Anopinion 4
Reading the first few paragraphs of Last War Brain by Noah Smith, I thought I would strongly disagree with his post and decided to write an attempted rebuttal. I find that I agree almost 100% and can mainly complain about what I assert is a bit of bait and switch. As always I advise readers to just click the link. Noah is a much better writer than I am (low bar) so my effort to summarize and explain might best be skipped (skip to ***)
Noah argues that liberals have overlearned two lessons of the noughties and teens: The lessons are don’t invade Iraq, and don’t impose austerity when the economy is depressed. Now he argues that some people are incorrectly assuming that Russia v Ukraine is like Bush V Saddam and that the macroeconomic policy mistake to fear is insufficient stimulus as it was 2008-2015 (at the earliest).
I agree entirely about Urkaine. It is silly to act as if US threats of economic sanctions and providing Ukraine with weapons combined with an absolute refusal to consider US boots on Ukrainian ground is at all like invading Iraq. In contrast, Putin reminds me (and him) of Bush and Cheney. There is a possible invasion which can be explained, if at all, as a result of resentments of past defeats. I actually think the Putin/(Cheney-Bush) analogy is very useful. I will give it two paragraphs (plus one more about how I agree with Noah).
Why did the US invade Iraq ? It would not have happened without 911, but 911 was an excuse not a reason. The advocates of invading had been advocating an invasion since Bush Sr stopped in Kuwait. I think a key issue is that Bush Sr was convinced by Colin Powell not Dick Cheney and this was a rematch. I also think a desire by Bush Jr to match and surpass his father was important. Similarly, I think Putin found the collapse of the Warsaw Pact and the Soviet Union humiliating and is trying to reverse it. I guess there is also some paranoia. I think Bush administration hawks really thought that Saddam Hussein was assisting al Qaeda and I think that Putin really thinks that the Ukrainian revolution was engineered by the CIA and that NATO might actually do something other than prepare for a possible Russian invasion.
On the other hand, one thing which is hard to remember (and was hard to believe) is how many people who were reasonable before 2001 and after 2005 supported the proposal to invade. I don’t understand how that happened (and wouldn’t mind some 20th anniversary mea culpae to be honest). Similarly, I think that Putin isn’t the only Russian who thinks that Putin’s actions aren’t insane. I think it is important to understand war fever, but mainly I agree that the war fever epidemic is currently in Russia.
Noah Smith actually names names and has quotes. There are people who reflexively always blame the USA (one is named Jeremy Corbyn).
Noah Smith also discusses macroeconomics, which is my job. He discusses the mistake made in the past “we then failed to deploy enough fiscal stimulus to boost us out of the post-crash hangover quickly, deepening that recession and extending it by a couple of years” and then the oversimplistic lesson learned. “The government should never be afraid of either deficits or inflation, and instead should always push for higher employment.”
I am going to criticize the second sentence I quoted. First never say someone said never without a quote. The sentence sets up a straw man by asserting that there were people who believe that Germany had no problem with inflation 1918-1923 and that Greece had no public debt problems. The sentence sets up a straw man. Also, in this case, Noah does not name names or quote claims. My more nearly substantive objection is to the word “deficits.” Noah argues that strawman is wrong about the current situation strongly suggesting that the US has a problem with excessive budget deficits. I do not agree. I also note that in the main body of the post Noah discusses inflation, but does not propose fiscal austerity. Rather he argues that the Fed should raise interest rates. He does not, in fact, present an argument the 2020 and 2021 deficits were higher than optimal. I do not think that they were.
I think there were another lesson overlearned 2009-2015 and one lesson which mysteriously not learned. The overlearned lesson was that, sometimes, monetary policy can’t get the job done. At the time (and ever since) some (I mean Krugman as usual) said that a reason to err on the side of fiscal over stimulus is the Fed can always raise interest rates but can’t cut them below zero. I think the other lesson is that QE has very small effects and that many people overestimated how much of the job of stimulus could be accomplished with QE. That is one of my obsessions, I have bored everyone on it, and I will type no more on the topic here.
The point of this post, if any, is that I think that decisions about deficits and inflation are not closely linked. The same aggregate demand can be achieved with low deficits and low interest rates and with high deficits and high interest rates. Noah wrote “Basic Keynesian economics . . . says when you have a booming economy and rapid inflation, you curb aggregate demand with fiscal austerity and tighter monetary policy” (emphasis moine). Keynes did in fact advocate austerity during booms, but basic Keynesian logic says it is time to curb aggregate demand with fiscal austerity and/or tighter monetary policy. There is no reason to assume that fiscal and monetary policy must both be used. In fact, whatever basic Keynesian economics says, Noah Smith writes “fiscal policy poses no inflationary threat.” I assert that it never does, so long as it does not influence monetary policy (called fiscal dominance). Loose fiscal and tight monetary can cause problems, but it does not necessarily cause inflation (in fact Volcker ended the last inflation just as fiscal policy shifted from neutral to expansionary). The logic is “we must each do our part” with no analysis of whose part is properly whose.
I think that Noah is fighting the last war. 2009-2015 it was reasonable to argue that monetary policy was not up to the task and fiscal demand management was needed (I argued this and so did Ur-nonstandard monetary policy Paul Krugman and Aleppo – nonstandard monetary policy Michael Woodford (Ur is used to refer to the oldest city and Aleppo is also very old)). Standard monetary policy could not be used because the Federal Funds Rate was near zero. Now it can be used because the Federal Funds Rate is not near infinity.
I stress this because of Joe Manchin. He argues against Build Back Better on the the grounds that inflation is high. This is a stupid argument not only because monetary policy can be used to fight inflation but also because BBB spending is gradual, spread out over 10 years (as per one of his many demands) and overheating is temporary. Now I am not so naive as to believe that Manchin is really influenced by his arguments let alone Noah’s, but I still object to using “and” instead of “or”.
Another obsession of mine is to point out that the balanced budget multiplier is positive. Equal increases in taxes and government consumption plus investment cause increased aggregate demand (proven as well as anything in macro is by the experiment of the tax financed war in Korea). Standard new Keynesian DSGE models do not consider deficits at all, because they have Ricardian equivalence, so spending matters, but debt v tax financing doesn’t. Those models are silly, but paleo Keynesian models also imply a positive balanced budget mutliplier. In particular, taxes on the rich have a very small effect on aggregate demand as their spending is limited by their time budget not their non-binding dollar budget. Yet economists regularly act as if the full employment deficit is a reasonable measure of fiscal stimulus. One of them is named Noah Smith. He argues BBB “wouldn’t increase deficits much even if it passed.” So what. It would increase aggregate demand by much more than it increased deficits. Still not much this year and next which are what matters. But I do not understand why people who know perfectly well the effect of fiscal policy on aggregate demand does not depend only on the deficit, often write as if it does.
Noah also writes the Fed does not have to bring inflation immediately back to 2% (I totally agree) and writes the aim should be “to keep a lid on inflation expectations and make sure they don’t spiral upward and cause an economically devastating hyperinflation.” No Noah — the US faces a miniscule risk of hyperinflation. Since before Noah was born, I have been reading people suggesting that inflation of 7.5% (or 12%) implies a risk of spiraling into hyperinflation. This is nonsense. Concerted effort is required to achieve hyperinflation. The problem is, except for that, economists can’t explain what is wrong with economy wide inflation (that is increases of all prices and wages). Ordinary people hate inflation, because they assume it does not affect their nominal income (ask Shiller). This is silly. One can calculate costs of inflation due to reduced real balances (shoe leather costs). They are tiny. The claim that policy makers have to worry about hyperinflation solves the discourse dissidence problem that economists would be the subject of even more contempt than we are already if we said 7.5% inflation is no big deal. But it’s no big deal.
And in conclusion, I agree 99.5% with Noah Smith who presented two good posts in one and is clearly right that many are still fighting (to stop) the last war.
“Now I am not so naive as to “
naïve
so, is inflation always caused by not enough unemployment. or can it be caused by “supply chain” monopoly manipulation…as in the oil crises of the 70’s?
does inflation really matter to anyone not subject to Boskin Report cynicism?..or private pension disregard of any inflation whatsoever?
my co-workers, not yet pensioners, in the 70’s observed that wage inflation never kept up with cost inflation. and a few of us were cynical, or paranoid, enough to see the Reagan recession as a means of disciplining the flower children. turned them into yuppies overnight.
and is raising interest rates really not an “austerity” program?
Coberly,
Excellent. Keep up the good work.
Waldmann
I ususally agree with you about stuff, but here I find the argument confusing, too abstract, and probably a bit over my head.
It is true that Ukraine 2022 is not Iraq 2002 (?or whenever). But the Great Game is not over and the plot is always the same. You don’t offer a reason why those reasonably sane before 2001 and after 2005 got on the war wagon for Iraq, but has it ever been any different? Whether it is policy directed by needs of empire (possibly real in a wicked world), or needs of “business” (always corrupt), or something deep in human nature that always rushes into a fight. It is as reliable as “the deficit” for uniting (or subduing) public opinion. Bush jr may have wanted to surpass his father, but if that his deep-brain reason for being persuaded, it was not the reason of the persuaders, If you will excuse me (and even if you won’t) this looks to me like a popular “meme” resonating with something in your own brain (mind) that replaces any need for real-world analysis. Of course that’s just something in my own brain resonating with a somewhat less popular meme.
Waldmann, part 2
as for the deficit etc. I think I would agree with you if I understood it better. But you assume a knowledge of economics (the science) which I do not have.
On the other hand, I agree with you entirely that Manchin does not believe his own argument, if that is what you were saying [a lttle ambiguity in the grammar].
But since i don’t know what you were talking about, I’ll leave the questions in my first comment to hopefully inspire a talk about the economics (that is, what actually happens in the real world, as opposed to what economists say about it.)[realizing that at least some of what economists say is true, and much of what they say influences what people do in the real world.]
Coberly,
If you learn enough about economics to understand and agree with Robert Waldmann on what he wrote herein, then it will not be that painful and it might even be worth the effort. To the extent that you trust me (however little or much that might be), then trust what Robert Waldmann wrote here.
However, I will add what of topical relevance that Waldmann did not write here. For the sovereign borrowing in their own currency, then in that vanilla flavor when the debt (forget current deficit for now) level combined with inflation rise to the point that the interest on outstanding debt is such that the only way to continue to pay federal government expenses is to increase the debt, then that is not a steep spiral, but still a spiral of sorts. Interest on past debt only rises when we role over that debt, so Bernanke did some good with Operation Twist, which was part of his QE. In any case calculate thirty years out from when the US had big deficits steeply increasing its debt and pray that interest rates at that time will be low.
If population declines, then so does GDP. The lower the GDP, then the bigger the burden of interest on debt relative to federal revenues. MMT is how we fix this, but starting from inflation and debt hysteria backed by a legislated debt ceiling does not bode well for the home team.
OTOH, inflation if wages keep up or nearly keep up serves our cause. Working people in the US are either debtors or too far in poverty to have credit. The latter should get public assistance. The debtors have less real debt when their nominal debt is offset by inflation as long as they get those higher wages to pay the mortgage or price controlled rent. Of course then that only works if the inflation rate including wage inflation exceeds the rate of new debt accumulation. There is also something called sticky prices that inflation helps to grease and unstick, but that is also not always a benefit to wage earners. Still though, these are principles usually ignored and definitely neglected in MSM “economic” coverage. When inflation rate keeps relative price levels changing, then the theoretical hope is that they approach a better relative price optimum by not sticking to prices reflective of past conditions.
That was my two cents.
Ron
I don’t “trust” you; I agree with you. Often.
beyond that, my brain is too fried to think about the rest of what you said just now.
Ron
2/20 12:47
re 2nd paragraph: i think that first, Fed sets the interest rate. 2 nd that mmt does not borrow but simply prints. i could easily be wrong.
3rd paragraph: gdp need not decline if productivity goes up. moreover that GDP goes to smaller population, so per person gap need not decline at all. as for growing debt per person, see mmt. similar idea comes up with SS trust fund. if we pay current expenses out of current income the TF debt never has to be paid. interest on present debt would grow until congess decided to pay it off…but that would mean congress would have to stop borrowing. i think they would choose a slow growing debt that never had to be paid to finding the money to pay it off. again, Kelton prefers to think of it as a “phony deficit.” i don’t like that language because it wipes out the “where did the money originally come from” factor, and therefor “who has first claim on the interest” if needed (to pay expenses during a recession?). of course it’s all just paper money. but it is a really good idea to keep honest books.
i can’t keep up with the rest of your comment. i don’t know what mmt would say about it. i think they would say we can finesse it with the printing press and tax the rich to stop inflation. and the rich would just smile and say, ‘well, it’s only paper money anyway. somehow i don’t see that working. especially since its going to be the same congress critters who decide where to spend the paper money in the first place.
and the people who will have no faith in paper money, whether they are right about it or not, (here i mean not paper dollars, but “paper” in the mmt sense).
Coberly,
The Fed only sets the inter-bank lending interest rate, which in turn is the basis for the prime rate used initially for short term lending to businesses with good credit and now extended by banks to select customers with good credit and prompt payment. The interest rate on debt is an indirect function of the Treasury securities auction market sale price.
MMT theoretically would just print more money as needed, but then that would require a system to control prices whether taxing the rich more (ROTFLMAO) or price controls (still ROTFLMAO). Realistically then MMT does not do anything because it does not exist although I would like some of what its advocates are smoking. The idle threat of MMT promotes conversation of more active fiscal policy, but simultaneously makes Keynesians appear silly, which does bother me a little, but not too much. The reality is that we have a long bridge to cross to get there that we have not yet even built.
Productivity may go up in China or Vietnam or somewhere which maybe transfers to US workers some, but the productivity of corporate consolidation and Amazonians will not leave much extra on the median household dinner table. Averages do not care about inequality, which is why we look at medians.
Actually it is the rest of my comment which has nothing to do with MMT that might have value since MMT is only an academic discussion and I am definitely not an academic. In any case, at our stage of life then we should be accustomed to the status quo and far too little time left to see that status quo substantially changed.
Take care. At least while it rains this week I should have all my wife’s earning statements so that I can at last settle up with the IRS. No problem as they will owe us.
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Coberly,
I replied to you about understanding Waldmann’s economics part which is correct enough in itself although incomplete enough to allow for a few contradictions that are generally also based upon incomplete understandings. Together it all provides a good idea of why MMT is so theoretically desirable along with a bad idea of why MMT is practically impossible. The simple side of it is that inflation bites creditors harder than debtors.
That longer and more elaborate reply remains in the trash.
…for no comprehensible reason – no profanity – no links – no copied pictures or text – and not terribly long.
…not sure how my 2/20/2022 @ 12:47 PM got into the trash, but I am happy to see it free at last. No way I was going to repeat that composition.
yes, as you explain even more clearly to Jerry.
getting too hard for me to find the comments because they do not appear in chronological order, as if there were several two-person discussions going on instead of something like a symposium’
despite the fact that we…you and i…agree about much, and might get jerry to agree with us if we were careful how we said it, and could make him a little more careful how he said his point of view, the discussion is still valuable as a way to shake thoughts out of the shadows, and just in case the children are listening.
on the other hand, i’ll have to wait for the next train.
Oh, I usually agree with Ron aka Darryl 🙂
We had a few discussions at Economists View over the years.
I will tone it down as far as my comments go.
Dear Robert Waldmann,
I still feel bad about the tone of one of my comments to a previous post about Noah Smith. And about misspelling your name in one of those.
I’m not going to read what Noah Smith wrote because I don’t want to. I’ll just comment on what you wrote. And I don’t think you are a bad writer.
There are people who reflexively blame the USA for just about anything bad. All over the world and including many Americans also. Sometimes they are right to blame the US and sometimes I think they are stretching it or just plain wrong.
So now it was necessary to read Noah Smith. And now I’m angry again. And he is a good writer even if he writes stupid things that are wrong. Like “flirting with fringe ideologies like MMT, which urge higher deficits and lower taxes in every situation.” Which is a complete bullshit statement in regard to what MMT says about deficit spending and taxes. If he wants to make a case about MMT being a ‘fringe ideology’ then he should do that but at least portray it accurately. Because that statement is just inaccurate, and he should be ashamed to write such inaccuracies.
I will get back to what you wrote when I calm down.
Jerry
I really think you should go to a quiet place you like and sit down and think about why you are made angry by someone else’s opinions. I get that way myself, but usually it is because they attack me personally or i suspect them of deliberate stupidity (desingned to make me angry or just waste my time?).
Then I think you should consider stopping when you have written something angry and think about rewriting it. Then you won’t have to apologize. [you don’t have to apologize anyway.]
That said, as an MMT-er you need to explain as clearly as you can what MMT does or says and why you think it is right and the other side is wrong. Just saying “bullshit” does not say anything useful. Unless your intent is to make the other guy angry.
The trouble with mmt-ers on blogs is they all … all…never give a rational argument for mmt..or a complete one. they make assertions which by theselves sound ridiculous to people who have not joined the cause. and in the case of, say, naked capitalism, threaten to block your comments if you use one of their sacred words in a non-approved way.
you need to do better.
Fair enough.
The statement by Noah Smith- “….like MMT, which urge higher deficits and lower taxes in every situation” is a complete and total falsehood that anyone who spent half an hour reading some of what MMT economists have written would recognize as being untrue. In other words, it is a lie that Noah Smith, who poses as an expert on economics, is telling to his readers. It is not the truth and when someone purports to be an expert in the field, who can explain ideas put forth by different economists, and so clearly instead, puts forth a complete falsehood, you may begin to question his motivations. And you may get a clue about them from the two words that preceded his statement above- “fringe ideologies like MMT…”. Perhaps he has a goal of portraying MMT as a fringe group and therefore is willing to misrepresent what they actually say.
This does a disservice to anyone who reads his commentary trusting that he knows something about MMT, or economics in general, and a further injustice to people like Robert Waldmann, who may use Noah’s false portrayal and trusting him, base their own commentary upon Noah’s falsehoods, and perhaps unknowingly, become spreaders of false information.
So you see, I am not angry about Noah Smith’s opinions about the validity of MMT ideas. Those ideas are clearly subject to debate. I was, and am, angry that he would lie about what MMT says. There will be no apology given to Noah Smith from me for this comment.
Jerry:
I doubt Noah will care what you think. So, we should convert all of the world’s economies (countries) to MMT?
run
noah won’t care.
i think jerry over reacts to noah’s “lies” which seem to me to be at worst “simplifications.’ it would to jerry good to get “lie” out of his system and try replacing it with “he is wrong about…” the latter has more respect for normal human limitations on knowing, or saying, everything.
i have to quit now. eyes and brain frying.
coberly
There is a reason, I asked the question I did.
i’ll let jerry answer it then. still not keeping up.
“So, we should convert all of the world’s economies (countries) to MMT?”
I’m not sure I understand the question, but I will give it a shot. MMT is mostly a description about how certain economies that print their own currency, and don’t fix the exchange rate, or promise to convert it into anything else are able to operate. So it is not really a matter of ‘converting’ countries to MMT- MMT would say if you are a country like Japan or the UK, or the US, or Australia, MMT already describes the economic policy options available to your government and how the economy operates. If you are a country that pegs its exchange rate to another currency, or uses another currency it doesn’t itself issue, you will have less policy options available.
I would imagine it is always better to have more available options than less. I don’t know if this answers your question though.
Jerry:
c
It is not really a question as much as a statement. A country with its own sovereign currency or not, whether pegged or not, still has limits as to how much its deficits can be. The issue is whether you can run up endless amounts of deficits. You have also qualified who can be an MMT nation by your selection of countries.
Pre-joining the Euro nations could Greece have been a MMT nation or Argentina. Chile is thought of as being a successful economic South American country on its own. Could it run similar percentages of deficits as the US or Germany pre-Euro?
The US has gone back and forth with its currency. What makes its currency an international one is the stability of the US and the ratio of deficit to GDP (although it has increased).
MMT is being described in a very simplistic manner. It leads people to believe you can run higher deficits and pay it off with newly printed bills. You can do this as long as the value of the country grows as a foundation to the money.
I have very little debt as compared to assets right now. If I get over my head, I sell off. If countries get over their heads they devalue, try to pass devalued currency as equal, and other countries refuse to sell to them.
My thoughts.
jerry
i thought that was what Kelton was saying. and I thought that i agreed at least up to a point. the point would be when countries that had accepted dollars in payment cannot buy things they “value equally” with with what they gave for the dollars.
that would fall under controlling inflation or other complications i haven’t thought of, but Ron Weakly may have.
Run 75441 seems to disagree. you guys need to hash it out. i don’t know enough.
What do MMT economists actually say about government deficit spending? The best way to answer that question might be to actually read what they write. There is quite a lot of it out there that you can read for free. I myself am partial to the economist Bill Mitchell who writes nearly daily at his blog.
But I can provide a very short intro on this topic that (hopefully) most MMT economists would agree with.
MMT posits that a fiat, non convertible currency issuing government like the federal government of the USA or Canada is very different from a person, or a business, or even a non-currency issuing government such as the State of New York. This is difference is not a matter of scale or size relative to the economy. The currency issuer can never involuntarily default on obligations that it has that are denominated in the currency it issues. Therefore, it faces a very different set of limitations than those that use the currency, like you or me. We face financial constraints- we need access to the currency first in order to purchase goods. We can be forced to go ‘bankrupt’- the US Federal Government can not be forced to go bankrupt for any debt payable in US Dollars. So the constraints on spending that particular kind of government faces are real resource limitations (like how many people are available to work, or how much food can be grown) rather than financial constraints. And whether the government collects as much in taxes as it spends has little to do with its ability to spend.
So deficit spending by the federal government is not stigmatized in MMT. But always, always it is emphasized that spending in excess of the available real resources is bound to cause inflation, which is the other constraint on government spending. Government spending and taxation has very significant effects on the economy and on general welfare. Competition with the private sector for real resources caused by government spending also has significant effects.
Taxes are very necessary in MMT understanding. Not to ‘finance’ government spending, but to cause demand (or provide value) for a currency. Taxes also limit private spending which can reduce demand for goods and services and therefore reduce inflationary pressure.
Noah Smith’s statement that MMT urges higher deficits and lower taxes in every situation is completely false. And he should know that before telling his audience that. I would recommend he read one of the many MMT primers that are available online for free. Here is a good one for him or anyone interested written by Randall Wray.
http://neweconomicperspectives.org/modern-monetary-theory-primer.html
jerry
thank you. says what Kelton says in her book. first time i heard anyone on a blog admit that inflation was still a problem with mmt.
i think you need to put this in your own words applied specifically to something someone on a blog says about mmt. you may develop some sympathy for people who are trying to summarize or characterize something briefly enough to make their point. for example noah said “and” and Waldmann says he should have said “and/or” which is correct, but us “deep structure” linguists think noah probably meant and/or and just left is as “assumed.” in any case nothing to get mad about.
not like yves threatening me with blog-death for saying taxes pay for [something] when mmt requires all persons and infidels to never taxes pay for anything, they are only used to restrict spending. [which of course is the same thing, except the normal way of talking “points at” a relation between “paying for” and “restricting spending” (for other things). I could say this better, but it would take too long.
in my mind breaking the bond between “paying for” and “restricting spending” is psychologically disastrous and an invitation to government malpractice {even worse that what we get now}, but i do agree with mmt that deficit spending is a perfectly good way to pay for things a country (the people) needs. it’s just a good idea to keep good books so you know what you are doing.
i alone am responsible for any lies or blasphemies in this message.
typo alert
“infidels to never taxes pay for” should have been
“…infidels to never say “taxes pay for”…”
I hear you about Naked Capitalism blog. I read it often enough but don’t comment there. They have developed their own culture there that brooks few dissenting opinions. And it is fiercely enforced by their moderators. It is unfortunate really. And they may think that they are MMT informed but that really isn’t the case for the most part. Bill Mitchell, the MMT economist I mentioned earlier will not post commenter links to that site on his comment section which may tell you something.
But they are allowed to have their own views of the world and the powers that be and that is a good thing. They point out a lot of the hypocrisies baked into our political system even if they might be described as a ‘we are doomed and gloomed by everything’ kind of place. It’s hard to think of a post over there that took a positive view of the future in any way.
As far as putting things in my own words- well honestly those are my own words used to describe what MMT says as briefly as possible as a rebuttal to Noah Smith’s false assertion.
jerry
i realized those were your own words after i posted.. what i meant was “in a situation where someone has said something about mmt that you disagree with.” words have to be tailored to the situation. but i apologize (see. even i do it sometimes) for not realizing sooner that you were not quoting from a book.
and most sincere thanks for your comments re naked capital, it helps ease my frustration over whatever was going on when i visited them.
for what it’s worth, i wasn’t disagreeing with them. i was trying to say something about SS in “normal” language and they were going to delete my comment because it was not it their idea of mmt approved language.
i don’t think noah was making a false assertion as much as a hyperbolic over generalization. the difference is subtle, but its the difference between a lie and satire. no attempt to fool anyone, but an exaggeration for effect.
Coberly,
Perhaps you have seen my first reply to your comment at 3:36 pm. If you have not, and it gets fished out of the trash and posted, I would not want you to be surprised by how critical it is of Noah Smith in this instance. Because it is critical and maybe harshly so. But I make no apology for it being that way.
But it is not critical of you or anyone else here- so you don’t have to worry about that:)
Thank you for your advice. I think it is good advice.
Coberly and Jerry Brown,
Good talk guys. The only problem with MMT is US. We have a debt ceiling that exists despite the disaster involved in the implied willingness to default on sovereign debt. This is to say “You can’t there from here” or “A bridge too far” to subjectively describe our reality. There is no objective reality in public administration. We are entirely limited by what people agree is correct and proper. The more ignorant the people, then the more harshly severe the limitations.
Unfortunately, liberalism has a boner for our public pedagogy which is generally about the same as our private pedagogy. People are free to believe what they want as long as they do not know too much. We are taught not to be judgemental rather than to have good judgement. Tolerance is essential, but responsible behavior is not. Our children are groomed to buy what elites are selling generally without question and certainly without reasoning. The sales pitch is all about what it takes to be successful in a world owned by corporate enterprise. Keep your head down, do what you are told, and don’t make waves.
The MMT talk is a useful distraction. It makes us think that we can still make a difference by championing some new economic theory as if the world is divided by some philosophical disagreement rather than just rich and poor, powerful and powerless. If we are too use the republican system to our advantage, then we must organize into majority coalitions built on a foundation of concrete policy rather than esoteric theory. It is one thing to know that a sovereign can buy their way out of past mistakes with the money illusion, but another thing entirely to relate that to a voting public that has been trained to fear state power and monetary inflation. All the much less likely when the advocates have behind them a long history of misreading the reality of their own policy consequences as well as still living in denial of those past mistakes.
Jerry,
If Noah Smith wrote the truth about MMT, then would you like that any better? Rich people do not like higher taxes and banks do not like higher inflation. Unfortunately, rich people and banks run the show here.
Yep- all those other problems would still be with us even if Noah could describe MMT accurately 🙂
Jerry
you are doing good. I am exhausted. still replying to comments, but I don’t know enough to say anything useful..about mmt or standard “economics” or money and banking, or foreign trade… and i try not to have opinions about what i don’t know about.
i have expressed some doubts about mmt, and some agreement with what they are saying, and some horror at what the blogsters are saying. but that is not knowledge, or opinion about what i don’t know.
i think you need to give fairly detailed answers to Ron and Run: what mmt says, and how they (you) expect it to work.
Jerry,
If you recall back in the day at EV what Paine thought of Noah Smith, then although I was optimistic about Noah when he first started blogging hopeful that a new PhD in such times as those would inspire more intellectual honesty instead of selling out to the status quo, then as it turned out Paine was spot on about NS and my hopes were dashed once more by reality. Such stuff happens, but not much to me any more so long after September 2008, the first time that I had dared to be hopeful since 1968. If you are much younger than me (@73 YO), then there may be time for your hopes to either be fulfilled or dashed to smithereens as mine were. My hopes are much smaller now. Best of luck to you on your journey, which I hear is the better part compared to the destination. That seems to hold true.
Jerry,
Also if you recall, Owen Paine was quite sympathetic to the cause of MMT advocates, which was essentially the same as his own cause (i.e., full employment to advance wages), but preferred a synthesis of Kalecki/Lerner/Vickrey macro as a methodology. Last time I checked, Paine was on Twitter, but I have not kept up with him there. I am not that involved in the meanderings of the political economy these days and do not subscribe to any kind of social media. I plan to spend the end of my days fixing up the homestead and taking my wife to the shore.
Take care and good luck.
Ron,
I don’t think any of us knows where the destination is. But all of us know what we are afraid it is. Some journeys are worse than others.
Gives me a hope that there is a purpose to it all…which would be spoiled by our knowing what it is.
I have also been “fooled” by the appearance of new, seemingly rational and decent, voices from the Right. But they give themelves away soon enough…soon enough that no one should ever trust the next pretty face. Gore Vidal kept a picture of Jack Kennedy on his wall….to remind himself never to fall in love with a politician again.
I don’t keep track of politicians so I would not have any background on Noah to warn me. If I just look at his words and can take him for an honest if not over-bright political observer. I still think it is bettre for Jerry to assume someone he disagrees with is just wrong and not lying. This is not out of any kindness to the other guy, just a way to keep from the perils of anger.
I was hoping that he and you and Run could find a way to make MMT clearer than others who have joined the fray. I am afraid I am left with nothing more than i started with: some doubts about how they can make it work. some hope..wish… that at least as a talking point they can defeat the “deficit hysteria” that runs, ruins, this country.
Now it is looking like we will have war hysteria to worry about… and i find my thoughts turning to how we can beat the bastard as opposed to “peace in our time.” I had an idea about how to manage that peace in our time bit, but i have to reckon with the fact that the other guys are as stupid and crazy as our guys. Puts me, i am afraid, in the same camp as the “previously reasonable” folk Waldmann mentioned. Though there the babies in bastinets and the mushroom cloud were much less credible than wondering if Putin thinks he can pull it off. I hope he remembers Munich, where Hitler pulled it off…and gave the rest of us time to arm ourselves for the next episode. Maybe we’ll get our money’s worth from all that defense spending after all.
Coberly,
I cannot help with MMT since we have a banking system designed to prevent such from happening. Just like toes, prerequisites go in first. Abba Lerner would I expect to have had a solution, but my research indicates little difference between his Functional Finance and MMT. When I found this discussion of the two then the first commenter on the article was Jerry Brown. Go figure!
http://www.bondeconomics.com/2020/02/functional-finance-roots-of-mmt.html
Sunday, February 9, 2020
Functional Finance Roots Of MMT
I have been writing online for over six years. and my experience is that almost all of the discussion around Modern Monetary Theory (MMT) involve basic principles of Functional Finance. Functional finance was a school of thinking within early post-World War II Keynesian economics. For a number of reasons (mainly political), Functional Finance disappeared from discussion — until proponents of MMT revived the ideas. The online debates (including opinion pieces from mainstream academics) bounce around Functional Finance ideas. This is somewhat unusual, as the theoretical dissent around the basic Functional Finance concepts used is not very strong.
Most critiques of MMT take the form of a critic asserting “MMT says X.” The response from MMT proponents is that MMT most definitely does not say “X”. This situation is obviously confusing. This article attempts to explain why the online debates are confusing (and pointless).
(Note: This is the second article in a sequence of articles on fiscal policy and MMT (link to first). These articles are drafts that are expected to form a chapter in an eventual intermediate introduction to MMT. This article is somewhat of a diversion, but it reflects the reality that most online debates about MMT are confused.)
Really Short Version of Functional Finance
For the purposes of deciphering online wrangling about MMT, the most important principle of Functional Finance is as follows:
There is more to Functional Finance than that, but it is what matters to us right now. (I have a longer tutorial on Functional Finance here, and it is the core of Chapter 7 of my book Understanding Government Finance.)…
Ron
thanks for the reference. I hope to be able to look at it soon. Because “useless” debate is what I am stuck with now..kind of like my efforts re Social Security.
Thanks Ron. Yeah I miss Owen Paine and his strange almost poetic way of writing. And ‘KLV’ as he distilled it was not far from MMT especially on the full employment issue.
Good find on the Bond Economics piece. Had forgotten all about that comment at this point. I guess you could say I am consistent.
Best Wishes,
Jerry
I’m curious why the world wasn’t as obsessed with stopping Bush from invading Iraq as they seem to be about Putin possibly invading Ukraine. What economic sanctions were going to be used against the US for an illegal invasion of another country? I don’t remember any.
Iraq war was illegal and breached UN charter, says Annan | World news | The Guardian
While Bush absolutely knew that Iraq had no weapons, with inspectors on the ground there at the time, Putin does not know if Ukraine will be admitted to NATO. If so, what does that mean for Crimea and Donbas? Is NATO going to go to war to take back Crimea?
good question.
another question:
when is the rest of the world going to boycott the u.s. for failing to follow climate change mitigation agreements?
Jim Hannan,
Perhaps the world has not yet seen the compassionate conservative side of Vlad Putin. Probably being named after Dracula does not help either.
jim
it’s a little hard to know what to think, given that their side has liars and crazies just like our side.
Jim Hannan
I think the world was not as worried about America>Iraq as they are about Putin>Ukraine because Iraq had much less chance of turning into WW3 than Ukraine. Never underestimate the power of rational self-interest.
And never underestimate the power of irrational self-interest.
This is part two of my comment.
It is a blog called Angry Bear, but maybe the commenters are not supposed to get angry. Like I did, again, at Noah Smith. Maybe my previous comment will show up eventually or maybe I will try to repost it without the more colorful language.
Anyways. Back to what Robert Waldmann wrote. And wrote well.
So I mostly agree with what Robert Waldmann says here about macro. Except for this statement.
“In fact, whatever basic Keynesian economics says, Noah Smith writes “fiscal policy poses no inflationary threat.” I assert that it never does, so long as it does not influence monetary policy (called fiscal dominance).”
Maybe it is surprising a MMTer like me would say Noah is wrong to say that. Someone who understands (and agrees with) MMT would say that certain fiscal policies in certain situations can always pose an inflationary threat. Regardless of monetary policy- which is a bit contrary to Waldmann here.
Jerry
You were neatly deposited in the trash. Fortunately, I check out the trash before it is “taken out.” Reminds me of a song (Coasters) back in the early sixties.
You are fine. Not to worry.
Justin
You are in spam because of Russian appearing on your comment a few days ago. You were detected as spam. After reviewing your comment, I placed you in spam. I am going to toss you again. Where else do you comment?
@Coberly on the invasion of Iraq. I guess I should have named names. The normally reasonable people I have in mind are Matt Yglesias, Ezra Klein, (semi) Brad DeLong, Mark Kleiman, Jon Chait, and Kevin Drum (until the last minute). These are the people I generally agree with and trust. They are not usually hawks and are definitely not crypto imperialists. Something very strange and unusual happened 2001-2003. I found it painful to type those names.
Inflation can definitely be caused by things other than extremely low unemployment. The combination of high unemployment and high inflation is the original meaning of “stagflation”. As you note the oilshock involved inflation of the 1970s is the classic example. Also coincidentally wages did not keep up with prices. I write coincidentally, because real wages continued to decline in the moderate inflation 90s. Now it is certainly arguable (as I argued in a post below with no comments) that wages are keeping up with prices (google krugman dallas fed for a better version of the argument).
On MMT again. Yes Noah’s assertion is incorrect. I also think that MMTers have to explain their theory in a different way. It is not OK to tell people “read my book” or “read our books”. One can’t expect people to read whole books about theory which they suspect is no good. Also the comment here (which I haven’t read yet) is a generous effort but comments in blog threads won’t get the job done either. The way ideas are presented to economists (who sometimes even consider them) is very standardized and you shouldn’t hope that the profession will accept other formats. There are articles with abstracts. My practice is to read a lot of abstracts. Then they have introductions. Then they have a formal explanation which, in recent decades, always includes equations. Then a conclusion. Ideas are always either “this model should be treated as if it were reality” or “this model is an example which illustrates the ideas”. Those are very different and one can consider the first claim to have always so far been a mistake and also do the second.
If you want to convince people who think you have nothing useful to contribute you have to meet them 99% of the way in every way you honestly can. Also the default is to assume that someone has nothing useful enough to contribute to be worth much time (it has to be that way given how many people think they have something useful to contribute).
I will now read your comments.
Robert
good lord. that was so sensible that no i am afraid to have you read my comments. i am never so sensible. i was going to start by saying “i agree with you..” but that would imply that i already agreed with you before you agreed with me, instead of, i now agree with you. it’s a mix of both.
i am not going to learn any economics in this lifetime. i learned a little in college, and then forty years later i realized it was all wrong. actually i had suspected that from the beginning, but i was charmed by some of the math, and stopped thinking. years later i realized that reality was always more complex than the math. and then i began to suspect that some people who played economists in public were not always telling the truth. when someone (Paul Ryan) says “you don’t want me to go all wonky on you” i know he is lying and not just misinformed.
so now i do the best i can with a poor version of how it looks to me, and make a pest of myself asking people to make things clear.
thanks for the reply. i think we could sort it all out if we had time.
@ Jerry Brown
I have read the very brief explanation of MMT and deficits. I agree with everything written about the economy there. I think my criticism of MMT is differerent from that of other critics. It certainly doesn’t consist of calling it a fringe ideology.
The explanation sounds to me like an abstract of “functional finance” by Abba Lerner (I am being honest, I have not read the article but only explainers of it written recently). It also sounds completely conventional. It is certainly true that most people (including most policy makers) do not understand that a country which borrows in its own currency is not at all like a household. However, I don’t think you can find a mainstream Keynesian who needs to have explained what you explained here. I stress that I use the present tense “needs” and not “has ever needed”.
OK I am going to be specific. What do you or Kelton have to teach Krugman ? What evidence is there that he doesn’t understand all that (note again present tense — citations of things he wrote more than 15 years ago do not count as answers to my challenge).
My criticism is that, as far as I can tell, MMT is a combination of 3 things, standard paleo Keynesianism, some specific policy proposals (here not “deficits are always fine” but a permanent zero interest rate policy and a job guarantee) and extreme combaitiveness.
On your explanatory comment I have two things to say. One is thanks. The other is I note that you stress that while MMTers agree with everyone else that taxes are needed, MMTers stress that the reason they are needed is to prevent inflation not default. I think this is a distinction without a difference. Are MMT models and Paleo Keynesian models observationally equivalent ? If MMT is a more useful approximation, what prediction is implied ? How do you test MMT vs a Paleo Keynesian alternative ?
This is *not* like my earlier comment “we demand articles with abstracts, introductions, and a mathematical model at least as an illustration”. We do demand that, but my current criticism is substance not style. To argue that two theories are different, one must present two inconsistent predictions of observable events implied by the two theories. Notice I use the imperative. A statement abou the reason one has to do something is not necessarily a testable prediction. A testable prediction are statements about what would happen if this were done or that were done. Until MMTers can explain how they disagree with Krugman about a conditional forecast, I will not be convinced that you have anything to add to his contribution.
I think all MMTers should read this Twitter thread
can you respond to it ? It convinces me that Kelton has nothing useful to contribute. Someone who asserts that Paul “It’s baaack … liquidity trap” asserts that “full employment because the central bank can always establish the “right size” interest rate to get you there” (emphasis mine) does not seem to me to be capable of rational discussion or to be worth any time at all. How could any literate adult with normal intelligence type that ? I ask for information.
I’m glad my explanation sounds conventional. Perhaps you would agree it sounds more conventional to many economists than it would have 15 years ago?
I’ll be working on a response to the rest of your reply. But thank you for the reply.
jerry
i think it was conventional the day Nixon said “we’re all Keynesians now.”
Hey, I like Paul Krugman. A lot. Read him for many years. Would buy the Times on days I knew his column would be there. Pay for a digital subscription now in part because he writes there. I think he is a very, very intelligent man. Probably forgot more economics than I will ever know. Great writer too. Even appreciate his sense of humor.
What’s the chances he could learn something from MMT? Zero if he won’t listen.
But he might want to pay more attention to things like the sectoral balance equations developed by Wynne Godley and incorporate them into his thinking. And some appreciation how double entry accounting works as far as banking and finance.
He’s probably on board with automatic stabilizers and their effects. Could learn a bit about the MMT Job Guarantee. I think he would not have major issues with it- but who knows.
While he says often (now) that when interest rates are low, the government can and should spend to counteract various problems that might be caused by things like liquidity traps and secular stagnations these miss the real points raised by MMT. The fact of the matter is the government spends its currency into existence and then taxes it out of existence. And when it ‘borrows’ in the currency it can create out of nothing, it can choose the interest rate it wants to pay on that ‘borrowing’.
Paul is a bit stuck on this aspect. Where he assumes that because interest rates are low, that would mean the government has more room to ‘borrow’ to spend into the economy to counteract things like high unemployment that cause problems for people. MMT says the government can always hire those who can’t find work but want to work-it’s called the Job Guarantee and is integral to MMT.
I will have to see if I can access that twitter thing you want me to read tomorrow. I am not on twitter and pretty sure I want to keep it that way. But we will see.
Man- you asked a lot of questions of me Robert. And while I am capable of explaining what I believe MMT says, and while I think I have a pretty good understanding of it, I cannot speak as an authority on the subject. So you’re going to have to keep that in mind while reading my answers.
And it’s not like I’m going to provide footnotes or links to things you made clear you don’t want to read anyways.
So it is true that MMT is similar in many ways to ‘paleo-Keynesian’ thought. In my opinion. They are usually described as coming from the post-keynesian branch of economics after all. But I am not sure what purpose is served by trying to stick MMT into some category. Is it so people can say ‘oh- they’re just like paleo-Keynesians and we know paleo-Keynesians are wrong so why bother addressing their ideas’?.
Which brings me to this insistence that many mainstream economics seem to have about mathematical equations and models for them to even consider any economic idea seriously. Let me ask you a question- would Keynes himself, as per the General Theory, been able to meet those requirements? I mean I am still slogging through that book myself and not having fun with it at all. You are a far better writer than he was in my opinion. People complain about being asked to read a blog post by an MMT economist… Compare that to being told to read that book.
What if my criteria for going to a movie was that it needed to have at least two car chase scenes and several gunfights? Sure I am allowed to have my own criteria- but what if I represented myself as a movie critic in general and wrote positively only about those movies that met my criteria? And panned all the rest of them publicly, even if I didn’t watch them? Wouldn’t be right I would think. People who liked some of those other type movies might say ‘Hey- at least watch the thing before you criticize it’. And they would be right.
On the need for taxes. You say you understand what I wrote, but I don’t think you do. There is a distinction. You wrote “while MMTers agree with everyone else that taxes are needed, MMTers stress that the reason they are needed is to prevent inflation not default.” That may be true but it leaves out the part about taxation as establishing a demand for the currency, which basically is just otherwise worthless pieces of paper or numbers in an account somewhere. The imposition of taxes establishes a base value for a fiat currency according to MMT. This goes to theory of what money actually is and how it came about. MMT rejects the idea that money came about as an improvement on some barter system that may have existed some time in the past. What gives money value in MMT ideas is the fact that the government demands payment of taxes in their fiat currency. For example, I have to pay thousands of dollars in taxes every year in order to ‘own’ my home. Which means I need to get them- either by selling my labor to people who will exchange dollars they have or to the government itself for the currency it issues.
I am still trying to access that twitter thing. Maybe I can get back to you on that.
jerry
i agree about the movie critic. i am not sure it really answers waldmann, who is only (i think) pointing out that mmt agrees with keynes (not claiming he agrees with him entirely.) i just read an early criticism of Copernicus which criticised him for not knowing or using “physics” as his starting point. trouble was that the physics of that time would not lead to Copernicus “discovery.” Similarly if Keynes or anyone else did not lead to MMT it would not be a valid reason to dismiss MMT. But Keynes and MMT do agree at least to a point. an important point. probably because both of them are right. there are other objections to mmt that seem to me less valid than “but Keynes…”
anyway. the problem for mmt is to express it’s ideas in a way people can accept them.
so..try this… i don’t agree that using taxes to control spending (and therefore inflation) is a very good idea. people need to see a connection between what they are paying and what they are getting. ordinary bookkeepig does that. separating spending from who ultimatley pays for it is a recipe for financial insanity. look at what happens when people claim falsely that “the government” or “the young” pay for social security. ss worked fine as long as people could say “we paid for it ourselves.” it has taken a billion dollars worth of lies to weaken that connection enough so politicians could get away with making dishonest and risky proposals to “save social security” by destroying it…either by turning it into “private accounts” or “welfare” by the Right and the Left respectively. Even Kelton gets pretty stupid when she talks about Social Security,
I don’t care what money “actually is” or how “it came about.” I do care about how people think about it today. MMT’s contribution is, would be, to stop the lie about deficits…a soverign nation with its own money can certainly deficit spend, and certainly “resources” is the ultimate check on reckless spending. but it does not help to destroy the whole idea of who pays for what in the process.
we can’t pretend the rich are not paying for socially desireable spending just by saying “we can print as much as we need” and then “tax the rich to prevent inflation.”
“money”, even gold, gets established because you can pay your taxes with it. but here “money” means a “universal medium of exchange,” it does not mean “the idea of money.” the idea of money depends, i think, on the faith that people can get what they consider equivalent value in return for the money…equivalent to what they gave in order to get the money. mmt as presented seems to me to destroy that faith.
whatever Keynes or Friedman or Kelton say.
coberly
This “a sovereign nation with its own money can certainly deficit spend, and certainly “resources” is the ultimate check on reckless spending. but it does not help to destroy the whole idea of who pays for what in the process.”
Not every country can spend or run a deficit to any limit it chooses. The US Dollar is a global currency and a majority of world trade is conducted in US dollars. That can not be said for Greek or Argentinian currency. “33 percent of marketable Treasury securities outstanding were held by foreign investors, both official and private, while 42 percent were held by private domestic investors, and 25 percent by the Federal Reserve System.”
That is what I was trying to get you to think about. Yeah, you can run deficits as a sovereign nation as long as your currency is desired. It is not a bottomless pit.
International Role of the US$
i don’t have any problem with that. but i thin greece and argentina did not have soverign control of their money the way mmt-ers think of it. not sure.
in any case i am one of the people arguing that mmt can’t work as far as they think it can. they still come up against limits that they may not yet understand.
as far as foreign debt is concerned, Kelton says is not a problem. you need to ask her. i don’t know.
Robert
I would like to say this time that i agreed with most of this before you said it. But I’m glad you said it because no one has heard me say it… and I don’thave your credentials.
I don’t know Keynes, but I have noticed that politicians don’t care about the deficit. despite what they say.
But I disagree about something that is not economics at all. Kelton does have something to say. for one thing, she agrees with Keynes…to the extent you say she does. And people need to hear it again now that “Keynes has been discredited” by people following the journalism version of Keynes and ignoring the details…which is exactly what would happen to mmt.. if they provided any details. But I’ll settle for “how are they going to make the politicians do the right thing?” We have already seen them switch in an instant from “the poor deficit” to “the poor inflation” and all in the cause of not spending any money on people who need it, and if they had it would spend it and “grow the economy.” Because… i am on an unscientific rant here… they don’t give a damn about people, the economy, the deficit, or inflation. their game is something else entirely.
What Kelton has to contribute is not a new theory…but some new rhetoric which potentially (only potentially) could stop the “where are we going to find the money” excuse. (but see paragraph above re “but oh! the inflation! oh my ducats! oh my daughter!”)
jerry
i agree about twitter. would like you to expand mmt ideas about topics you name. i thin it might you who might be stuck on a lovely idea. as waldmann points out there is not time enough to seriously consider all, oreven a small part of, all the ideas that people come up with,
i’m afraid you need to find some middle ground between “not time enough” and “too short to mean anything.” for myself, i do not know much about “economics” or banking. I like to stick to what i do know (essentially one importat aspect of Social Security) but I think I am up to asking honest questions about asset.rions made about economic policy as they affect real people.
long time ago Krugman said something dumb about social security. dean baker corrected him. he agreed with baker, but i think he has yet to really get the point: SS can and should pay for itself. “pay for” in a non mmt sense: that is..take the noney out of my pocket. exchange it for a promise to pay me back with interest in the future (including a real insurance benefit in certain very likely events)..all this “paid for” in another very real sense, by people in the future taking money out of their own personal pockets to pay for their own very real personal benefits in their own very real personal future. “paid for” here “by people in the future” the same way EVERY investment or bank account is paid for by people in the future paying for their own future benefits.
did not mean to change the subject here…except it’s what i know. be very glad to continue with mmt, but, as waldmann points out, not say “go read…” make your case here and now. expect to be cross examined or frankly disagreed with. it’s how people learn, (that’s someting else i tink i know about…but they killed socrates for inventing it. and were none too easy on copernicus for believing in it.
sorry about the typos. i think they are the outward and visible signs of personal limitations on knowledge. so far mere aggravations, but likely to get worse. i am sure people will let me know when that happens.