asks that instead of worrying about their balance sheets, governments start looking at ways to use the resources at their disposal in the most efficient way possible. According to the theory, generating full employment, creating a more equal society and fortifying our education systems are all possible without causing rampant inflation. It is not a question of being able to afford it – it is a question of political will.