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June 21, 2010

Comments

""Real goods and services" is what the unemployed 10% of the workforce could be creating, if not for the absurd conceit that the government would run out of money by putting them to work."

Billy's analysis is specifically NOT limited to 10% unemployment situations. He again and again suggests that it is a fabulous solution for budget shortfalls in economic expansions and he specifically suggests it as a solution to the government pension problems.

I am not, I repeat NOT, arguing against expansionary government spending NOW. I'm arguing against bobby and billy's mode of financial analysis in the general case. The fact that it gets the right answer NOW, doesn't mean it is a good way of analyzing budgets/deficits/government spending generally.

It isn't. It doesn't deal well with hyperinflation or even normal level stagflation. These aren't marginal cases, these are cases that come up regularly.

You keep trying to restrict billy's analysis to the severe unemployment case, but he doesn't restrict himself to that at all.

"Seb: Japan has a public debt to GNP ratio of 170%. They have engaged in huge deficit spending for years. Their interest rates are extremely low. Their currency is sound. Your take would imply massive inflation."

Thank you for finally getting to a specific case. I was wondering if you meant that, but hoped you didn't because it means that you aren't understanding your own theory very well. The reason there isn't massive inflation is because the Japanese have an enormously high personal savings rate, *at interest rates which are effectively negative* (their interest has tended to be at 0% or negative real earnings). And of course if you have been paying attention recently, this is all on the verge of falling apart because the high age of the Japanese means that they have started to pull out these savings (though still maintained at a world record rate) and this is causing enormous squeezing pressure on the government's ability to spend because they can't do so without causing the savings to lose value.

Which is exactly what Keynes would predict.

"I'll say that it's getting tiresome hearing about MMT advocating, without qualification, the expansion of the money supply. It's stated over and over and over again that there are conditions under which this can be done without significant risk of problematic inflation. It's not that you can always print more money."

I don't know about MMT in general, but that isn't what billy of billyblog which is the only place I've been asked to read up on it says unless you lean VERY heavily on *always*. He specifically advocates using the printing presses to pay money for government pensions throughout economic expansions. I've already quoted the section where he strongly disagrees with Krugman's analysis (spend/print money in recession but THEN pay off deficit/debt during expansion). So he thinks you can do it throughout recessions AND expansions. There really isn't much left.

If you have a better MMR source I'd be happy to read it. It isn't well accepted by economists so I have trouble figuring out what you think counts as 'real' MMR. I thought billyblog counted.

What you quote at 12:57 leans too heavily on unproven assumptions.

"So the purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain."

Ummmm. No. Not entirely. Having a relatively stable unit of exchange is super useful for all sorts of completely private transactions. For a rather large portion of governmental money history that has been the dominant factor. So he is starting off on the wrong foot.

"To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. "

The mind boggles at this formulation--that private actors work SO they can pay taxes. So we have a probably wrong understanding of government money in general and it is compounded by a probably wrong understanding of why private actors work.

"The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save."

Beware "the obvious" when people are saying things that almost no other economist believes. At the very least it isn't obvious enough that 95% of economists can figure it out. Suffice to say that this is probably a rather oversimplistic diagnosis for unemployment in general. Delong and Krugman and Cowen wouldn't agree that unemployment is just a lack of government spending.

"This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid."

Note: I *think* you are interpreting "this analysis sets the limits on government spending" as an upper limit. But the analysis ONLY sets it as a LOWER limit. He is talking about minimum levels of government spending. He is not talking about an upper bound.

"In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time."

Note that he thinks this is a complete explanation for unemployment. He says it is 'obvious' yet almost no other economist agrees.

Does MMR exist outside of its guru?

BTW, I'm not trying to appeal to authority here, but does MMT get talked about by any economist who isn't a hyper billy enthusiast? Maybe my google-fu isn't up to it but I can't find anyone talking about it. Here is where I've looked:

Marginal Revolution
Brad Delong
Robin Hanson
John Quiggin
Econobrowser
Greg Mankiw
Becker/Posner
Econbrowser

Basically MMT doesn't show up anywhere, left, right, or center where I would expect interesting and innovative economic theories to show up.

Is there anybody talking about it who isn't a raving fan? Is there anyone talking about it who is an economist? The website and comments feel like the mirror image of gold bug websites to me.

The mind boggles at this formulation--that private actors work SO they can pay taxes.

I think you're reading this wrong. Obviously, people generate income to spend it on things and to invest or save it. One of the things you have to spend it on is taxes. How do they generate the income necessary to pay their taxes? They offer goods and services in exchange for money. I don't see the controversy in that.

Note: I *think* you are interpreting "this analysis sets the limits on government spending" as an upper limit. But the analysis ONLY sets it as a LOWER limit. He is talking about minimum levels of government spending. He is not talking about an upper bound.

I don't. The key word in the quote being "sufficient."

What does set an upper bound is the capacity for production. Once you've reached that, you will induce inflation with further spending, which is why he discusses unused capacity in discounting inflationary effects. You appear to be ignoring that.

Here's the thing, Seb - I fully understand that MMT and Keynes diverge on the "surplus during expansions" side. But, from my reading, MMT says there no reason that gov't can't operate under some amount of deficit, even though it may approach zero (i.e. balanced budget) under certain conditions. They simply deny the need to reduce debt simply to build up future spending capacity. I'm not entirely sold on that, myself. But I think I can at least agree that deficit spending that builds capacity and grows the economy faster than the debt grows, over the long term, doesn't bother me so much.

MMT is highly critical of the work of current mainstream economists, so I don't know what point there is in saying they disagree on the things you point out. And it doesn't speak to the relative merits of the arguments on either side.

It isn't. It doesn't deal well with hyperinflation or even normal level stagflation. These aren't marginal cases, these are cases that come up regularly.

You should read his post on Zimbabwe. It's not about accounting, either, which you might find appealing.

Sebastian: Is there anyone talking about it who is an economist?

The post-Keynesians are into it.

James Galbraith says things along much the same line.

"Does MMR exist outside of its guru?"

Good question.

I know that inside of its guru it's too dark to tell.

I know that inside of its guru it's too dark to tell.

I am so not asking.

Thullen with a sigmoidoscope in the locker room!

Jacob Davies beat me to it, only because the comment field wasn't loading for while. There are different strands, but they are variations on the same theme.

http://en.wikipedia.org/wiki/Post-Keynesian_economics

Outside of a dog, a book is a man's best friend.

Inside of a dog, it's too dark to read.


I guess you could use an MRI to spot the MMR instead of the sigfreudoscope, but that would move us from the library to the locker room and then down to the imaging room.

I've always been a Marxist economist.


This is hilarious. I point out that in a fiat system where there is a net private desire to save, then the government (all else being equal) will run a defict, and further that this spending, in a financial sense, is unconstrained.

Seb replies that I "don't know my theory", and says, "yeah, sure, but that is due to the pechant for Japanese to have a high savings rate, and adds some blather about money "losing value" and that Keynes "said exactly that, and predicted the loss of "monetary value" for the Yen that, for some inexplicable reason, the international money markets have missed entirely.

That paragraph alone verged on inchoherence, demonstrated a total misunderstanding of neoclassical economics, much less Keynes, and moved the goal posts so far that it might take a sled dog team and expert trackers to find them.

Pretty soon this thread will fall off the edge of the blogosphere. It's been fun.

Haven't heard of MMT? Well the concept is not unknown, by any means. Here is a quote from Paul Samuelson. You may have heard of him:

"I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say "uh, oh what you have done" and James Buchanan argues in those terms. I have to say that I see merit in that view."

The point is this: He calls it (unnatural fear of deficits) a myth. Perhaps a valuable myth, but a myth, nonetheless.

Source:
http://neweconomicperspectives.blogspot.com/2010/04/paul-samuelson-on-deficit-myths.html

Jacob Davies, responding to Sebastian's question: "the post-Keynesians are into it."

I haven't read much about MMT, but from what I've seen it pretty much is a splinter group of the post-Keynesian party, which has a distinguished history but not much political influence.

That paragraph alone verged on inchoherence

When throwing stones, always make sure that your quotes are paired off properly.

inchoherence

Typo, or fiendishly clever pun?

;)

Thanks, Slarti. Unlike some other blogs, there is no edit key, and I dropped a couple of quote marks.

I don't know the why for the extra "h". I seem to repeat that mistake all the time.

Perhaps I need to call my doctor and up my prescriptions.

As for throwing stones.....well, I'm trying to calm down, but when I point out that Japan has been fighting deflation for over a decade and run its public debt to 170% of GNP without, as predicted by Seb, experiencing runaway inflation, government bankruptcy, or a wildly depreciated currency, I was taken aback by the reply that it was due to a tendency of the Japanese to "have a high savings rate". MMT posits that if S>I then it needs to be offset by government spending (unless you desire a decrease in economic activity), and deficits will be experienced (all else remaining the same).

Neoclassical theory does not. It merely posits a new equilibrium at a lower price level (essentially doing the hand wave wrt the paradox of thrift), something that has never happened, given the key neo-classical assumption that there is always full employment.

You have the causation direction wrong for MMT and Japanese savings.

Seb: "You have the causation direction wrong for MMT and Japanese savings."

No. Equilibrium is S=I. When S>I, then MMT posits that for the identity to hold, something else MUST change to maintain a given level of output with a given level of resources. All else being constant, that thing that changes is the government sector's deficit position: It will go into deficit.

Thus Mitchell asserts that the government's net spending position is exogenously determined. I'm still trying to get my head around that one.

Thanks.

WORLD LEADERS PLEDGE TO SLASH DEFICITS IN HALF--McClatchy Newspapers, 6/28/10 as printed on p. 1 of the Seattle Times.

This will end badly.

Bobby, you're just reciting the theory as its own proof.

S=I with nothing further interesting to add to the equation, according to billy. That is his theory.

When S>I, according to billy, the government *must* go in to deficit.

So far as I can tell, he is one of maybe 3 to 4 economists who believe that.

Japan has had amazingly high savings for the past 50 years. Many of those years included budget surpluses (1950-1964) or small deficits.

There is clearly more to economics than S=I.

Thus Mitchell asserts that the government's net spending position is exogenously determined.

I think that's sort of backwards. My understanding is that net private savings, in the aggregate, cannot happen without the government net spending (i.e. in deficit), and that the deficit money is exogenous to the financial system. It's not so much determined by net private savings as it is a necessary pre-condition for net private savings.

Japan has had amazingly high savings for the past 50 years. Many of those years included budget surpluses (1950-1964) or small deficits.

But it's aggregate savings across the entire economy that matters. Individuals can save, but the bank can lend the money back out to become investment. It's what the banking system and households do in aggregate that matters with regard to the need or lack thereof of government deficits.

Regarding S=I, where else can net savings across the entire economy come from over a given period other than net government spending if the government has a monopoly on currency? There's a given number of dollars at the beginning of the period. How does it go up if the government spends (dollars in) and taxes (dollars out) the same number of dollars over the period? (Maybe there's an answer, but I don't see it. Please come up with something good if you're going to bother at all.)

Fractional reserve banking.

Seb,

I know we don't pay you by the word around here, but you don't have to be so terse. Maybe these oracular pronouncements of yours indicate profound understanding pithily expressed, but cynical readers may start to wonder about that.

What the hell is "fractional reserve banking" supposed to mean in this context?

"Fractional reserve" says that when you deposit $100 in the bank, the bank doesn't lock the money in the vault but gets to loan some of it. The bank's reserve is a fraction of your deposit -- say $10. The other $90, the bank lends to me. If I deposit that $90 right back in the same bank, the bank can lend $81 of my deposit to bobbyp; if he does the same thing, the bank can lend about $73 to hairshirt, and so on. Keep going the same way with an infinite series of borrower-depositors, and the bank's total deposits are $1,000, its outstanding loans are $900, and your original $100 is locked in the vault as the 10% reserve.

Do you notice any investment happening there? Has anybody in the infinite chain of borrowers bought anything or hired anybody, which is what investment amounts to? No. The magic of fractional reserve banking has turned your $100 savings into $1,000 worth of deposits on the bank's books, but not a dime has been invested anywhere.

Well, not quite: the bank does not literally lock your $100 in the vault. It can, in fact, buy "securities" with it.

For illustrative purposes, it can buy stock in Thullen's start-up endoscope factory. That's an actual investment (and a good one, I say) but you'll note that the bank's investment exactly equals your actual savings. Even with "fractional reserve banking", the net savings of our motley crew (the $100 you scraped together out of your income after consuming whatever it is you consume) is exactly equal to the net investment in our motley fool.

Note that if you cut out the middlemen, and you yourself take your $100 savings and buy stock in Thullen's start-up endoscope business (thus allowing him to create a job for a gorgeous secretary, buy endoscope-making machinery, and so on) it's even more obvious that savings equals investment.

S=I, FRB or no FRB -- if I may be so terse.

--TP

Multiple deposit creation. (That's how it's done, Tony P.)

It's unanimous -- everyone except at OBWI -- except Brett -- is some sort of Keynsian.

All very well.

Meanwhile, the world's "leaders", like a blind proctologist, choose the buggering of Ireland as the model.

Who knew the world would end with a good reaming?

remove the first "except", like a polyp.

Dead horse quote of the day:

The private credit markets represent relationships (depicted by horizontal arrows) and house the leveraging of credit activity by commercial banks, business firms, and households (including foreigners), which many economists in the Post Keynesian tradition consider to be endogenous circuits of money. The crucial distinction is that the horizontal transactions do not create net financial assets – all assets created are matched by a liability of equivalent magnitude so all transactions net to zero. The implications of this are dealt with soon when we consider the impacts of net government spending on liquidity and the role of bond issuance.

I've gotten terse because at this point I'm being asked to attack a position that MMT, at least as espoused by its guru doesn't even hold and at this point at least 3 of the people who claim to want me to care about it are making arguments that are in direct opposition to that held by its guru.

I'm terse because long hasn't actually gotten much analysis anyway.

I'm terse because you aren't taking MMT seriously, at least as presented by the single economist I can find who seems to believe it.

Billy explicitly disagrees with Krugman that you have to pull back the money press in the expansionary phase. I've quoted it, and it is found all over his blog. He thinks his theory makes it an identity. He doesn't even engage Krugman's argument, he just asserts that he is wrong because of the magic accounting identity fixes it all.

Sometimes I don't have the scientific background to complete debunk a perpetual motion machine. But I do know enough to be skeptical of perpetual motion machines. Skeptical enough that until at least a fair number of scientists are convinced that it is really working, I don't have to think deeply about it.

That skepticism is not being embraced here. Bobbyp appears to be a believer. HSTD, whom I respect deeply, seems to want to make billy a proponent of the Krugman analysis (which is in line with nearly everything that HSTD says, so I have no idea why he wants to appeal to complete outlier billy rather than very mainstream Krugman) when billy explicitly rejects that view. And I don't mean that I have interpreted his views as best I can and think that he would reject it. (Though I have and I think he would). He specifically rejected it by quoting his formula. So HSTD just won't believe that billy means what he says.

And your paragraph on fractional reserve banking doesn't even make sense. You can't put it back in savings because the interest rate on the loan is higher than you can get in the savings. Your entire chain of borrowing and putting it back in savings is not the basis of fractional reserve banking at all. The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing.

So in short: I've looked into this particular perpetual motion machine enough to determine that its main proponent says that it really is a perpetual motion machine, that he thinks a single simplistic equation explains the entire government/private sector relationship, and that he disagrees with nearly every one in his field. I also see some rather obvious-to-me flaws (like long term inflation which actually has happened--US, Germany, Brazil).

It is theoretically possible that he is the new harbinger ushering in economic understanding, but it isn't probable. As a layman I'll stick to the general range of views (which range approximately from Quiggin to Delong to Krugman to Mankiw in left to right order). All of them disagree with billy on long term deficits, though all of them are fine with his short term deficit in the deepest recession in 80 years prescription.

When one of them (or someone of similar stature) takes him seriously, I'll look again. At this point his sites seem like direct left-wing mapping of gold bug sites.

Calling Krugman's analysis deficit terrorism and asserting hyper simplistic accounting identities as the solution to our problems doesn't sound convincing to me.

That's my long answer.

HSTD, whom I respect deeply, seems to want to make billy a proponent of the Krugman analysis...

I fully understand that they differ on the "surpluses during expansions" side. I explicitly stated that before. My position on that point, as stated before (Posted by: hairshirthedonist | June 28, 2010 at 02:35 PM), is this:

Here's the thing, Seb - I fully understand that MMT and Keynes diverge on the "surplus during expansions" side. But, from my reading, MMT says there no reason that gov't can't operate under some amount of deficit, even though it may approach zero (i.e. balanced budget) under certain conditions. They simply deny the need to reduce debt simply to build up future spending capacity. I'm not entirely sold on that, myself. But I think I can at least agree that deficit spending that builds capacity and grows the economy faster than the debt grows, over the long term, doesn't bother me so much.

I can see how MMT can work if there is enough economic growth over the long term to outpace the growth of the overall debt, even if the debt grows every single year (i.e. there is some deficit each and every year). The deficits may be very small provided the private economy is utilizing its capacity; perhaps there may even be a balanced budget now and then under the best of conditions. I can see how that could work. It's a qualified acceptance of the MMT model.

I also can see, perhaps more obviously, how paying down the debt during expansions, provided that the surpluses aren't so great that they kill the expansion, could work. Perhaps it's a more conservative (in the general, not political, sense) approach. Perhaps it's sub-optimal, but requires less judgment about where the government puts its money, so it reduces the risks of screw-ups.

I'm not trying to reconcile the two theories. I'm just not sure they can't both work, if in different ways. And sometimes I describe things without necessarily endorsing them, just to clarify what my understanding is of them, so that we're arguing about what it seems to me that we should be, if only to the best of my knowledge. (It's a "what I think he's saying is this" versus "what he's saying is correct" kind of thing, sometimes, which may not always be clear.)

"I can see how MMT can work if there is enough economic growth over the long term to outpace the growth of the overall debt, even if the debt grows every single year (i.e. there is some deficit each and every year). The deficits may be very small provided the private economy is utilizing its capacity; perhaps there may even be a balanced budget now and then under the best of conditions. I can see how that could work. It's a qualified acceptance of the MMT model."

I guess I don't really see that. It seems like an acceptance of the current general model that you are trying to force into MMT. According to billy, the only year to year government deficit limit during an expansion is the entire productive output of the economy. (Again this is not my interpretation, he straight up says it in the comments I read yesterday). That isn't talking about 'very small' deficits. That is talking about annual deficits the size of the entire economy. That is an incredibly radical view, and so far as I can tell, only billy and his immediate followers believe it.

I guess I don't see anything there that makes me have to think "wow, every other economist has totally screwed it all up".

It is more like "wow, economics isn't a very well developed field".

That is talking about annual deficits the size of the entire economy.

I don't see it that way. I think it's whatever the difference is between the productive capacity of the economy and the utilization of it by the private sector. There may be times when the private sector is going full-bore, leaving very little to no excess capacity for the government to utilize. (In short, it's only the slack that government takes up, without inducing inflation.)

Maybe, but that isn't what billy says. I'm happy to take up the discussion in Keynesian terms, and you seem to be doing so. Why do we need to refer to MMT to do so? It seems like a complete distraction.

Maybe, but that isn't what billy says.

Then what does this mean?

The point is that for a given tax structure, if people want to work but do not want to continue consuming (and going further into debt) at the previous rate, then the Government can increase spending and purchase goods and services and full employment is maintained. The alternative is unemployment and a recessed economy. It is difficult to imagine that an increasing deficit will be inflationary in a recessed economy because there are so many underutilised resources, both capital and labour.

And when you say "Maybe, but that isn't what billy says" you're confusing my description of what billy says with what you seem to think is my definitive personal prescription. So there can be no "maybe" involved. It may be my fault, again, for not making clear that I'm describing my understanding of MMT.

He is talking about a recessed economy there, but he doesn't limit it to that elsewhere. He thinks that the solution to the European pension issue is to just print money even during an expansion. His point of disagreement with Krugman isn't what to do during a recession. They agree on that point. The reason he has to so pointedly disagree with Krugman is because Krugman believes that you have to cut that spending and pay off that debt *in the expansion*. If he was limiting himself to the depression treatment, why is he so strenuously disagreeing with Krugman, who completely agrees with him on the depression treatment?

The reason I'm so confused, is that you seem to want to limit all these things to the recession, but billy does not. His understanding of MMT does not differ in any obvious respect to what Keynesian theory want *during a recession*. If you want to limit the discussion to those circumstances there isn't any reason to talk about MMT at all so far as I can tell. MMT and Keynesian theory both have the same prescription for now.

They have radically different ideas about what to do during the expansion, however. So every time you want to limit it to the recession, I don't understand why we should bother with MMT at all. And if you don't want to limit it to recessions, it has all the radical properties that you seem to want to limit, but that billy does not.

Your entire chain of borrowing and putting it back in savings is not the basis of fractional reserve banking at all. The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing.

So you have saved $100. You deposit it in a fractional reserve bank. The bank lends $90 of it to me. I buy a lawnmower with the money, to earn a few bucks mowing lawns. That's an investment. I don't redeposit the money. That breaks the chain. The bank can't lend $81 to bobbyp, $73 to hairshirt, and so on ad infinitum. It has $10 in reserve and a $90 loan oustanding, against $100 in deposits.

As before, the bank invests its $10 reserve in ThullenCo. Total investment: $90 by me and $10 by Thullen. Total savings: your $100. Seems equal to me. Again.

Seb, I think the main bee in your bonnet is the notion that MMT says we don't have to run surpluses in boom times. But "don't have to" is not the same as "must not". In boom times, we may very well decide that running a surplus (i.e. "decreasing the net financial wealth of the private sector") is an appropriate thing to do. Even if we don't have to do it.

--TP

The reason he has to so pointedly disagree with Krugman is because Krugman believes that you have to cut that spending and pay off that debt *in the expansion*. If he was limiting himself to the depression treatment, why is he so strenuously disagreeing with Krugman, who completely agrees with him on the depression treatment?

The reason I'm so confused, is that you seem to want to limit all these things to the recession, but billy does not.

We must be talking past each other or something. But Tony P. captures it pretty well. And I don't intend to limit the discussion to recessions or depressions. I've already stated that I can see how MMT would work if, over the long term, economic growth outpaced the growth of accumulated debt. Economic growth is what happens to a greater degree during expansions, so I guess I'm confused as to why you think I want to limit the discussion to recessions. Yes, he says you can and perhaps should defict spend during expansions. The question is how much relative to growth. How many goods and services are still available? How many people are employed? How much inflation will result? Can the automatic stabilizers provide sufficient negative feedback?

And I haven't been able to find what he wrote regarding pensions, so, if you can point me in the right direction or provide a quote, that might help. We may well agree that he's wrong in that particular case (seeing as we both agree that he's right about recessions).

hairshirthedlonist,

I was mystified also by the remark about just printing money to pay Euro pensions. I can find no such claim, or most especially, the context in which it was allegedly made.

Billy disagrees with Keynesian "doves" becuase they believe as does Seb, that the national debt "simply must" be paid down over the expansionary part of the business cycle or "something bad will happen". Other MMT theorists (Mosler, et al) pretty much say the same thing as billy, so it's not just him.

In fact, Billy goes so far as to state that the issuance of public debt by the monopoly supplier is not necessary. It's an artifice. Bond traders make a great living from that artifice!

Now one might say that the politicians would go crazy and try to buy everything and screw it (the economy) up and bury the nation in worthless paper. I don't disagree. They could. I mean, the temptation is certainly there (it's there already--but Seb just doesn't get it). But that is a political question, not one dictated by the rules of economics or monetary finance, give a fiat currrency system.

So when Seb asserts that the debt "must" be paid down over the business cycle, I get terse, too. This is simply and flatly false. Just look at the absolute level of public debt since WWII. Has it gone up and down with the business cycle? No. It has not. The delta or rate of growth may vary over the cycle, but in absolute terms, it has gone up....just about always. No, this incorrect claim is advanced to grind a political ax...that debt is bad, spending is bad, that the government must act like a good little Calvinist dowager, and that always comes down to cutting social services, or insuring that taxes are not raised for the rich.

Further. Seb gets no points with me by baldly mischaracterizing Mitchell's arguments.

Alas, my mischaracterizations of Mitchell's work are mine, and mine alone.

Claim: "The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing."

Money, according the usual suspects (you know, the economists who utterly missed the housing bubble) is created by the banking system based on fractional reserve requirements established by the fed and the discount rate. Consumer spending is approximately 2/3 of the economy.

Or are you saying that investments "create" money. Now there is a novel economic theory!

"But that is a political question, not one dictated by the rules of economics or monetary finance, give a fiat currrency system."

Exactly. And it is TRACKED by the finance system.

Billy is trivially right that governments have no 'financial' reason not to print money out their asses.

But that doesn't say anything useful. Of course it is a political question, because politically it is stupid to hyperinflate and ruinously indebt your economy. I'm pretty sure the reason none of the other real economists are talking like billy is because he talking about a triviality as if it was important.

There is no ACCOUNTING reason why the government can't print more money.

Whoop de doo.

There are economic reasons why it would be stupid. Billy focuses on the accounting, and sweeps away all useful discussion on the non-accounting effects--the real effects.

When he says that it is all just a political decision, that is because he has artificially restricted the question to bookkeeping for no good reasons.

Yes. The government can add 10 trillion dollars and there is no accounting principle that would stop them.

Brilliant.

Yes it would wreck the economy with hyperinflation.

But that isn't an accounting principle so we can't talk about it. Wrecking the economy isn't an accounting principle, so the only thing stopping us from doing it is politics. Wheeeee.

He isn't saying anything edgy, so much as he just isn't saying anything useful.

I think Yglasias and Wilkinson both wrote excellent articles which speak to the problems on this thread. here and here.

Will Wilkinson notes that “a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science.” That certainly seems true to me.

To oversimplify a bit for the sake of polemic, a lot of economics work seems to put more emphasis on “doing work that superficially resembles physics and therefore counts as science-like” rather than on doing work that actually resembles scientific endeavor in the sense of leading to useful predictions or technologies or what have you. You get the sense that some practitioners of economics would pick up The Origin of Species and dismiss it as too narrative to count as real science. This guy’s just arguing from a bunch of anecdotes!

Basically, we are nowhere near the place where economics is so well understood that you can just plug in an equation and expect to get a useful answer to most questions. Have you ever seen the laffer curve cartoon where it is a huge squiggly line except for a smooth curve at the very ends? It is like that.

The fact that billy thinks he can reduce it all to a single equation, and then derive everything he wants to talk about from that single identity doesn't *prove* that he is wrong, but it should make you very suspicious.

"And it is TRACKED by the finance system."

Well, that is just as meaningless, I should think. In that case just what is the disagreement about? No. It is the deficit hawks who have fled reality. They use their cracked finance theories to dictate political outcomes. But when somebody comes up with a theory that demonstrates the incredibly bad thinking at work here, you scoff, throw up you hands and shout wheeee.

Mitchell claims, rightly or wrongly, that the real way the government spends, and banks loan, is different than traditionally thought, and that it frees society to make different choices that are not constrained by the usual 'rules' of thinking about finance.

Wilkinson? That's rich. A libertarian criticizing those who make sweeping "idealized assumptions"? That is simply too funny. Biology is just a "grab bag" of "theories"? Krugman is dismissed as a "glib oversimplifier"? This we are to take seriously? Seriously?

But I'll give him this, the second to last paragraph was very good--spot on. Athreya has it coming.

Yglesias is also on to something. Minsky should be taken seriously, but he's not. I suppose since Minsky hasn't won the popularity contest yet, you are free to dismiss him. In that instance you have forfeited all rights to niggle Mitchell about the 'scientific method' or philosophy of anything for that matter.

And there's that whole "you're looking at it backwards" thing yet again. Comes up all the time. Who'da' thought?

Happy 4th

No, I think Minsky should be taken quite a bit more seriously than billy. He actually thought that debt, both government and private, means something. And he thought that reducing economics to simplistic equations tended to be hubristic. I'm pretty sure he wouldn't agree that S=I was the magical formula for deriving government action.

"But when somebody comes up with a theory that demonstrates the incredibly bad thinking at work here, you scoff, throw up you hands and shout wheeee.""

No. Billy's theories have some readily apparent holes, he glosses over well defined problems, and he doesn't tackle well known examples of governments which followed his prescription to disasterous consequences. (See especially Brazil 1980-1995). His theory hasn't *demonstrated* anything, you're falling exactly into the trap that Yglesias talks about.

Brazil? Oh, you mean the country that took out massive loans denominated in foreign currency, tried several rounds of price controls, pegged its currency to the dollar, and took the bitter pill of IMF austerity strictures? That Brazil?

That sad period for that country is not, in any sense, an example of "following (Mitchell's) prescription to disastrous consequences".

What next? Zimbabwe? Mitchell explicitly took that one on at length. Tell me where is analysis is off the mark.

Yes. The government can add 10 trillion dollars and there is no accounting principle that would stop them.

Brilliant.

Yes it would wreck the economy with hyperinflation.

But that isn't an accounting principle so we can't talk about it. Wrecking the economy isn't an accounting principle, so the only thing stopping us from doing it is politics. Wheeeee.

This is a strawman, Seb. You're continuing, AFAICT, to grossly oversimplify what he's saying. There are conditions under which he says the deficit can be greater than others. He's not saying there is no upward bound on the money supply, assuming one doesn't intend to induce excessive inflation.

Billy focuses on the accounting, and sweeps away all useful discussion on the non-accounting effects--the real effects.

This isn't a strawman so much as just completely untrue. I honestly don't know what you're reading that makes you write this. I've quoted billy blog several times showing that the real effects are critical to what he's saying. One of the biggest points he makes is that mainstream economics ignores the real effects AND a particular, basic bit of accounting. And you keep harping on S=I as though that's the only thing supporting his arguments. It's a useful introduction to the concept he's trying to get across, not the be-all end-all of what he's saying.

I trust you enough to assume you're arguing in good faith, so this is very frustrating to me that you don't argue against what he's saying rather than continuing to miss so much of it. At least that's how it looks from where I'm sitting. I'm giving up now.

"Brazil? Oh, you mean the country that took out massive loans denominated in foreign currency, tried several rounds of price controls, pegged its currency to the dollar, and took the bitter pill of IMF austerity strictures? "

You might want to look at your timing. The peg to the dollar wasn't until 1994 when they were trying to break the horrible cycle of hyperinflation which had been caused by the government printing money to pay for everything. The hyperinflation period was 1980 to early 1995. I'm relatively sure that the few months of currency peg in that period, which resulted in the end of the hyperinflation, didn't cause the nearly 13 years of hyperinflation.

Also you appeal to Brazil's current account deficit via foreign loans is decidedly anti-billy, he doesn't think the CAD is a big deal.

"I honestly don't know what you're reading that makes you write this. I've quoted billy blog several times showing that the real effects are critical to what he's saying. One of the biggest points he makes is that mainstream economics ignores the real effects AND a particular, basic bit of accounting."

Look, I went from literally never having heard of the guy, to reading like 40 pages worth of his stuff. He is hyper-dismissive of critics, especially ones with economics backgrounds. I think you're deeply misreading his sidenotes. He does not say that real effects like hyperinflation are critical to what he's saying. He is saying that his formula proves that printing money won't cause hyperinflation, that it is caused by other things. That is an assertion based on his formula, not based on real-world observation. He claims that lots of other things are the 'real' cause of hyperinflation, but he has to because his formula demands it. Not because the observation demands it.

But you can see that his real world caveats don't really matter, because he insists on the same prescription no matter what. You haven't responded to his curt dismissal of Krugman's analysis of the long term budget problem. I'll quote it again:

Krugman writes:

Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?

...

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.

Here Krugman makes a number of very standard Keynesian points. Does billy bother addressing them directly? Of course not, his accounting identity saves the need for that.

Billy's response to THAT is:

Because he concludes: “So America has a long-run budget problem”.

No it hasn’t. It has a long-run political problem where a particular cohort in the population will require more real resources (possibly) and that will have to be mediated by: (a) productivity growth; (b) others having less.

There is no financial problem for the US government in any of that. It is a real resource availability problem which becomes a political problem.

Of-course, they can start converting primary schools into aged care units as they become obsolete.

Which is essentially a non-response. Krugman, and every other economist from DeLong to Quiggin to Mankiw, fully understands that the US *could* print more money. They don't need billy and his magical formula to tell them that. They just strongly suspect that it would be stupid to do so because of other, non-accounting issues. And their suspicion is well founded in evidence, because every country that has tried to print their way out of problems ends up with the same problems that they had before AND hyperinflation.

But billy does not engage that.

He is asked that question in about every other post, and he dodges it the same way: it isn't a financial problem.

But Krugman and all the other economists know that full well in his hyper-narrow point. Yes, accounting identities don't stop countries from just printing money, it is other things.

What billy does is translate discussions of the budget deficit, or government debt, into pure financial terms and then dismisses them.

But Krugman isn't saying that the budget deficit and government debt are a problem in pure financial terms (that could be solved or not solved by printing money). No one is saying that. He is saying that the deficit and government debt cause tensions which can only be resolved in horribly bad ways, one of which includes hyperinflation (if the government takes the printing method out) and of which there are others (like being forced into a tax structure which stifles the private sector or cutting benefits precipitously).

So MMT isn't adding anything to the discussion. It tells us something we already know, and in a way that isn't any more helpful than how we already know it. And billy uses it as a way to avoid discussing the rest of the problem every single time it is raised on his blog.

I just don't see the added value of going through MMT. In recessions it gives 100% Keynesian prescriptions. No added value. In expansions it either gives the "government debt doesn't matter" result that I'm interpreting, which is almost certainly empirically wrong, or it is just another way of expressing Keynes (which is how you are interpreting it).

But in neither case is it adding value to the discussion. By my interpretation he is just being crazy in the expansion analysis. By your interpretation he is just being useless.

In either case, why bother talking about him? We could have been just talking strict Keynesian economics and having more fruitful discussions.

"Also you appeal to Brazil's current account deficit via foreign loans is decidedly anti-billy, he doesn't think the CAD is a big deal."

Wrong. When the CAD is denominated in a currency that is not yours, that is decidedly a BIG deal. Mitchell is quite explicit on this.

"He is saying that his formula proves that printing money won't cause hyperinflation.."

He says no such thing. This is a gross misrepresentation of his position.

"Which is essentially a non-response.."

Which is simply arguing by assertion. You have missed the point entirely.

"...because of other, non-accounting issues."

You mean political issues? OK. Or do you mean financial issues? Then-not so much.

"And their suspicion is well founded in evidence,"

Of which you provide none.

"because every country that has tried to print their way out of problems ends up with the same problems that they had before AND hyperinflation."

Either because: (1.) They did not have a monopoly fiat currency that was freely floating in international markets; or (2.) Because the government sector was trying to purchase more than the economy was capable of producing.

H"(Krugman) is saying that the deficit and government debt cause tensions which can only be resolved in horribly bad ways, one of which includes hyperinflation (if the government takes the printing method out) and of which there are others (like being forced into a tax structure which stifles the private sector or cutting benefits precipitously).

The issuance of public debt is not necessary in a true fiat currency system...and the other "tensions" and "others" are simply an expression of deeply seated political prejudices masking as "economic" concerns (such as pathological concern for the tender mercies of creditors over debtors, to take just one example).

By demonstrating explicitly how a true fiat currency system actually operates, MMT brings a valuable insight to discussions of government deficits and debt that is sadly lacking, even taking into account otherwise insightful economists such as Paul Krugman.

"The issuance of public debt is not necessary in a true fiat currency system...and the other "tensions" and "others" are simply an expression of deeply seated political prejudices masking as "economic" concerns (such as pathological concern for the tender mercies of creditors over debtors, to take just one example)."

Yes you are quoting the guru quite accurately there. But that doesn't make it true. Every other economist seems to think that it is necessary.

I don't believe in perpetual motion machines. I don't believe that billy is adding anything to the discourse that isn't available in non-mmt keynesian theory. I do believe that he doesn't deal well with inflation.

If some well regarded economists take him seriously, I'll think that maybe I was wrong and look again. Until then, I've looked as deeply as I can on my own and don't see reason to worry about his opinions further.

I'm not convinced that MMT brings valuable insights to discussions of government deficits. In fact, I'm convinced that it actively obscures valuable insights on government deficits by focusing on an accounting matter that is mostly irrelevant to useful discussion.

bobbyp,

On a side note, I thought you had something backward earlier, but on futher reading, not so much. While net government spending is exogenous to the private financial system, net government spending can also be exogenously determined by the private sector, meaning that the private sector can slow down by saving, reducing government tax revenues below projections and forcing the government toward, into or further into deficit. So we each had half of it right, exogenously of each other.

Hairshirthedonist,

Google "Seven Deadly Innocent Frauds of Economic Policy" by Warren Mosler. He's not an academic economist, but he lays out the basic tenets of MMT in a very readable fashion. The part about inflation beginning on p. 113 is particularly instructive.

His policy prescriptions strike one as fantastical, but I am determined to be of open mind on this matter and find out more.

Economic prejudices, like most others, die hard. I am sure there were many like Sebastion, who, back in the day when the world currency system departed from the gold standard, could only wring their hands and proclaim doom and inflation (goldbugs, which see). After all, if money is not "worth" anything, then it is "worthless", right?

History has clearly revealed the "worthlessness" of that apparently logically irrefutable assertion.

We still have a ways to go to clear the remaining intellectual cobwebs out..

Best Regards,

According to his policy prescriptions, both deficit spending and tax cuts are the way to a better economy. This is the Keynesian prescription during recessions. He, like bobby, appears to hold it during recovery as well.

When I had skipped to the portion about inflation (I think you mean 11-13 not 113) my first thought was: "deficit spending plus tax cuts, Bush was following the MMT prescription".

When I read the whole document, I find that it wasn't just a sarcastic response in my head. According to Moser:

I pointed out to Candidate Gore how the last 6 periods of surplus in our 200+ year history had been followed by the only 6 depressions in our history, and how the coming bust due to allowing the budget to go into surplus and drain our savings would result in a recession that would not end until the deficit got high enough to add back our lost income and savings, and deliver the aggregate demand needed to restore output and employment. I suggested the $5.6 trillion surplus forecast for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.
And that’s pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his then massive deficit spending of 2003, but after that, and before we had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again, and after the sub-prime debt driven bubble burst we again fell apart due to a deficit that was far too small for the circumstances.

Now this makes sense as political rhetoric, as Mosler is apparently running for president and is campaigning at the tea parties see his website here. So he is preaching to the choir.

But I wouldn't quote him as an authoritative source in the sense you are. Frankly I was much more impressed with billy.

Seb,

The version I was reading is, I believe, here:

http://obsidianwings.blogs.com/obsidian_wings/2010/06/by-eric-martin----social-security-is-a-government-program-funded-by-a-dedicated-tax-there-are-two-ways-to-look-at-this-firs/comments/page/3/#comments

Mosler is a popularizer, not an academic, but he does a good job of making the basic concepts clearer.

It is the basic concepts that you deny, and the prescriptions that you stubbornly refuse to accept (that include deficits in 'good times', not surpluses). But look: We have generally had deficits in 'good times'.

The fact that you ceaselessly attack the prescriptions, but not the underlying tenets is telling.

Enjoy your 4th

OOPs. Darn my fat ignorant fingers. Try this:

http://www.moslereconomics.com/wp-content/powerpoints/7DIF.pdf

MMT, apart from the Keynesian stuff which can be dealt with as Keynesian, doesn't seem to have much to it so far as I can tell. I've done the research, and I have no idea which underlying tenets you think I ought to be attacking.

But to be crystal clear, do you agree with Mosler, the MMT popularizer that you referred me to, that Bush's high deficit, tax cutting methods, are good for the economy and that Clinton was bad for the economy?

Is that what you think?

I quoted him from his own talking points.

"Is that what you think?"

It makes sense. Given the stock market bubble, the Clinton surpluses could not be sustained. Mosler's prediction was deadly accurate, assuming the prediction was made prior to the Bush ascendancy. That would be something to verify. Or do you believe there is something George Bush did shortly after assuming the presidency that caused the recession? 9/11 effects should be seen as somewhat temporary.

Further, the Bush tax cuts were stimulative in response to the dot.com bust, but this was mostly an accident, since the GOP advocates tax cuts for the wealthy under any circumstances. Such tax cuts have limited stimulative effect, but they have some. Mostly I disagree with the political outcomes of biased tax cuts for those who really should be taxed much more. That is a political question.

Clinton's economic policies, such as they were, did not create the boom time of the 90's. Tax hikes did not create prosperity. The surpluses (due in great deal to the dot.com mania) were followed by a recession, exactly as predicted by MMT.

As a side issue, many of the heterodox economists saw the housing bubble coming. The mainstream didn't.

As for those tenets:

1. Government spends first, and undertakes borrowing/taxing later. Government spending is not limited by some perceived ability to tax or borrow.
2. Deficits do not leave a "burden" to future generations.
3. Federal deficits take away private savings.

Just for starters.

But to be crystal clear, do you agree with Mosler, the MMT popularizer that you referred me to, that Bush's high deficit, tax cutting methods, are good for the economy and that Clinton was bad for the economy?

I was going to give up on this, but I'm bored, so I might as well jump back in.

My thinking is that government net spending is always going to be simulative to some degree or other so long as the economy has room to grow to supply the needed output, so, if that's what one means by "good for the economy," the answer would have to be "yes."

But there's good spending and bad spending, regardless of deficits and surpluses. Were Bush's tax cuts and war spending good for economy in the long run? Did they represent a good allocation of resources that would spur future growth and increase the welfare of Americans? I have my thoughts on that, but I'll leave it to others to provide their own, if they like of course. And MMT does consider such questions to be very important, at least according to what I've read.

oops...#3 should read "federal SURPLUSES take away private savings".

Hairshirthedonist,

Sorry to bore you! You are right. Politicians say dumb things and try to justify them by reference to "economic laws"....like "we have to pay the deficit down in good times".

The Bush tax cuts did little for economy in the long run...except make rich people richer.

How are your teams doing in the World Cup?

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