Credit and credibility
A couple of weeks ago I was spouting about the need to get back to the basics of what money is, and start to challenge deeply entrenched assumptions about the need to pay down debt, and hence the need to cut public spending.
Paul S and Barney, two of TCF’s coterie of intelligent commenters, have given interesting responses:
I just feel that the papers you refer to just aren’t convincing. They are almost pre-scientific in their analysis, and all of them are far too brief to adequately cover the ground (Barney).
But look how long and complicated your blog post it. In politics, if you’re explaining you’re losing. And if you’re explaining at that length in that detail (without accredited economics qualifications that enable you to argue from authority, however unfairly) you’re dead in the water (Paul).
Blimey, thought I, dammed if I write a lot; damned if I don’t. Mind you, at least they engaged with ideas, however dismissively. Sunny couldn’t even be bothered to do that (though I know he can’t follow all responses through).
In fact, even though Barney won’t take seriously what I say because I’ve not written enough, and Paul won’t take it on board because I’ve written too much, their point is substantially the same: Modern Monetary Theory, or any socialist variant of it, isn’t going to take off because it’s just not respectable.
It’s either ‘pre-scientific’ because it’s doesn’t belong to economic orthodoxy, or it’s not got ‘authority’ because it, erm, doesn’t belong to economic orthodoxy.
Kuhn was right, then (I think Barney’s making this point when he uses the Kuhnian term ‘prescientific’). It matters little whether what I’m saying is right. It’s just not within the paradigm of current economics.
Indeed, one of the main proponents of Modern Monetary Theory (MMT), Warren Mosler recognises this when he tells the tales of how he puts senior academics to shame for their lack of understanding of the basics of reserve banking or cheque clearing works. The reality of how money is made, moved about the system, and disposed of, is unimportant to them; they are focused on the loftier issues of how they think the economy might be ‘modelled’.
And from within ‘respectable’ academia itself, there’s a recognition from Mary Mellor that economic theory is even more constrained by convention than other social science, for the very reason that it has developed as a separate speciality:
Economics became separated from the other social sciences which meant that social and political questions about the nature of money were not posed (p.22, see also Red Pepper article).
So where does that leave us? Here’s a perfectly logical critical examination of the basic tenets of the way modern economies work, which if judged solely on its own merits should be taking the wold of economic and political science by storm.
More importantly the broader Left (and the Labour leadership candidates) should be seizing on it as a key argument, both against the current worldwide austerity wave (aka. class power).
MMT’s basic argument is, after all, that if governments understood what money is and how it works better, we could do all those things the Left is quite keen on – full utilisation of resources, full employment, that kind of thing.
Certainly there are unanswered questions about how the new model might be implemented, particularly the question posed by a broker-cum-MMT-convert here:
I have been thinking a lot about the actual ability of government to withdraw demand from the economy by increasing taxes – a key assumption in Modern Monetary Theory (MMT) with which I have an issue, and critical to containing eventual inflation. But for now, I am on an MMT kick and their analyses demonstrate that sustained consumer price inflation is a long way off.
Even so, any leftie I know (internetly) who’s got as far as taking the stuff seriously, ends up being seriously impressed by what at first sight looks like counter-intuition, but which looks startlingly clear once the first concepts are grasped.
There are two broad choices then, it seems to me, for those of who believe there is something in MMT, and want to get it a wider hearing, or in Kuhnian terms, ensure that MMT is regarded not as ‘prescience’ but as ‘revolutionary science’.
The first is to continue what’s already happening. This is the marketing of MMT as an alternative economic model, using the traditional methods – setting out the logics of the model, contrasting it to the one currently in use, and keeping on saying it.
It’s difficult to say how much traction that approach is having, though perhaps we may know more in the autumn when Warren Mosler’s campaign to become a Senator, based on his promise to ‘fix the economy in 90 days’, is concluded. The book form of his ‘Seven Deadly Innoncent Frauds of Economic Policy should also be out then, and may have some impact.
But my suspicion is that none of this is going to get very far, for the very ‘Kuhnian’ reasons I’ve set out above. In political economy, it seems, being right will not be enough in itself.
So perhaps we need to take some tips from those who are wrong, but whom many people think are right.
The climate change denier brigade do a pretty good job, it seems, of being both utterly wrong and very believable to an awful lot of people. Again, our friend Paul S at Bad Conscience points us in the right direction:
We’re all familiar with the loony right, which simply denies that climate change is even happening. The sorts of people who with no climate science qualifications dismiss the findings of experts, and decry the international conspiracy which they, through their special powers, can see through and expose.
Perhaps the MMT and MMT-interested/post-Keynesian community could do with take a leaf out of the loony right’s book. Perhaps we’re too intent on respect for academy. Perhaps a bit more focus on the ‘international conspiracy’ which is modern capitalist economics might bring us a lot more attention and kudos than being right about stuff.
Is it time for Warren Mosler to shed the Mr Nice Economist image, and go for the jugular? There are signs that he’s thinking about it, when he quotes Fed Chairman Ben Bernanke admitting on 60 minutes that the US monetary system boils down to data entry on a spreadsheet:
SCOTT PELLEY: Is that tax money that the Fed is spending?
CHAIRMAN BERNANKE: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
So the lie is out, suggests Mosler, though – gentleman that he is – he doesn’t follow it right through; the Fed has inexhaustible cash, quite independent of tax revenue, because it is, well, the Fed, and everything every politician’s ever told you about countries only being able to spend what they earn is horse shit.
Why isn’t the fact that Bernanke has admitted he just logs on and adds a zero or two the banks’ money big news?
Why, as Mary Mellor points out, can we not see the blindingly obvious?
In Galbraith well-recorded works ‘the process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent’.
……….
If new money can be created out of fresh air, like fresh air it should be seen as a resource available to everyone, or at least their availability should be open to democratic consideration’ (p.26-7, quoting Galbraith p.18-19).
Well, the slight drawback is that the MMT doesn’t have the loony right’s access to and control of the mass media, but we have to start somewhere. That’s where this comes back in……….(to be continued)
“Kuhn was right, then (I think Barney’s making this point when he uses the Kuhnian term ‘prescientific’). It matters little whether what I’m saying is right. It’s just not within the paradigm of current economics. ”
Going to be a stickler for accuracy: in Kuhnian lingo, if a discipline is “pre-scientific” (as economics and the social science are, according to Kuhne) the paradigms don’t yet enter the picture because an established practice of puzzle-solving hasn’t been stabilised amongst the relevant community of researchers.
The problem with economics (at least, from the Kuhnian perspective) is that there isn’t “a” paradigm of economics yet, because the discpline is just too immature – there are competing conceptions, models and attempts at explanation but as of yet none of them can get enough of their own account sorted to be able to establish a hegemonic (if we’re going to get Gramscian) claim to the effect “this is how we do the discipline”; instead lots of contenders are still fighting.
hence your problem isn’t so much that you’re not in the right paradigm, and need to effect a paradigm shift – it’s arguably much worse that that; your predicament is that economics is stuffed full of half-baked, not-quite-there-yet accounts and approaches which are all vying for supremacy. Yours doesn’t have the strength or manpower to bully out the others, and unless you can radically move the entire discpline on to the point where it ceases to be pre-scientific, you’re not going to be able to boot-out the other approaches.
Which leaves everyone in a mess, but you in a very unfortunate position within that mess because you (basically) lack the power and influence to assert your model.
That, in any case, would be the Kuhnian analysis. Personally I’m not a Kuhnian, as I just don’t know enough about the philosophy of science and social science to commit. But the above would look – even if in the end not faithfull to Kuhne all the way down – like a fair description of your predicament…
I don’t think there is any need to argue about competing “theories”. The effects of a massive fiscal consolidation right now *should* be obvious to everyone. I’ve already posted US data to this site. Here’s the UK: http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf
Paul @!: I’m happy to concede on Kuhn, who only really got in the post because of Barney’s reference. In fact in my notes as I battered I had words like hegemoney and Gramsci, and the argument that a new line of counter-hegemonic attack(thinking Laclau and Mouffe about the creation of boundaries) may have been better. In the end though, I think this substantive point – that we need a more guerilla-like approach to getting leftist economics taken more seriously in the face of Mont Pelerin-inspired/funded orthodoxy – is the same.
Vimothy @2: I’d love to be able to agree with you that the data set out v clearly in the Economic Consequences of Osborne would be enough to persuade governments that they’re going in absolutely the wrong direction. But it’s not. Papers like this are being ignored because it’s in the interests of capital to ensure that it is so, through its hegemonic control of the media.
Hence, i’m arguing that, while it would be nice not to have competing theories, opposition of the type i’ve set out may be needed to ensure that your type of thinking sees the light of day.
By the way, the discussion has gone over to http://www.pickledpolitics.com, where Sunny posted his ‘reply to Paul’.
Why should liberals and progressives be concerned about this? Because MMT shows how the liberal/progressive agenda can be funded, It also undermines specious arguments about how this agenda cannot be funded.
MMT is an established alternative to contemporary thinking that may be dominant but is not monolithic, the way a scientific paradigm in physics becomes once accepted by the community of physicists. Economics does not function like the physical sciences or the life sciences, or even the social sciences, because of its interface with politics. Economics is inherently ideological and therefore contentious, instead of normally scientific. There are similarities with Kuhn, as I have pointed out myself, but economics is as much normative as it is scientific, owing to its close connection with policy-making.
MMT describes how the modern (post-1971) monetary system works and what it’s potential is for policy-making. It has clear principles that extend from the classical age to the present and numbers many highly respected economists as its precursors — Marx, Knapp, Fisher, Keynes, Kalecki, Lerner, Minsky, and Godley. It’s macro theory is based on Keynes, so it’s a branch of Post Keynesianism, as well as on Wynne Godley’s stock-flow consistent macro models. It is represented by a number of professors of economics both in the US and abroad, including James K. Galbraith. It has extensive professional literature. It is not an entirely new way of doing economics, and its adoption would not constitute a scientific revolution. Rather, if it were adopted some outmoded concepts would just disappear, as physicists just dropped “the ether” when it was found not to add anything substantial to understanding.
There is no economic “orthodoxy” that prevails in the US. The primary schools academically and politically are Neoliberalism and New Keynesianism. Greg Mankiw and Paul Krugman are New Keynesians, and Greg was George W. Bush’s economic advisor. While it is true that these schools are dominant, there is a variety and disagreement. Moreover, many prominent economists belong to neither school. Many economists working in finance, for example, are Austrians, which is considered a marginal school in academia.
Those who criticize MMT without being familiar with the literature and the lively discussion at MMT blogs as well as non-MMT blogs about MMT are simply missing the point. And there are a lot of these people, many professionals. In my field (philosophy), to criticize colleagues without reading them is considered unprofessional. No serious person would do it.
MMT is only “a new paradigm” (economists do speak about paradigms) in the sense that contemporary economics either is operating as if the US were still issuing a convertible fixed rate currency or is using macro models that are not stock-flow consistent. MMT also criticizes theoretical assumptions that are not supported by data. MMT then provides a macro model that it claims has more explanatory and predictive power.
For liberals and progressives, however, the objective of MMT is most salient. What MMT seeks to achieve socially and policy-wise is full employment (employment for everyone who desires work) together with price stability. MMT macro theory shows how to achieve and maintain this, chiefly through fiscal policy. It also proposes changes to current law and practice in order to facilitate this by taking full advantage of the potential of the current monetary system, instead of placing political restraints upon it that are not financially necessary and just get in the way of achieving public purpose.
I’ve been reading a lot on MMT over the last year and although we’ve kissed and fondled I’m not quite ready to consummate. I’m happy with the accounting identity: public + private + external = 0 (the kiss), was surprisingly taken with government is the source of money (the fondle) but I’m not quite ready to let government spending as a cure all for our times into my underwear. Perhaps others who have been wooed by MMT can help. I can see in aggregate that if private spending falls government can make it up. Further that the spending can be financed by government creating money in a controlled non-inflationary way and needn’t be financed by debt (and even if it is that’s not a problem). But the fact remains that governments spend on different things from the private sector so how effective is this going to be ?
As private sector spending collapses I see less demand for holidays, TV’s, cinema tickets, cars, meals out etc. The government steps in a spends on roads, schools, aircraft carriers etc. How does an unemployed restaurant chief suddenly become a civil engineer ? Sure the civil engineer eats out once in a while and the money cycle through. But fundamentally it feels like there would be a load of underemployed resources as a result of the private sector slowing and a different set of in-demand resources a result of the government spending. The re-allocation between the two has to be slow and painful.
Then when it’s all over and normal service is resumed government reigns in spending. Now we have a second long a painful re-allocation as the resources all re-train, re-skill and transition back again.
At the aggregate level the figures look great, but for individual people you get two redundancies for the price of one.
Tell me it ain’t so.
Spallen,
Under MMT, the government does not have to spend to pump up aggregate demand. It can lower taxes instead, or even drop money out of helicopters (i.e. give everybody a check). That way, the allocation of real resources is left up to the private sector to decide, not bureaucrats and lobbyists in Washington, DC. The important thing is to create enough net financial assets to meet the aggregate savings desires of the non-governmental sector (which means the private sector and the rest of the world). Once those savings desires are met, aggregate demand will rise.
You’ll find that even though the commenters on the MMT blogs skew left (like my fellow MMTer Tom Hickey above), there is nothing inherently political about MMT, and conservatives (or centrists like me), who want to see smaller government, should not be afraid of embracing it as well. I guess I can see the reluctance to embrace MMT when the Democrats have the White House and strong majorities in the House and Senate, but that won’t be an issue starting early next year. It would certainly be nice if we could have a presidential election in which both candidates embrace MMT and tell the people how they intend to implement it, so the election would be about fiscal policy unconstrained by monetary ignorance, but we can’t wait that long.
spallen: “I’m happy with the accounting identity: public + private + external = 0 (the kiss), was surprisingly taken with government is the source of money (the fondle) but I’m not quite ready to let government spending as a cure all for our times into my underwear.”
I am a bit surprised you have difficulties with the third step – government spending.
Once there is indication the system lacks enough money to maintain its normal work – full employment with stable prizes (due to private saving desires, and not enough support from external sector), nobody else but the sovereign government issuing its own non convertible fiat currency can provide that lacking part of money through same amount of budget deficit.
How the government will fill this gap through budget deficits is a political matter.
I am sure Bill Mitchell and Warren Mosler will have different approaches to that, but both of them will agree on the same amount of needed budget deficits.
My statement that the papers were pre-scientific was not an invocation of Kuhn, though I can see how the terminology was misleading.
My actual point was that the papers are a bit “hand wavy”. This is summed up by the recurrent statement by proponents of MMT on this site that it all follows “logically”, as if we can sit in our armchairs and divine economic policy from a few basic propositions.
That kind of reasoning strikes me as unscientific. The idea that we can tell from almost pure logic that a reduction in government spending causes aggregate demand to fall strikes me as absurd.
I have not seen, though I cannot pretend I have looked very hard, any mathematical models or microfoundations, or detailed empirical studies. The best offering, the Pettifor paper, starts off with a lamentable regression analysis (the choice of time periods is absurd) and then essentially concludes “of course correlation doesn’t prove causation – but it would be really weird if the two just coincided.” Yes, erm, yeah…
Which is not to say MMT can’t have sensible credible foundations – I just haven’t seen any evidence of them!
spallen, Lethe, your concerns cannot be fruitfully addressed within the limited scope of this post. Wander over to Warren Mosler’s The Center of the Universe and Bill Mitchell’s billyblog and present your questions. This is what regularly goes on there. Although they are in basic agreement about MMT and have co-authored papers, they have slightly different approaches. The policy application of MMT is not monolithic.
http://moslereconomics.com/
http://bilbo.economicoutlook.net/blog/
Tom H @4 and 9: First off, and just for clarity, I’m not a liberal or a progressive. I’m a socialist (I realise it’s more accepptable to say that in the UK).
Second, I’m not quite sure where the irritation that becomes evident in your first comment is directed? Is it at my as author of the main piece, or at the first comments? If at me, I think it’s a bit unwarranted. I’m not a ‘professional’, and I don’t have a ‘field’.
Anyway, thanks for the run through of where MMT sits in terms of historical development and current ‘schools’. While I accept that in US academia and economist circles MMT may have be part of the furniture, my point in this post was that it certainly has no place yet in the popular consciousness (at least in the UK). My post started by referring back to two comments on a previous blogpost, which were dismissive of MMT in their own ways (and Lethe, who is Barney from the previous post, I think) continues in a similar vein here. My aim is not to examine in huge detail whether MMT is operationally viable or not (I’m not competent to do that) but to set out how its basic concepts – the properties of asovereign fiat currency and what tax is – might be used as a way to challenge the narrative which DOES hold sway in the popular consciousness – that the government can only spend what it earns. I want to use the basics of MMT to challenge the general rightist narrative, which holds that it’s fine for commercial banks to produce money from thin air in order to create its own profits, but wrong if the state does that to meet the needs of its citizens. Whether MMT in its purity is implementable i.e. whether inflation can be managed, whether we can avoid the ‘double redundancy’ issue Spallen suggests might occur, is less important at this point than challenging all this. My post is about political discourse and challenging power imbalances, not about technical economic issues.
If my comments have come across as harsh, I apologize.
My point is that MMT is a well-developed macro theory. When most people refer to MMT, they do not realize this and that they are referring to a particular, and usually limited aspect of MMT, often an aspect that MMT shares with other Post Keynesians or is drawn from sources that long preceded the development of MMT, which began only in the last couple of decades. The chief concern of MMT as a branch of Post Keynesianism is how to achieve full employment, which means a job for anyone who desires to work rather than the conceptual approach to “unemployment” under, e.g., NAIRU. The goal is propound a theory of full employment along with price stability. This implies that a national economy must grow sufficiently with population growth to provide full employment. The chief tool MMT uses is stock-flow consistent macro models based on national accounting identities, developed pre-MMT by Wynne Godley, who served at Her Majesty’s Treasury.
This requires understanding the contemporary monetary system and its potential for policy-making. The world switched from a convertible fixed rate monetary system to a nonconvertible floating rate monetary system after US President Nixon unilaterally shut the gold window on August 15, 1971. However, most Establishment economists did not sufficiently shift their thinking to take into account the change in monetary systems, and this as undermined the validity of much of that thinking. Much of what is considered MMT involves criticism of those obsolete ideas. MMT is much more than that as a macro theory.
The operational descriptions and accounting identities that MMT proponents use are not unique to MMT. This is not theoretical at all. It is just the operational reality familiar to everyone who knows how the present monetary system works and the accounting in use. Whether one accepts the more theoretic aspects of MMT, operational reality and standard accounting are independent of it. Anyone can check this by examining how a modern central bank, treasury, and commercial banking system operates. This is essentially the same internationally, but with national differences, too.
What MMT emphasizes is that the world is not running on a fiat currency regime, with some modifications. The EZ has a consolidated central bank but no consolidated treasury, and the EMU states have ceded monetary sovereignty. Some countries peg their currencies instead of letting them float, notably China.
The US, UK, Japan, Canada and Australia are monetary sovereign nations whose government is the monopoly provider of a nonconvertible flexible rate currency of issue, and as such they are not financially constrained. They do not use taxation to fund themselves, not borrowing to finance themselves, as under a convertible fixed rate system like the previous gold standard. This has profound implications for macro and also policy options.
To get back to the original post, the answer is that the question is about operational reality, not theory involving assumptions. there is no question of “scientific” vs ‘prescientific” involved at this level. A proper description of operational reality shows that the goverment-finance-is-like-housefhold-finance analogy is erroneous, and virtually all the political kerfuffle is over the government being revenue constrained. It is not. That is just how a fiat system works in practice. No economics needed to explain this.
Abba Lerner’s principles of functional finance, which predate MMT, show how to use fiscal policy to increase nongovernment net financial assets through issuance and to decrease nongovernment NFA through taxation to provide for public purpose while controlling inflation. Wynne Godley showed how to use stock-flow consistent models based on national accounting identities to evaluate policy outcomes, which also predates MMT.
What all this shows is that there is a governmental component to money creation that increases and decreases nongovernment net financial assets, influencing nominal aggregate demand by QUANTITY. Commercial banking does NOT add to or subtract from nongovernment NFA because loans create deposits and this nets to zero. Non-governmental money creation can only increase and decrease VELOCITY.
Deficits are flows that increase nongovernment NFA, and cumulative deficits increase the stock of nongovernment NFA or national savings. Ironically, this is called “the national debt” instead.
Hope that clears things up.
Nice post, Tom!
Tom
It’s useful to have this primer on what MMT is, and I’m grateful for the time devoted to it.
I can’t reel off the premises (and ‘operational realities’) of MMT as fluently as you can, but I do know what they are. I’ve not read everything in sight, but I’ve read what’s easily available online.
But the fact remains that your primer doesn’t really engage with my original post. MMT may well be a ‘well-developed macro theory’, but the reality is that very few people grasp it, and even less accept it, because most people DO accept the ‘goverment-finance-is-like-housefhold-finance’ analogy, because it has been in the interests of financial capital and their tame governments and government advisers (excepting the odd one like Wynne Godley) to have that as the dominant narrative.
My post is about how the essential concepts of MMT might be boiled down, in the same way that ‘flat earth economists’ boil the economy down to the household analogy, so that people at large start to question those hitherto unquestioned assumptions, now being widely peddled in the UK by the new government, that they must suffer unemployment and deprivation because the previous government spent too much/led us close to bankruptcy.
So while you’re comment is useful as a resume of what MMT is (and as I say I’m grateful for the condensation), I’m not interested (or capable) of simply rehashing the prescriptions of MMT. My purpose is that of the political agitant.
Paul, I am interested in MMT as a political activist rather than an economists or financial type, too. What I have found is most useful in getting people on the right track is debunking the government-household finance analogy, the idea that government is revenue constrained like households, firms and states in the US. This is bogus, of course, because the government is the currency issuer and others are currency users. The relationship is therefore not the same but opposite — not direct but inverse.
The best piece I know of on this is Warren Mosler’s The Seven Deadly Innocent Frauds. The book is now in print, and there is a free PDF download at The Center of the Universe. Warren has authorized non-commercial distribution of the PDF for educational purposes. Here is the link.
http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
Commercial banks are also currency issuers. Loans create deposits.
If I have a line of credit, I can spend by crediting bank accounts as well.
The government has its line of credit in the form of a debt ceiling. I have mine. Both are imposed by authority. We both spend by crediting bank accounts with checks drawn on our respective banks – the government with its central bank and me with my commercial banks.
So that muddies the currency issuer/user argument considerably.
“But the fact remains that your primer doesn’t really engage with my original post. MMT may well be a ‘well-developed macro theory’, but the reality is that very few people grasp it, and even less accept it, because most people DO accept the ‘goverment-finance-is-like-housefhold-finance’ analogy, because it has been in the interests of financial capital and their tame governments and government advisers (excepting the odd one like Wynne Godley) to have that as the dominant narrative.”
Could you unpack how it is in the interests of financial capital to follow this analogy? If it is false (which it is) then following it would cause recessions, which are bad for capital (witness the shooing they got in the last recession). Moreover, how does it suit them anyway? Why is it good for finance to believe in a model which limits the amount of bonds governments can issue?
Barney, in a fiat system a monetarily sovereign government is not financially constrained and therefore debt issuance is unnecessary. Being unnecessary it constitutes a subsidy and that is inefficient absent a good reason. This is currently being debated at Warren Mosler’s The Center of the Universe.
The short answer is that financial capital is opposed to no bonds since it loses its subsidy, i.e., a risk-free parking place that bond holder gets payed for using. Quite obviously, were the public to know the truth about this, they would question this allocation of public funds to apparently private advantage. So it is in the advantage of financial capital to keep the public in the dark and keep this out of political discussion.
Hi Tom,
Excellent posts!
Let me attempt to go one more and say for the US federal gov, the issuer of its non convertible currency/floating fx policy, spending itself is in fact debt issuance.
Every dollar spent by the US gov, generally by crediting a fed reserve account, increases outstanding net dollar govt. liabilities, whether in the form of actual cash, reserve balances, or tsy secs.
and, of course, what govt ‘owes’/is liable for is nothing more than accepting dollars as payment of federal taxes.
Tom
I think we’re settling down into a dialogue after a slightly spiky beginning where neither of us knew where the other was trying to come from.
Yes, I’m well aware of the Seven Deadly Innocent Frauds, and link to it and quote from it (approvingly) in the original article above. I also use it as a tool at the other linked discussion at http://www.pickledpolitics.com to explain to someone who might be described as a ‘flat earther’ what tax is (using the 1800s mud hut tax in many parts of Africa to set this out).
I’ve also been following your and others’ thoughts today on how to address ‘deficit terrorists’ on websites, using google searches etc. etc. and am interested in the approach taken. But my world is really about how we might take the idea that logically unnecessary concerns about deficits to a wider audience, and I’m using this blog to explore those ideas, in the context of the way austerity measures planned by our new government will hurt the poor (the ‘working class’ in my socialist terms of reference) and how we fight back against that, not just be saying we’ll cut the deficit slower (the dove position) but by challenging the fundamental (and the class-power hypocrisy of a system that allows banks to create money using sovereign currency authority, but not the government itself to create it and manage it through tax as needed to create full employment (in the terms you use full employment).
In effect, what I want to use the logical certainties of MMT for is to help develop working class struggle against a capitalist state, by exposing the falsehoods on which that state’s economy is founded.
But the key issue is how I can help do that in unison with socialists who don’t yet (and may never) accept MMT in its entirety for the reasons that many intelligent and economically engaged post-Keynesians don’t – and these reasons are more refined than the ‘Zimbabwe hyeprinflation’ quip you use at Warren’s blog.
The fact that they don’t agree with how ‘pure MMTers’ like yourself about how an MMT run economy might be run (and my learning is not advanced enough yet to judge), should not be an obstacle to working together on the aspects about which we do agree i.e. that the deficit hawks need to be challenged and combatted.
Paul -
You pose the hardest nut to crack:
I share your quest at least in terms of informing working class people about MMT so that they can start questioning the decisions and policies of a neoliberal economic consensus. The challenge in the U.S. is that we have a high level of financial and economic illiteracy. But, I believe, the public interest is there to learn more about economics.
So what to do? I believe we have to continue to do what we are doing now via the internet. Traditional media outlets are not going to help. The internet is our strongest weapon. One thing is to cross-post and/or keep linking to MMT. The other is calling out the bullshit when we read it or hear it. Any change is going to have happen at the grassroots level. I’ve contemplated power point presentations to any community group that will listen. I am planning a web based documentary based on MMT. This about broadcasting an alternative message over and beyond the corporate owned noise machine.
I am sorry that this comment wasn’t very profound but I am still struggling to crack that nut.
Paul, this is where macro comes in. Most of the objections are raised in terms of failed macro ideas, either because they are not based on current monetary system or owing to faulty assumptions. This is where the MMT economists become especially important and why it is necessary to understand the economic issues and how MMT deals with them in contrast to the current orthodoxy — Neoliberalism, on one hand, and New Keynesianism, on the other.
This is explained in lay terms in the blogs of Warren Mosler, Bill Mitchell, and Winterspeak, and the posts of Randy Wray and Scott Fulwiller at New Economic Perspectives, Marshal Auerback at New Deal 2.0, and Rob Partineau, who posts in various places, especially at Naked Capitalism. There are a lot of free working papers at The Levy Insititue for those who want to wade into it deeper. I also highly recommend L. Randall Wray, Understanding Modern Money (1998) as a primer.
The basic idea is this:
1. Modern money is a creation of the state, which gets its value from the taxing power of the state and the fact that the state defines legal tender for payment of taxes. The state only accepts its own money in payment of taxes, fee, fines and penalties. (LIbertarians hate this, but that is the way it is.)
2. State money generates the possibility of unemployment because the state extracts money that it creates from the economy, so that income is not sufficient to purchase total output.
3. Since it generates unemployment, the state has the corresponding responsibility to deal with the consequence of unemployment.
4. Following Keynes, MMT holds that the first question of macro is how to handle unemployment.
5. MMT proposes a way to achieve full employment along with price stability, a condition that orthodox economics holds is impossible without redefining full employment to about 5% at full capacity (NAIRU). Now it is being proposed that the new normal is about 8%. MMT claims to be able to hit a target of 1-2% “frictional” unemployment (people voluntarily out of work temporarily, e.g., in transition to other employment), and to be able to do this while maintaining price stability.
6. Key to this is a job guarantee for anyone seeking work (government as employer of last resort comparable to government of lender of last resort in finance). This establishes a price anchor (base price of labor) along with a base interest rate, the rate the central bank fixes for overnight funds in the interbank market, together with the discount rate as lending of last resort in the interbank market in order to provide liquidity.
I don’t think that this is too shabby for socialists living in a capitalistic system with a managed economy, like the US, UK, and other developed countries. This also profits everyone, because the largest leakage is from not operating the economy at full capacity at all times. The foregone opportunity is huge and vastly dwarfs everything else, especially because it is recurrent and cumulative. It is impossible to make up the losses after they occur. Bill MItchell has written a book about this with Joan Muysken, Full Employment Abandoned.
Barney @15: I’d ‘unpack’ it differently from Tom @16, though his is an interesting take on it that I’ve not seen before.
I’d ask you whether recessions are really that bad for capital, by which I mean the capitalist class. Yes, there are some short term hits, but the FTSE’s and the Dow are back up again two years on etc. etc.. Some city guys lost their jobs, but they’ll pick up the pieces pretty well, if not always easily, because they have the starting sdvantage of having cash in pocket.
The benefits the capital class gets out of it are greater (at least in the terms they have adopted). They get a government voted in which is happy to batter the working class to pay of the deficit. Simple as. Or in the usual terms, ‘we pay for their crisis’, and capital gets more power over labour in the process as unemployment rises and that good ‘ole surplus army of labour comes into play.
Of course there is the argument I posted on a while ago that they’re wrong – that a strong welfare state actually improves their profits in the long run – but that’s another story.
Not an unexpected response from me, I guess.
Dennis @18
Yes, I think we’re thinking on the same lines here, though I’m less convinced than you of the power of the internet, and more (and increasingly convinced of the need for the development of alternative local medias, linked to but not wholly reliant on internet readership and with a greater interactivity than the internet promotes (e.g. through unionism). That’s the ideas I link to at the very end of my original piece above.
Paul -
You are right the link between internet and local activism is key. There have been some cases of success in U.S. Moveon.org is decent at mobilizing at local level and unions did a good job with linking during our debate on the financial tweaks bill. But it has to be a sustained effort.
What we are talking about is creating a social/economic movement that doesn’t leave out any segment of society (particularly one that doesn’t frequent the internet). I asked someone on Twitter what was missing today that was present during civil rights movement of 60′s – the response was the conglomeration of small activist churches.
Tip: one of the tweets I having been repeating very frequently on Twitter and some people seem to get is:
This is based on Prof. Pavlina Tcherneva’s post:
What is Responsible Fiscal Policy?
Pavlina received her PhD from the University of Missouri-Kansas City in 2008. She was a student of MMT’er Randy Wray, who was a student of Hyman Minsky. The next generation of MMT scholars is emerging.
Tom @19: Yes, I’ve read a fair bit of the online stuff you recommend. I’d like to get the Randall Wray and the Bill Mitchell texts you refer to but having searched them out they’re beyond my current (household) budget.
As we’re swapping links, you may want to see Ralph Musgrave, here in the UK, giving the same upbeat reading as Warren does about the recent Krugman/Galbraith exchange. See http://ralphanomics.blogspot.com/2010/07/yipee-krugman-almost-accepts-functional.html
Tom @19 (again): Of course, not everyone is as enlightened as Ralph. Here’s the answer I got from David Miliband, the front runner to become the leader of the UK Labour party, and therefore the leader of the opposition to the deficit thugs now in charge:
Q. (from Paul): Do you agree that one of the problems Labour faces, as it opposes the current coalition’s cuts, is that the coalition’s ‘national debt’ narrative which aligns itself to the concept of household debt is actually quite strong and that by setting out Labour’s policy of cutting the deficit later when growth has set in we merely fall into the trap of looking like Tories, but without their courage of conviction?
A. Well yes and no. We have to avoid the trap of looking like because we don’t accept the masochism of George Osborne that we’re in denial. No, I don’t think our plans were simply aping theirs, because reducing the deficit in half was necessary once private sector growth had been properly established. So I think that we have a responsibility to be a party that shows it’s willing to take tough economic decisions. But they have to be in the interests of the country as a whole and they have to be consistent with the growth pattern.
(http://thoughcowardsflinch.com/2010/07/13/post-zombie-economics/)
There is much work to be done.
Here is what I would suggest. Bill Mitchell advises countries on stuff like this and he flies all over the world to do it. He generously flew from Australia to DC to address the Fiscal Sustainability Conference organized by some activists here in the US. He was just in Boston talking to about 40 financiers. He is good at this kind of thing. Warren Mosler is, too, and I’m sure he would be happy to oblige also.
I would do my best to arrange a meeting between Bill and or Warren with the Labour Party leaders as the earliest convenience. Both are knowledge about the UK and EZ, and would be able to address UK issues very specifically, both domestically and internationally.
If this happens, it would also be wise to arrange for a larger conference, too, and get everyone you and your network can contact there. The UK is facing a terrible crisis if it proceeds with its proposed policy and the current government will be short-lived. You folks badly need a real solution for your next government to implement immediately on assuming power.
Tom @26:
I think you may overestimate my position and rank within the Labour party. No-one listens to me at a national level, despite my best efforts to be heard (and this reasonably well read blog).
But I’ll have a go.
If you could assist by getting Bill or Warren to send an email to my direct, I’ll happily forward it on to the Labour leader candidates’ teams (there are 6 candidates for the new position, with the result in Sept at the national Labour conference) asking them to meet you/ask one of the ‘think tanks;’ they connect in to pull together a MMT conference (possibly as part of the national conference event).
The email should simply say something along the lines of:
‘Dear Paul
I refer to engagement over the potential for the development of MMT as an ‘alternative model’ of economic management for the UK, focused on full employment, and its role in combatting the deficit fetishism and economic vandalism now being engineered by the incumbent UK government.
I can confirm that I and/or Bill Mitchell [or the other way round] will be happy to come over to the UK at a mutually convenient time to discuss the matter with any of the Labour leadership candidates who choose to do so, and to participate at any event you and Labour colleagues can set up to promote MMT concepts and economic policy in the UK.’
Erm, or something.
I’ll work on it.
Paul,
I agree that getting MMT discussed more widely would be a good thing. I’ve been following the various blogs for the past few months and have found the MMTers ideas to be useful too, just in understanding what is going on. But I’m not an economist, and don’t really expect to be taken seriously by ‘serious’ policy people. Getting Bill Mitchell across to the UK would be fantastic, and maybe it would help get one of the think-tanks (or similar) involved. It would be very helpful to have a UK-based economist on board as well, to show that professionals take this seriously.
But spreading the word on the internet is having some effect – you can see new people arriving on these blogs all the time. You mentioned Mont Pelerin somewhere: those guys succeeded in changing the mindset by going after a relatively small number of influential people. One or two politicians, journalists, ‘thinkers.’ But it took a long time. It really ought to be possible to speed things up in the internet age. We can learn from their strategy.
Btw MMT really can be used by all sides of the politcal debate, eg one person you mentioned.
“CHAIRMAN BERNANKE: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.”
This quote applies to central bank lending/asset acquisition.
It does not apply to government deficit spending.
The government borrows with bonds to credit its central bank account. That may be considered a self-imposed constraint. Nevertheless, that’s how it works, and Bernanke would never use the same words above to describe the operational process of deficit borrowing and spending.
Agog @29: Bugger me (re Ralph Musgrave)! I had no idea. Ta for bringing to my attention. In fact his brief bio that you link to seems to suggest he joined the BNP from a spirit of contrariness, but still – even a symbolic act in their favour puts him beyond the pale. Thanks again.
Yes, the fact that MMT can be adopted by the Right in its ‘small government’ quest is to be noted, but I think we also have to remember that the linkage of socialism and ‘tax and spend’/big government policy is also part of the dominant but incorrecty marrative. Socialism is about (class) power over resources, not the simplicities of state/non-state distinction. To a great extent this comes from a post-war misreading of clause 4 in the Labour party, and the confusion between democratic control and nationalisation. I think I’ve blogged about that somewhere.
I’m not an economist either, as you can probably tell. Yet I think that’s actually important thing. The more the likes of you and me start to make the links between the ‘disciplines’ of politics and economics, the better the chance of the (ruling class-favouring) distinction between them being fused.
That’s why we read all this gubbins, and why I try not to be scared to stick my oar into areas that have traditionally been the areas of ‘the experts’ even though I know that on occasion I’ll be found out for crass ignorance. That doesn’t matter, except in as far as I have to balance what I ‘go for’ with the risk of total, total lack of credibility as a blogger (a credibility many would say I never had anyway).
I huge thing that is often overlooked by Wall Street and City-types who find MMT interesting, and probably the same goes for “small government” -types is that MMT uses a “Job Guarantee” as a means to address inflation/price stability and it advocates for full employment. The underlying assumption, based on my interpretation of MMT, is that a sovereign government that issues a fiat currency and is not revenue constrained has a duty and responsibility to make sure its citizens are fully employed.
Very interesting discussion, and plenty of informative-looking links for me to have a crack at!
Knowing very little about the economic theories being discussed, I would just like to make some comments about the ‘Household economics’ narrative the Tories have adopted, because it is something that hugely pisses me off. Like a lot of right-wing arguments, it is short, snappy and sounds as though it makes sense (but really doesn’t). These are the main reasons that it has caught on – it is something that people can relate to very easily because it ties in with their own experiences, and it is very easy to remember and parrot. The Left needs to learn from this, and we need to find ways to make our economic arguments resonate with ordinary people.
One thing that I have said to people is to look at how businesses operate – they depend upon easy access to credit at different stages of the business cycle. Many retailers lose money all year except the Christmas period, and so for the rest of the year they are ‘spending money they don’t have yet’. The company I work for is struggling at the moment and so is investing more money in sales, marketing and so on to boost performance. Obviously these individual arguments are not perfect, but they have been useful just to get people to actually think about things a little bit deeper than just “there’s no money left”.
Paul,
I’m with you. I initially found my way to Bill’s blog while despairing about all the deficit hysteria here (mostly coming through the BBC), but I think longer term his and Randall Wray’s ideas relating to full employment will be more important and will grab the man-on-the-street’s attention more than abstract sounding stuff about macroeconomics (I’m agreeing with Dennis above at #32). I need to read some more about that. Maybe one of those guys could be approached to write a guest post focusing on the UK specifically – all aspects of the economy?
Re political affiliations I was reassured when I saw that Bill posted his politicalcompass.org
score on his site. For the record I scored around -8 and -4 last time I checked.
Anon, Congress can change the debt ceiling at will and does. I can’t do that with mine.
Where the line is a bit muddy is in the case of endogenous banking. Banks in the US are public/private partnerships, which gives them privileges like access to reserves in the FRS that strictly nongovernment entities do not have. So although I can credit accounts with my checks, I cannot engage in the endogenous money creation process unless I am a chartered bank with access to the FRS, as banks can and continuously do by extending credit against capital.
Paul,
Mission accomplished. Expect something through the contact address at this site.
Best regards,
tom
That’s great Tom. If you get a chance can it also go to paul.cotterill@usa-is.co.uk as well, as I don’t administer this site’s email, but it’ll get to my anyway at some point.