Search This Blog

Tuesday, November 29, 2011

MMT Update

Been following some interesting back and forth regarding MMT at (see below - the comments are public so I feel ok in re-posting them. It's not my intent to remove from context but I truly feel they epitomize the main back-and-forth re: MMT). I am thankful that the MMTers are finally having a discussion on the points that are causing the confusion - the "should/could" instead of "does". As I observe this from afar it becomes apparent that most MMTers prefer to start with the abstract theory and make 'should/could' assumptions about how the Treasury interacts with the Fed (namely consolidating their operations) - assumptions that at least in some cases are factually inaccurate. When one points out the inaccuracies, the response is, "that's a political problem, not an economic one." And then, you are back to my basic beef with MMT in that you cannot, ever, separate political institutions from economic institutions. The only reason the US is a monopoly of its fiat currency is due to the political institutions. So, ignoring real barriers upfront to a 'should/could' philosophy makes ones theory rather moot, in my opinion. This will become even more of a reality as the Fed is continued to be scrutinized for its actions and calls for audits are mandated.

But I am still learning this new and seemingly more realistic way of thinking about the government's role in money. Is my beef for style than substance? Commenters....please discuss.

One specific thought, reading the comments shows that perhaps the focus is existing solely on the interaction on the spending side of the coin - whether its a style disagreement or a substance disagreement. But I'm much more concerned about any real barriers on the tax side of the coin. What if the government made an error and released too much money. According to MMT, taxes could be raised to effectively remove it from the system. But taxation is political and SOLELY in the hands of the executive and legislative branches....

UPDATE - ongoing discussion

JKH said...
(The following is not directed at Dan K.’s articulate comment; it is rather a broad observation.)

I could almost get more value from reading “market monetarist” posts these days than from witnessing the blogosphere train wreck of tortured conceptualizations that has become "MMT”.

MMT has valuable insights into the nature of the monetary system. But it is ineffective as a platform for conceptual exposition of the monetary system. It seems incapable of distinguishing consistently between factual and counterfactual monetary operations. It seems intent on conflating these two parallel modes of analysis, with such stuff as “the government neither has nor doesn’t have money”.

It is not logically possible to present any interpretation of a monetary system that does not reference explicit institutional design assumptions. Monetary systems don’t exist without specific institutional design. In this regard, there are facts of actual prevailing design, and there are counterfactuals, and there are differences between those two things.

It is certainly possible to design an institutional monetary configuration in which “the government neither has nor doesn’t have money”. But the existing system as it is designed does not have this property.

I’d love to see MMT turned upside down in its expositional approach. But the MMT’ers are a small group, with a thoughtful investment in their chosen presentation, so I don’t expect this sort of change to happen. And understandably, like most of us, they probably don’t appreciate criticism at a fundamental level.

6:29 AM

Neil Wilson said...
"But the existing system as it is designed does not have this property."

It does when you consolidate the balance sheet of the government sector and 'zoom out'.

It very much depends what level of abstraction you are working on at the time.

I do this all the time when designing systems. Sometimes I'm zoomed out ignoring the specifics, and sometimes I'm zoomed in dealing with the nitty gritty - often below the level you talk about (how do transaction records get from A to B in a timely and secure fashion?).

Sticking at one level of abstraction, or constraining yourself by the 'current design' is a huge mistake.

What we can learn from the 'current design' we largely have. Now to explore what the new design should be to deliver the required goals.

7:42 AM

JKH said...

I'm aware of the abstraction. It's not a question of constraining one's view. It's about being clear on the starting facts.

If you consolidate all of the balance sheets in the world, what you end up with is a single balance sheet. On the left is all of the real assets of the world. On the right is a global net worth valuation of them.

All financial claims net out in such a consolidated view. But the conclusion from that is not that I "neither have nor don't have money".

Such a conclusion would be the height of silliness (unless you assume a design change to barter).

Yet it's the same point.

winterspeak said...
JKH: I think that's an excellent way to put things. The Federal Reserve is the currency issuer, not the Federal Government.

To what degree those two entities are truly distinct is a worthy topic, but fundamentally political, not economic.

10:41 PM

A Ridiculous Response From

Ridiculousness here.

I'm removing as a link on my blog - I liked it better when it was run by Mike Moffatt.

Whether or not students were 'right' to walk out of class is beside the point - the point it seems that Ms. Beggs can't see. Value judgement are inescapable in the economics of real life. Half of the so-called 'positive statements' in economics are really just normative statements disguised by bad and unrealistic assumptions.

I agree the students don't quite perhaps articulate their own beef very well, but the point about Adam Smith vs. Keynes, as I read it, was more to point out the broad fact that Mankiw teaches a specific ideology, at the expense of alternatives - not just Keynes'. And the Keynesianism he does teach is arguably not the Keyensianism that Keynes would have taught himself. (See distinction between Post-Keynesian economics and so-called New-Keynesian economics).

And now for my shameless plug: anti-mankiw

Sunday, November 27, 2011

Agreeing and Disagreeing with Steve Keen

Steve Keen interview here

I agree that the crisis is due to a Minskian debt bubble....
I disagree that the solution is necessarily to write off the debt per capita with new money.

He is asked directly about the moral hazard problem and he simply restates what he always says - the is was a systematic problem not an individual problem and therefore moral hazard, implication being, shouldn't matter. There are two things, as I see it, wrong with that.

1. Moral hazard doesn't care if a problem is systematic or individual or not - it only matters what people think. And, as the interviewer notes, many people would think that 'bad actors' would be given the same handouts that the 'good actors' are given. To some, that's not fair - and that creates moral hazard moreover in so far as 'bad' debtors have some blame. And what about those that have no debts at all - Do they get nothing? ... which brings me to my next point.

2. Keen makes the assumption that creditors should take full blame for the systematic failure. This is not obvious to me. Credit / loans are a multiple-party transaction and while one can argue that relatively speaking the creditors should have known better and have more power in the relationship and therefore more responsibility, the fact nevertheless remains that many debtors should have known better and demanded funds well beyond their means. I find it somewhat ironic that Keen doesn't agree on this point since circuit theory explains that credit money expands, and bubbles are formed, due in part for the the demand for it.

I believe Prof. Keen is correct that the financial failure was a structural failure - but the structure arises from behavior of individuals and institutions, not some amorphous blob immune to moral hazard.

"Everyone gets a boost because we are not trying to boost individuals...."

It's that kind of statement that makes it clear to me that Keen has no ready answer for the question of fairness and moral hazard. I respect Prof. Keen and agree with him on many points, but I can't agree with his prescription on it's face.

Wednesday, November 16, 2011

"Teaching Amidst a Crisis" - A Personal Experience

We at anti-mankiw have recently blogged about how one might incorporate pluralist teaching tools in economics. The introductory paragraph links to a blog post by Prof. Mankiw posted in 2009 basically outlining how he believes introductory econ texts should remain status quo - which by definition, means that he believes nothing new has been learned from the crisis that students should know about.

I thought I'd relate my personal teaching experience to expand upon the anti-mankiw post at a more personal level.

First, I don't use Mankiw's textbooks to teach my intro macroeconomics class. I did - once upon a time - just before the financial meltdown. Then that event happened, and I, having been already fairly heavily exposed and interested in heterodox concepts outside of the classroom decided that I would be doing my students a disservice by continuing to teach from a textbook written by an author who is so blindly and ideologically biased.

Deciding on a main textbook to use is actually a fairly daunting and complicated process though. There exists imop no textbook that incorporates pluralist/heterodox concepts in a student-friendly way where I could use just one textbook. There are good heterodox publications, but they are devoid of pictures, and/or obviously published on a severe budget-constraint: the sorts of books that only the most dedicated students could sink their teeth into. I teach a night class so most of my students have full-time jobs - so I need a text that is going to be formatted and written in an inviting way. So, years ago I decided the best way to teach my students was to find a mainstream textbook that did not have the same philosophy as Mankiw - published by someone who learned something from the finanaical crisis - who thinks current events are useful learning and teaching moments. And, I would use free-of-charge supplemental materials from various other sources, to create 'heterodox modules' to teach along-side the mainstream text.

The mainstream text I use today is Robert Hall and Marc Lieberman's Principles text. Why do I like it so much better than Mankiw's text (note: I have no loyalties to this text, so if anyone has any other options, I'm constantly re-evaluating)? Because every other chapter has been expanded with new topics since the crisis: interest rate spreads, ARRA stimulus, 'too big to fail', unorthodox monetary policy, housing market as it relates to macro, etc. These authors, while still thoroughly mainstream and therefore missing huge chunks of true economic thought, at least learned that their previous edition was missing something crucial, and in some cases included unfortunate assumptions that they incorrectly assumed to be simplifying ones.

Here's my favorite example. In their 4th edition, Hall and Lieberman say the following in the 'money' chapter:

Fortunately the details and complexities of measuring money are not important for a basic understanding of the monetary system and monetary policy.

I always hated that quote. Sounds very Mankiwian doesn't it. But then, in the fifth edition published in 2010, that quote vanishes. Makes me smile.

As mentioned, I use numerous supplemental materials in my class - which is helpful to engage different kinds of students. I also use supplemental portions of a heterodox text and the aforementioned main text. It of course has its drawbacks as, ideally, I'd like to use just one text. In some cases, students have to read duplicated concepts - parts where the mainstream text and the heterodox supplements overlap. But to me it's worth it. For one, I feel better about myself because I feel I'm being academically honest. And two, many students really get it. And when I say get it, I mean they graduate my class less like neo-classical robots and more like well-rounded, well-educated individuals.

Saturday, November 5, 2011

Neo-Chartalism Reconsidered

I was forwarded a link to recent paper by post-Keynesian Marc Lavoie. I was forwarded it in part because my blog is cited in the paper as an outside observer (totally true) - which is pretty cool.

I must admit, it has me taking a second glance at MMT theory, frankly, because his paper is the first to calmly explain (at least one piece of) MMT in a way that doesn't alienate, and in a way that bridges some of the language gaps and misleading or just factually wrong (given common usage of terms) statements by MMTers. Ahh the power of words....

Some 'aha!' passages:
Another problematic statement is that the government has to run deficits, at least over the long run, for the public to get access to larger cash balances (high powered money). As Wray (1998, p. 123) puts it, “persistent deficits are the expected norm”, that is, “normally, taxes in the aggregate will have to be less than total government spending due to preferences of the public to hold some reserves of fiat money” (Wray 1998, p. 81). If the government was running persistent surpluses, the public would “run out of net money hoards” (Wray 1998, p. 79). While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash.

Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector. Wray (1998, p. 79-80) himself recognizes this, as he later adds that “a surplus on the Treasury’s account is possible as long as the central bank injects reserves through purchases of assets or through loans of reserves”. Presumably, what he has in mind, as we will see soon, is that total government expenditures include “spending” by the central bank, when the central bank purchases private assets or claims on the private sector and adds them to the asset side of its balance sheet. But this is an odd way to define government spending.While this terminology problem is easy to solve, things may not be so simple with the oft-made statement that “government spends first”, a statement that, of course, has some relationship with the causal sequence mentioned when discussing the links of neo-chartalism with circuit theory. This expression comes back like a leitmotiv on many of the blogs devoted to modern monetary theory, but it can also be found in academic writings: “Government spends simply by crediting a private sector bank account at the central bank. Operationally, this process is independent of any prior revenue, including taxing or borrowing” (Mitchell and Muysken 2008, p. 209); “The government spends simply by writing Treasury cheques or by crediting private bank accounts” (Tcherneva 2006, p. 78). These statements are at best misleading. They skip one fundamental step that makes incomprehensible the leitmotiv sentence that “government spends first”. Any agent must have funds in a banking account. Before being able to spend, the Treasury must somehow replenish its deposit account at the central bank (or at private banks).

This step is often skipped because neo-chartalists prefer to consolidate the central bank and the federal government into one entity, the State. Now, in itself, such a consolidation is not illogical. Other authors, such as Godley (1999B), have on occasion consolidated the central bank with the government. But such an integration may not be appropriate for the purpose….

The purpose of this whole exercise is to show that there is no point in making the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency. Even in the case of the US federal government, securities need to be issued when the government deficit-spends, and these securities initially need to be purchased by the private financial sector….

...neo-chartalism carries some excess baggage, which must be gotten rid of. In trying to convince economists and the public that there are no financial constraints to expansionary fiscal policies, besides artificial constraints erected by politicians or bureaucrats that believe in mainstream theories and in the principles of sound finance, neochartalists end up using arguments that become counter-productive. There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; tha tgovernment expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures. All these counter-intuitive claims are mostly based on a logic that relies on the consolidation of the financial activities of the government with the operations of the central bank, thus modifying standard terminology. I believe that such a consolidation leads to the avoidance of crucial steps in the analysis of the nexus between the government activities and the clearing and settlement system to which the central bank partakes, and hence leads to confusion and misunderstandings. And so do references to a leveraged vertical component of the money supply.

It's important to note that Lavoie's paper focuses only on the fiscal/monetary settlements relationship with MMT. Some of the other ideas of MMTers (like a government-mandated and set fully employed workforce - employment targeting) are still quite a bit harder to swallow, but I'll continue to keep an open mind.

Finally, Lavoie's paper is an exercise in positive economics, not normative economics. For me, it is still an altogether different (and potentially more important) question whether we should be using strong fiscal policy tools to guide an economy, regardless of whether or not there are any direct financial constraints, as there most certainly are other constraints that need be considered, not the least of which are logistical (politics) and the reality that fiscal policy has been shown to be very messy in practice, and one need to be very careful about discussing fiscal policy in the vacuum of a research paper. That is, at the end of the day we will likely still have the debate about the merits of functional finance.

Friday, November 4, 2011


I am coordinating with a group of economics grad students and other friends of the social science in a new blog.

A goal will be to expose, as a determined group, the inadequate present academic discourse in economics, as propagated by economics faculties worldwide that have been brainwashed by people like Prof. N. Gregory Mankiw. And along the way, we hope to propose a newer, better, more inclusive and less bad-assumption laden discourse.

Wednesday, November 2, 2011

Fed Statement

US Fed to US citizens: "yeahhhh, we got nothing."


How Do Financial Investors Make Choices?

Let's assume a somewhat unsophisticated, though intelligent, investor. Do these investors make decisions to invest significant dollars in up-starts based on job commitment announcements by politicians? A Butler University economist thinks so. I'm skeptical - I would like to think that even the most unsophisticated, risk-taking investor would not make a decision in large part or solely based on the words of politicians. And, I certainly know of no study that shows otherwise. For his part, the Governor suggests if some investors do make decisions based on politicians' hopes, that's their own problem. Discuss.