Friday, July 10, 2020

Quiggen on MMT

John Quiggen is awesome. His book, Economics in One Two Lessons should, I think, be required reading for everyone (and I assign it for extra credit in my Principles of Macroeconomics classes). But his recent post, The General Theory and the Special Theories, shows that he doesn't quite get Modern Monetary Theory. Or, at least, he doesn't get it in the same way I do.

I am not any kind of "official" spokesbeing for MMT. I don't have a PhD and I don't publish. I'm not affiliated with the Levy Institute or UMKC. I've never met or corresponded with Kelton, Mitchell, Mosler, Tcherneva, Wray, etc.

I have, however, read a lot of the MMT literature, both peer-reviewed and popular. And I have a Master's degree in economics, and I teach undergraduate economics, so I'm not entirely illiterate in economics. The best I can do is put my interpretation of MMT alongside Quiggen's.

Quiggen claims that "Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a 'liquidity trap'"; in other words, it applies only under special circumstances, when the "natural" rate of interest is below the zero lower bound.

I disagree. Modern Monetary Theory is, in essence, based on the observation that a sovereign-currency issuing government creates currency, the foundation of the social permission to allocate real resources. Therefore, the government is not required to obtain currency (or money) from those who already have it to get the social permission to allocate resources. The government's social permission both to allocate resources and to manage the money system comes from its political legitimacy.

More technically, MMT scholars conclude (not assume) that monetary policy is never an effective method to employ unused resources. Mainstream Keynesian economists generally believe that monetary policy is ineffective only in a "liquidity trap" (where the real interest rate "wants" to be negative), so this confusion is perhaps understandable. But Quiggen's assertion and the actual MMT position are different.

Quiggen complains that "The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure." Well, yes, and MMT advocates always add this proviso literally in the same (or next) breath as the assertion that well-targeted fiscal policy can reach full employment.

Quiggen nitpicks that "MMT advocates, like Stephanie Kelton kind-of admit" that progressive taxation is necessary to reduce private expenditure, "but continuously seek to dodge the point." Maybe Quiggen kind-of has a point, and maybe MMT advocates should emphasize that really big infrastructure projects such as the Green New Deal will require increased taxes to distribute the necessary reduction in real private consumption. I honestly don't know what specific policy positions MMT advocates should emphasize; I'm not at all a specialist in public policy debate. However, the right mix of tools to manage private consumption versus inflation seems to me more like implementation details than deep theoretical issues.

Quiggen states that:
MMT advocates Nersiyan and Wray* suggest that the Green New Deal can be financed without “taxing the rich” . . . relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”
But this interpretation misses a key theoretical point about MMT. MMT advocates argue that large public works programs such as Green New Deal will necessarily be financed the way all government spending is financed: by creating the currency. Financing, i.e. getting the money, isn't ever a problem for the government; the problem is fairly distributing the opportunity cost of using money creation to divert real resources, with inflation (perhaps) the most problematic way of distributing opportunity cost.

Quiggen does not include a link; presumably he's referring to How to Pay for the Green New Deal.

And I honestly don't know whether households in top decile or percentile even use as many resources as a huge public spending program such as the Green New Deal would require, even if we reduce their consumption to the 20th percentile. I'm pretty sure we cannot provide universal health care just by reducing the real consumption of the ultra rich; we cannot return all the purchasing power middle-income households already forego by paying private insurance companies.

Other than quibbles about the gory details about optimal tax policy, I really don't understand why Quiggen seems to dislike MMT at a theoretical level.

Saturday, July 04, 2020

The fundamental problem with MMT

Robert P. Murphy has a mostly negative review of Stephanie Kelton's The Deficit Myth. Murphy appears to be a member of the Mises Institute, so I assume he believes that the government cannot do anything good, other than to protect the property of the wealthy. Even before reading, I was pretty sure he would disapprove in principle of the whole MMT project of making it easier for the government provide for social welfare. Still, Murphy avoids the OMG! hyperinflation hysteria so common to vulgar critics of MMT, and ideological bias is no guarantee of error, so I want to look at his criticism in more detail.

Murphy presents a laundry list of mostly unconnected objections to MMT, so I'll just present a corresponding list of rebuttals over at least a couple of posts, perhaps more.

The Fundamental Problem of MMT

Murphy begins his objections by stating MMT's "fundamental problem":
regardless of what happens to the "price level," monetary inflation transfers real resources away from the private sector and into the hands of political officials. If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press.
I'm still really struggling to understand this objection. Clearly, Murphy thinks that monetary inflation is something different from a general increase in the price level, the usual definition of inflation. But I don't know what that is. (Murphy kind of expands on the point below.) Presumably, because MMT is all about the government creating currency as needed, I think Murphy considers the creation of additional currency by itself to constitute monetary inflation.

Now it is definitely true that when the government creates money to purchase goods and services from the population, it is transferring real resources from the private sector to the government. That's pretty much the whole point of a government, and what governments have been doing for about 7,000 years. I get it, Libertarians are completely against governments except to protect their own privilege, but this objection seems misplaced and has nothing to do with MMT per se.

Murphy continues with another opaque objection: "If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press." But what does Murphy mean by "unaffordable" and by "conventional accounting"? Affordability precedes accounting: spending is affordable if a firm or household can get the money; once it has the money, firms and households account for how they spend it. But where does the money that firms and households need to get ultimately come from? Well, in every large economy since 1971, the government creates the money*. All government spending is "funded" by created money. Although MMT scholars are exceptional in that they don't try to pretend that governments don't create money, this objection has nothing to do with MMT. Libertarians might pine for a return to the gold standard, but the world abandoned the gold standard because it just doesn't work. Go back 50 years and argue with Richard Nixon, not Stephanie Kelton.

*The Eurozone is a Hot Mess and has suffered several financial crises precisely because the European Central Bank is not part of any national government.

I will concede one point to Murphy: if the government wants to appropriate real resources away from private production, it should ensure that the citizens believe that benefit of the government spending exceeds the benefit of alternative private employment of those resources: to avoid price inflation, the government should collect enough taxes (after, of course, it spends the money) to reduce private demand by as much as it reduced private production. But every MMT scholar agrees with this concession. The whole point of MMT is about how to employ unused resources, i.e. available labor not employed by the private sector.

Murphy expands a bit, presumably on "monetary inflation". Government spending to employ real resources increases the price level. If the price level would have otherwised decreased, so that spending keeps the price level stable, then those with financial assets are poorer than they would have been had the government permitted deflation.

The easiest rebuttal is simply: yes, but so what? That's how the money system works. Instead of permitting deflation, investors increase their real wealth by collecting interest, which requires increasing the money supply. We might have chosen to keep the money supply constant and let price levels decline instead, but we didn't; which method is correct is beyond the scope of this post. Regardless, investors can't have it both ways: investors cannot be both entitled to interest, increasing their real wealth holding the price level constant, and entitled them a decrease in the price level, increasing their real wealth holding the money supply constant.

But it also matters why the price level decreases. There are two ways the price level can decrease. The price level will decrease if real production increases holding the money supply constant. That's the trade-off above: presently, the government increases the money supply, supplying all holders of financial assets with interest. However, the price level can decrease when real output decreases. In this case, an increase in real wealth for holders of financial assets is at best illusory. If financial asset holders were to increase their consumption, that spending would simply drive prices back up. Even worse, if the decrease in real production were to become permanent (as equipment rusts and workers forget their skills), then an attempt to convert financial assets to consumption will increase the price level above its original point, causing a decrease in asset holders' real wealth.

Murphy argues directly against employing unused resources at all. Murphy cites Mises' malinvestment argument: unused capacity is the result of earlier bad investments; employing that unused capacity will just perpetuate the bad investments. If, for example, we have a thousand factories and a million workers making Pet Rocks that nobody wants anymore, it's a pointless waste of real resources for the government to print the money to keep the Pet Rock factories operating and employing those workers. MMT theorist agree that the Pet Rock factories should not operate (and investors would lose financial claims to their revenue), but what about the workers?

Even taking the malinvestment theory at face value, what do we do with the million workers? We have four choices: pay them to continue to make Pet Rocks, let them starve and die, pay them while they're not working, or pay them to do something else useful. In theory, the private sector should be able to pay them to do something else useful, probably building more factories for products that people do want. Not that Libertarians care much about evidence, but the evidence shows that's not what happens in real life. Instead, if we abandon too many bad investments at once, those workers are not reaborbed into the workforce. Even worse, the workers that provided the newly unemployed workers with consumer goods also leave the private labor force. We end up losing useful productivity for years and sometimes decades.

Murphy continues with some more MMT-specific objections. I'll cover those in a later post.

Monday, June 22, 2020

Content-free criticism

The Deseret News Editorial Board believes that Washington’s deficit spending is dangerous. However, their criticism is just that heterodox economics is heterodox.

Their key point quotes Fed Chair Jerome Powell: "'The United States federal budget has been on an unsustainable path for years now,' he said, adding 'the debt is growing faster than the economy, so debt-to-GDP is rising. That is, by definition, unsustainable.'"

But why should a present rise in debt-to-GDP during a severe economic crisis imply that debt-to-GDP must rise forever? If I heat my house in the winter, should I assume that I must necessarily run the furnace in the summer? If I incur \$300,000 debt this year to buy a house, should I assume that I will incur \$300,000 of debt every year for the rest of my life?

Of course, the board does not understand MMT or the operations of the federal government:
Interest on the debt is now \$385 billion. This is money that must be paid through taxes before the government can begin funding necessary programs. It also is money that otherwise could be in private hands, funding businesses and innovations that create jobs.
But these assertions are wrong.

First, interest on outstanding government securities does not need to be paid specifically through taxes. Taxes do not fund any government spending in the same way that income or revenue funds households' or firms' spending. The government spends what it chooses to spend, on purchases and interest payments, and then collects taxes.

Second, the government has chosen pay \$385 billion on interest payments; the government could, if it wished, choose to pay any amount, including \$0, on interest payments: the government, not the public, sets the interest rate on government securities.

Third, of course, the money that the government pays in interest goes to private hands, where it could, if the private sector wished, fund "businesses and innovations that create jobs."

The board also claims that "fending off a much more damaging fiscal day of reckoning, in which the world loses faith in the dollar, will take hard work and sustained effort." But why would the world lose faith in the dollar? Why should we even care if the world loses faith in the dollar? Literally, the worst that could happen is that the world starts using its dollars to buy stuff from the U.S., which would increase exports and GDP, hardly a catastrophe.

Wednesday, June 17, 2020

Blue lives matter!

https://t.co/IcudsNfVLY

Cops are making themselves objects of ridicule.

Fucking snowflakes with guns, bad tempers, and no morals.

Tuesday, June 09, 2020

What a criticism of MMT lacks

Perhaps surprisingly, Daniel Tenreiro's criticism of Modern Monetary Theory, "What The Deficit Myth Lacks," at least avoids the usual hysterical bad-faith anti-MMT propaganda: Tenreiro does not froth at the mouth screaming hyperinflation! and Venezuela. Indeed, Tenriero grants MMT's most important claim: the United States can presently use government spending to use idle productive resources. However, seems to understand neither the basics of MMT nor basic economic theory.

Tenreiro observes that MMT (following Keynes) prescribes government spending when the economy is below full employment and MMT predicts that government spending will cause inflationary only when the economy is at (or above) full employment. However, these theories do not simply restate the Phillips Curve; more over, modern theory has not thoroughly undermined the Phillips Curve.

We can use the Phillips Curve to say that if unemployment is above the "natural rate" (momentarily ignoring the political choices embedded in the natural rate of unemployment) and inflation is below the corresponding natural rate, then rather than shifting the Phillips Curve, government spending should just move both unemployment and inflation to their natural rates. Indeed, since the GFC, most capitalist economies have seen both too-high unemployment and too-low inflation, indicating that the government can indeed spend extra to use idle productive resources, i.e. labor and existing industrial capacity. Such spending is inflationary by design: a little inflation is a Good Thing.

It is only when unemployment is at or below the natural rate, indicating that the private economy (and ordinary government spending) is using all available labor, that government stimulus spending will crowd out private economic activity. This crowding out causes the Phillips curve to shift outwards, causing inflation with no corresponding increase in long-run unemployment, rather than causing movement along the curve to equilibrium.

Tenreiro mentions the Job Guarantee, an important and perhaps intrinsic MMT policy prescription. His sarcasm aside (the Job Guarantee does not "solve[] the economy"), he correctly states the MMT position: the Job Guarantee will "spur economic growth by employing workers who would otherwise be idle [emphasis added]." The qualification is critical, but Tenreiro perhaps does not grasp its implication.

Tenreiro does not appear to understand ECON 101 national accounting nor the usual rationale for government spending. Tenreiro's complaint here is that the Job Guarantee "would have a negligible effect on output, because by definition it would employ workers in the production of goods and services that private firms consciously avoid." Basic national accounting assumes that government spending counts directly to output: it's the $G$ in $Y=C+I+G+(X-M)$.* Tenreiro's deeper fallacy is that all government spending — roads, bridges, schools, police, the military — is by definition useless: if it were useful, private investors would find it profitable. There's nothing about MMT or the Job Guarantee that's any different from any other government spending.

*In English, output (Y) equals the sum of consumption (C), investment (I), government (G) and net exports (X—M)

Tenreiro shows his disdain for public goods with the usual conservative contempt for alternative "clean" energy. But of course alternative energy hasn't "flopped". It's doing quite well, and the Germans and Chinese are killing us in the sector. The U.S. is lagging behind because it's actually productive, and there's no way to use alternative energy to loot American consumers. More importantly, the job guarantee's primary role would be not in developing but converting the current electricity, heating, and transportation infrastructure to methods that won't kill us all from global warming. Again, ECON 101 (at least as I teach it) tells us that public goods cannot generate profit in a free market because of the free-rider problem. It is worth repeating that the social value of governments providing public goods is not a feature unique to MMT; it's standard economics.

Finally, Tenreiro absurdly objects that MMT isn't what he wants it to be. Tenriero wants a supply-side theory of long-run economic growth; MMT is a demand-side theory of short-run utilization of idle resources. True, MMT fails to address supply-side economics, nor does it promise to do away with war, disease, famine, death, mopery on the high seas, nor the heartbreak of psoriasis. So what? Criticize the theory for what it is, not what it does not even pretend to address.

Wednesday, May 27, 2020

Socialism and markets

Much ink has been wasted on the supposed conflict between free markets versus central planning, with free markets supposedly being intrinsic to capitalism and central planning intrinsic to socialism. All nonsense. Sadly, too many socialists retain an irrational and unfounded fear of the word market.

In the broadest sense, a market is a system of voluntary transactional exchanges of goods and services using money tokens.

As a general principle, a society should ban voluntary action only in extreme cases where the voluntary action either imposes uncorrectable externalities, such as going without a mask in a pandemic, or is just completely stupid, such as driving without wearing a seat belt. (I tend to libertarianism in the latter case, but that's not a hill I'm willing to die on.)

Any society facing scarcity must have some numerical way of allocating scarce resources. If a society imposes a numerical limit on consumption, it has money: money is the numbers and the limits.

Different jobs have different average desirability, so it makes sense to somehow make undesirable jobs more desirable by allowing workers in undesirable jobs to consume more per hour of work.

"Market socialism" is, therefore, kind of a redundancy. A truly communist society would not have markets, but only because communism presupposes no material scarcity. Under communism, a transactional accounting method for allocating scarce resources, i.e. money, would be superfluous. Whether we might have unlimited material resources in the future, at present we do not yet have them.

A socialist society could ban voluntary transactions, and some societies have. I have no idea whether those bans were good or bad ideas in those societies under their specific historical circumstances. But such a ban is a tool, not an intrinsic characteristic of socialism.

A more critical investigation of capitalist markets, however, gives socialists a better idea of what is essential to socialism.

First, capitalist markets are not always voluntary. If I must pay rent or freeze to death, the "choice" to pay rent is not voluntary. If I must kiss my boss's ass to keep my job so I can pay my rent and not freeze to death, the "choice" to kiss my boss's ass is not voluntary. Nature does coerce us — we must eat to live — but we can eliminate nature's coercion only with science and engineering, not with law or social construction.

Second, capitalism really does require markets (however involuntary) in everything. We can carve out exceptions, and the exceptions work in practice, but capitalists always offer unrelenting indefatigable opposition to any exceptions to markets. Capitalists exercise power using involuntary capitalist markets; any exceptions diminish their power.

Third, and most important, the driving force behind capitalist markets is the profit motive: each household must do whatever it takes to increase its flow of money tokens, without limit. Capitalist markets are about accumulating power, not the efficient allocation of scarce resources. Just because Elon Musk has accumulated a metric assload of money tokens does not mean that firing a Tesla into space is an efficient use of scarce resources. (I mean, maybe it was, but we can't tell just because Musk had enough money tokens to do so.)

The essential nature of socialism is not to ban voluntary transactions. A socialist society might or might not ban some or perhaps all voluntary transactions, based on specific material circumstances, but such bans are not essential: we cannot say that a society that does not ban voluntary transactions is therefore not socialist.

What is essential to socialism is first being honest about distributing nature's coercion. Human beings must work to live, so a socialist society, unlike capitalist societies, must be honest and direct about saying that each person capable of working must actually work. And once we are honest about nature's coercion, we can tackle the scientific and technical task of freeing ourselves from nature's coercion.

It is also essential to a socialist society to reject the profit motive. The motive for each households should not to accumulate as much wealth as possible, but to offer its scarce resource, labor, and use its demand on the social product efficiently to maximize the happiness of its members.

Sunday, May 17, 2020

What is socialism?

Every so often, I talk to people about socialism. Almost always, the first response is, "But what about Stalin/Mao/Castro/Chavez!? If you're a socialist, you must be in favor of gulags, reeducation camps, famines, hyperinflation, and mopery on the high seas."

Bollocks. It's a bad faith argument on its face. The reasoning is obviously unsound: Stalin was a socialist (granted), Stalin sucked (granted arguendo); therefore socialism sucks. Sorry, non-sequitur. You would have to establish that Stalin sucked just because he was a socialist. And people don't do that.

I'm sure there are a few fringe people out there who think that Stalin, Mao, Castro, etc. is the One True Prophet. Fine, whatever. But most people don't think so.

These guys (and others) were real socialists, but they were also human beings, and they were working in very specific historical, economic, social, cultural, and international contexts. A simplistic analysis cannot separate out these various historical influences from the influence of socialist ideology.

It's worth taking a step back, though, and trying to just answer the question, "What is socialism?" There's not one good answer; it's not like the National Institute of Standards and Technology has standardized the term.

The best I can do is take a position that is half historical and half normative: I think what follows is common among socialists and worth keeping.

Socialism consists of three elements:
  1. The government acts directly in the material interests of the working class
  2. The working class holds and exercises direct economic power
  3. The working class holds and exercises direct political power

Feel free to add "should" to the above to go from actually existing socialism to normative socialism.

These elements are continuous, not binary, so there is an overall continuum of socialism.

So, for example, the U.S. federal and state governments provide Social Security, Medicare, and Medicaid, unemployment insurance, workplace safety and health regulations, mass transit and other public goods, so the government does in fact at least partially act in accordance with the first element of socialism.

Most of the workers in the U.S. vote, and we still have (for now!) a political system that resembles a democratic republic, so the U.S. is at least partially socialist in the third element.

Workers have almost no direct (or even indirect) economic power, so the U.S. is almost completely non-socialist on the second element.

Anti-socialism, then, just negates the three elements:

  1. The government does not or should not act directly in the material interests of the working class
  2. The working class does not and should not hold and exercise direct economic power
  3. The working class does not and should not hold and exercise direct political power

Everyone should be aware of long-standing anti-socialist opposition in the U.S. to Social Security, Medicare, and all the socialist measures listed above. The working class has been all but excluded from any sort of economic power (and was almost completely excluded from economic power for most the United States' existence), and the project of neoliberalism has been to place most economic power outside the control of the state. Finally, the Republican Party (and to a lesser extent the Democratic Party) has been dismantling even the appearance of a democratic republic.

If you want to say you're against socialism, I think you have to commit to 100 percent to all three of of the anti-socialist negations. Otherwise, you're at least a little bit socialist, and as they saying goes, I already know what you are, we're just negotiating the price.

Notice that the above elements say nothing about markets, central planning, the structure of the government, reeducation camps, freedom of speech/religion/assembly, etc.

These are important issues, to be sure, but they are not essential to socialism; they are implementation details. Implementation details are important, of course, but we have to agree first on the goals and framework before we can begin implementation.

The elements of socialism also say nothing about racism, sexism, homophobia, transphobia, etc. Someone could be a racist socialist: they would be an asshole, of course, and wrong, but they would be a socialist asshole. It is more productive, I think, to just say, "You shouldn't be racist," than to say, "If you're a racist, you're not a socialist."