Mitchell, Wray and Watts Macroeconomics p 323, give a the correct version of the #MMT position on budget aggregates .
Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.
Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.
(I’d say would rather than could, but otherwise spot-on)
Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.
(This exactly matches Keynes’ position “the boom, not the slump is the time for austerity at the Treasury”)
3 per cent average deficit over the cycle is consistent with debt averaging 60 per cent, nominal growth g and nominal bond rate r averaging 5 per cent. In this case, primary deficit is zero on average.
But if r<g (desirable), can run a primary deficit as well as a total deficit.
25 thoughts on “MWW on MMT (from Twitter via Spooler)”
I can see how that makes sense as a “rough and ready” heuristic for government spending but I’m wondering if it always applies. The economy may in aggregate be booming due to, let’s say, a mining boom in WA. Perth inflation may shoot through the roof as a result. However, other geographical areas may be suffering (in part due to the boom) while other industries may also be flat.
Provided it doesn’t (1) cause an appreciable increase in aggregate inflation or (2) misallocate scarce resources (3) but picks up potential that exists but isn’t fully utilised (eg. the perennial pool of underemployed science grads ) and (4) is in a non-booming geographical location, would it matter if government spent more than the (admittedly inflated due to the aggregate boom) tax revenue available by simply creating some extra money out of thin air?
I pick the science grad example b/c I’m aware that many science grads end up stacking shelves in supermarkets and b/c I have this vision of tens times the current number of scientists, many supported by government “out of thin air” money, fast tracking the future in every area from medicine to renewable energy.
One concern I’ve seen raised by conservative economists in relation to “out of thin air” money is that governments would become addicted to using it, scarce resources would be misallocated, inflation would ramp up and the private sector would be crowded out. I have to admit there is probably much truth to that but I would like to think safeguards of some sort could help.
But I admit to having no affinity for economics or confidence in my economic ideas so maybe I’m just rambling gibberish.
Hugo: One concern I’ve seen raised by conservative economists in relation to “out of thin air” money=
“Out of thin air money” is just another word for “money”. There isn’t any other kind of money, any other way to create money, except by creating money. Out of thin air.
The essence of what these commentators is saying, is
Money given to us (rich people to do insane and disgusting things) is GOOD.
Money provided to poor people for necessary and beneficial work is BAD.
The “conservative”:point here is lunacy. In reality, “addiction” to the latter is a good thing. We should kick the addiction to the first one. But we are having trouble with it.
Just saw the hilarious episode of the old show Sliders, where they visit a world where everyone must be high all the time, enforced by the police, and people who preach the weird state of “being clean” are anti-drug hippies addicting our youth to their degenerate lifestyle.
But when it comes to spending and money – we ARE living in that world – right now.
I offer a different view:
Note that the household spending in GDP includes EVERYTHING that the public buys to consume – food, housing, transportation, healthcare, entertainment, etc. Looking at the income side of GDP, you find that neither Federal borrowing nor personal or corporate income taxes are part of that income – so they DO NOT (and never have) paid for (or “funded”) that spending. For proof, simply pull up the GDP Primer at https://www.bea.gov/resources/methodologies and look at Account 1 on Page 9.
So long as government’s spending to fulfill household (consumption) needs does not exceed those needs, there CANNOT be a lack of supply of the needed goods/services (as business opportunity continues to exist) and that CANNOT cause inflation so long as there is adequate business competition.
“But if rg. So what?” People may search for the article of this title if they wish.
The real issue for all economics which uses the numéraire as a measure is that the numéraire is nominal not real. This raises the key question. What should we measure growth or de-growth in? Should we measure it in the numéraire or in some other manner?
The numéraire purportedly solves the aggregation problem. In what dimension do we aggregate disparate objects (goods) and processes (services)? Currently we aggregate these items in the dimension of the numéraire. But the dollar is not a real dimension, it is a social fictive dimension. Here I use the term “dimension” in the scientific (International System of Units) sense. Anything measured in one of the seven base units is a dimension.
Until economics jettisons its fallacious ontology, where it seeks to manage a world of real dimensions with measures in a nominal social-fictive dimension, it will remain a degenerate research program to use the term coined by Imre Lakatos.
My attempt to use the GT symbol wrecked the start of my above post. The article “Yes, r GT than g! So What?” is by Greg Mankiw. I don’t recommend it but you can read it if you wish. The rest of my above post says what I meant it to say.
During the mining boom investment ramped up expanding the economy with the reserve bank having to raise the cash rate accordingly. The increased in bank rates had the effect of attracting foreign cash investment which then helped to increase the value of the AUD.
But not all of the economy was involved with mining and the currency movement put pressure on exporters and domestic tourism while increased interest rates hitting home buyers.
So booms can be difficult to identify.
I don’t agree with WWW on MMT and with JQ because:
1) Increasing aggregate demand does not solve the income and wealth concentration problem but is most likely to make it worse due to the proposed tax measure (the relatively poor will gain less).
2. Increasing aggregate demand does not solve the environmental degradation problem but is likely to make it worse. (Piketty’s analysis does not include a real resource constraint.)
3. The “all else being equal” condition is fanciful given the magnitudes of proposed change involved. (it is in general an indication that the problem hasn’t been thought through regarding flow on effects). I would expect major discontinuities in parts of the financial system, including foreign exchange, which could set of a downward spiral making things worse
I am still waiting for the theory bit of the MMT.
So, the corona virus pandemic has obliged governments to ‘go into debt’ to ensure the survival of their populations as much as possible. What can be done? Well, it ultimately depends on the particular economy. For countries like Australia with relatively little government debt (not under financial distress), the following mix of measure could be a starting point:
a) Issue bonds to the public under prevailing conditions, say x(1) %, together with a plan to roll over a fraction of this debt parcel with the fraction decreasing or increasing over time, if ‘aggregate demand management’ conditions call for it.
b) Issue Consols to the public (a consol is a financial security which pays a constant interest in perpetuity and, depending on the specific terms, may be redeemed by the issuer, but does not require payment of capital until and if it is redeemed. This type of security had been used by the UK and the USA in the past. These securities are tradeable. Given there are negative interest rates for cash balances in major international financial markets, I believe there is a good chance that pension funds and insurance companies would include consols in their portfolios – worth testing in any case.
d) Print a little bit of money via the RBA. (How little is little? Well, it depends.)
e) Increase the top marginal income tax rate a little bit, say 2%, or, better still, introduce a further income tax bracket for very high income earners with say 5% above the current top rate. This would marginally reduce wealth concentration. My expectation is that for this tax change the assumption of ‘all else being equal’ could be justified.
d) Gradually reduce the tax expenditure on negative gearing and capital gains tax concessions and some subsidies for some industries.
e) Continue to chase taxes from large corporations who use tax heavens and transfer pricing
f) Cancel all advisory contracts with the big accounting firms.
g) Introduce a financial transactions tax on all but financial transactions which are associated with the payment or receipt of trade in commodities (‘goods’). Check the volume of derivative trades – a very small tax would result in a sizeable help to plug the budget hole and it would reduce the speed or extent of pure speculation.
h) Then do the sums and see what is still missing or refine.
For countries like Italy and Spain, that have been badly affected by both the GFC and the corona virus, and their debt capacity is much smaller than that of Australia (after scaling), items a) and b) are available to a much lesser extent. Merkel and Macron have proposed Euro bonds to be issued by the ECB and the proceeds to be essentially gifted to those Euro countries most badly affected by the corona virus pandemic. Austria, Denmark, The Netherlands and Sweden object. Lets see what happens.
Greece, extraordinarily badly affected by the GFC (actually by the Wall Street bankers), have managed the pandemic better than any other country in the EU so far.
The USA is beyond my power of analysis and imagination. And so is China (their wealth concentration problem is severe.)
PS: Ikonoclast makes the point that ‘money’ (fiat money in particular) is a human creation. In a sense its value depends on people believing the system works. So any theory which tries to solve an actual problem by using a letter “M” and assigning bigger or smaller numerical values to it, depending on the conclusion desired, isn’t confidence inspiring IMHO.
I agree with Ernestine in this matter and I want to recommend a wonkish paper below. The maths in this paper are well beyond me. The logic I can partly follow and with more painstaking re-reading and thinking I might be able to understand more of it. The author, like others in the heterodox arena, is concerned with the ontology problem at the base of conventional economics.
The Abstract and Introduction will give a flavor of the ideas being investigated.
Every quantitative order has a structure. These structures vary greatly between different orders, for example, those of mass, temperature and probability. Economics has neglected to investigate the structure of exchange-value, and this paper seeks to identify it. By considering the structural implications of several market phenomena, including negatively sloped demand curves, inelastic demand, monetary inflation and the commensurability problem with units of account, this paper demonstrates that exchange-value is a boolean algebra. This result is considered in the light of the “homogeneity problem” in GET and of Becker’s “scarcity principle”.
The subjective theory of value holds that the quantitative order variously called “exchange-value”, “market-value” and “money-value” is analyzable into intrasubjective preferences and ratios of exchange between pairs of commodities. This paper will demonstrate:
1. that this presumed reducibility is logically impredicative;
2. that exchange-value is conditional upon and describes a broad intersubjective space;
3. that the structure of exchange-value is boolean rather than euclidean;
4. that this boolean structure, rather than the maximizing behavior of individual agents, accounts in the main for downward sloping demand curves; and
5. that some well-known paradoxes that appeared in twentieth-century economic theory were due to applying euclidean and intrasubjective assumptions to intersubjective boolean reality.” – Edward Fullbrook.
Click to access IntersubjectiveTheoryofValue.pdf
I have a feeling you don’t mean ‘In a sense its value depends on people believing the system works.’
I have a feeling that what you mean is actually ‘Its value depends on people believing the system works.’
I don’t know. I could be wrong. But that’s what I think.
If A is a necessary but not sufficient condition for B, then colloquially one can say “in a sense B depends on A.” It’s a colloquial way of omitting reference to all the other conditions necessary for B, thus obviating the need for a long-winded, exhaustive numeration of many factors. It is done to highlight the condition chosen and to do so for rhetorical or logical reasons.
Can someone explain the part where (they said it again on the news tonight) we’re passing on a debt, that all the future generations will have to pay? It’s not literally true the Australian government has borrowed money–is getting funds from someone or some entity, a debt that actually was written down on paper…
I, the undersigned …Oz.. agree to pay …Youseall… the sum of …1 trillion bucks… on …next Tuesdee…
like a contract, which has to be serviced, is it? I was under the impression they do just create the money by typing in on someone’s laptop. We can’t owe sovereign debt in a currency we control/print and all jazz like that.
Can that just be answered straight out? Or is it like how long is your piece of string?
John. I think you are coming to the same conclusion with the selected text from MWW but from a different framework and perspective.
As best as I understand MMT. They use of ‘could’ instead of ‘would’ makes a huge difference to how you and MMT perceive the economy.
A 30% increase in aggregate demand may increase inflation if the total resources of the economy commanded by that currency is exhausted or put to use. An economy with substantial amounts of idle labour and spare capacity could absorb this increased demand without inflation.
The same could be applied to your calculation. A deficit of 5 or 10% could be non-inflationary or a surplus could be inflationary. So, a govt could run 10% deficits long term with no inflationary pressure. So why should the govt hamstring themselves when with all of our idle labour?
Right now we are seeing a case, with the COVID-19 shutdown, where an economy with substantial amounts of idle labour and spare capacity simply CANNOT DELIVER increased demand.
The assumption that increased demand, meaning increased consumption, is the holy grail (shared by Keynesian and MMT economists alike) ignores the finite nature of the world. It illustrates that they are still the mental prisoners of growthism.
What is needed is a theory and practice for a sustainable, steady-state and renewables economy. The steady state part refers to quantity, not quality. We must stop growing quantitatively. That means stabilizing population and stablizing our footprint on planet earth. The latter means not opening new lands to crops and development, not paving over more of the earth, not increasing the total quantitative amounts of infrastructure and so on.
Qualitative improvements should remain possible for a long time. Even qualitative improvements increase complexity which requires higher amounts of energy harnessed for useful work to create and maintain the complexity. However, given the amounts of energy and materials we waste on useless and counter-productive complexity (war equipment for example), we still have a great deal of leeway to increase productive complexity.
The questions are these. Who is doing the work to analyze how we could taper off population growth to zero and then stabilize the demographic pyramid over time? How do we deal with the top-heavy aged demographic bulge that would result for a multi-generation transition period? This is notwithstanding factors like COVID-19 which surprisingly will not solve this problem on its own. How do we remake our economy function to handle this demographic transition issue?
How do we move away from a debt money creation system which presupposes endless growth? The process of capitalization and debt creation so central to modern capitalism presupposes repayment of capital plus interest for a healthy (capitalist) economy. Keynesians and MMTers accept this shibboleth without critical questioning.Thus, like all generals they fight the last war and not the next one. The last war was how to keep the perpetual motion machine of capitalism running and growing indefinitely. The next war is how to create a sustainable, steady-state, renewables economy.
I don’t see any Keynesian or MMT economists seriously grappling with this problem. The more scientifically literate among them acknowledge the problem but then go right back to prescriptions which involve demand-driven recovery (the endless increase of consumption) and the continuation of the ever-expanding debt-money fueled, capitalization spiral. This is plain old double-think. They simply are not radical enough and forward-thinking enough to contemplate a real solution which acknowledges the finite real systems of the biosphere with their finite stocks and flows, including finite bioservices.
A Loon Raving,
I’m no expert, but I’ll take a peanut gallery stab: Typically (in “normal” times), when the treasury want to raise funds, instead of just pushing a key, they’ll auction off bonds to the private sector to raise the funds. They do this drain excess reserves from the banking system. They need to drain excess reserves from the banking system to ensure the cash rate set by the RBA is the *lowest* interbank lending rate – otherwise the RBA loses control of interest rate settings.
The bonds are typically (ultimately) purchased by funds with large capital like super funds. The “debt” and interest the gov is paying on these is mostly to large super funds – ie. local aussie investors but of the older generation – with the younger generation paying the debt.
How burdensome or important this “debt” is, is very much a point of ideological contention and probably needs to be debated on a case by case basis.
Now, the question: well, if we just did away with the whole monetary policy levers and maybe utilised variable taxation rates as the primary level to control inflation and employment? Don’t know if that’s possible, but with modern technology… who knows… and would it be politically accepted by the taxpaying portion of society?
Yep, thanks very much. A very clear explanation. ‘specially for a peanut 🙂
Addendum: Note I did say in “normal” times 🙂 When the RBA introduced a policy of QE on 18th of April, it actually purchased a stack of bonds itself from the Treasury resulting in excess reserves in the banking system and as a result the interbank lending rate fell well below the nominated RBA cash rate. This is indeed, effectively, the government issuing AUD on its own (pushing that keyboard key) without involving the private sector.
Troy – I agree with your description but MMT would argue that bond issuance to match govt spending is only required to maintain the overnight cash rate you describe. It isn’t necessary to finance govt spending.
If debt issuance were necessary to fund fiscal policy why does the Bank of Japan hold 40% of all ‘debt’ that Govt has issued. This was pre-covid so ‘normal’ conditions. Inflation in Japan has rarely been above 2%.
Simon, IIRC the Bank of Japan was the 1st to implement QE in 2001? – and if inflation stays below a targeted threshold with little forecasting of it escalating our of control, why would a sovereign gov do otherwise? BTW: when I referred to “normal” conditions, I wasn’t referring to pre-COVID, I was referring to the times when inflation was a risk ie, when such forms of monetary expansion actually risked pushing inflation into risky territory. Japan probably hasn’t seen that in 20 years. Australia, much more recently.
This idea that MMT thinks growth is the holy grail is just flat out rubbish. I have not seen a single MMT aligned economist arguing that way – every one that I’ve read is extremely aware of the limitations of the finite real world and the importance of staying within those limits. Everyone from Bill Mitchell to Randy Wray or Steven Hail or Stephanie Kelton or anyone else you care to name seems to be /constantly/ talking about how we need to reshape our economies to reduce their impact on the natural world.
What those MMT aligned economists /are/ arguing for is the full utillisation of the resources we actually /have/ in order to achieve our policy goals, rather than wasting a large portion of our resources because of stupid economic fictions or outright lies. But most of them also clearly believe that those policy goals should include moving to a properly sustainable economy, not simply continuing to mess the entire planetary ecosystem up with our current policy approach.
Ikonoclast, here’s a whole conference on the topic of sustainable prosperity, run by MMT aligned economists and with lots of MMT aligned speakers – https://mmt-adelaide-2020.com/
Seriously, the idea that they’re not talking about this whole topic, or grappling with the questions it raises, is just ridiculous.
(1) I am in favor of MMT thinking as far as it goes. I support the UBI (Universal Basic Income) and JG (Job Guarantee) concepts. If it was up to me they would be implemented post haste, especially in the current crisis, and then kept in place.
(2) I support “taking back the state” as statism or dirigisme of the democratic socialist kind.
(3) However, MMT is still a limited theory and program both descriptively and prescriptively. It is a good start in some ways but it is still not profound enough ontologically, nor radical enough politically.
MMT still does not grapple adequately with the basic ontological problems of conventional economics. As the middle term of its name suggests, it is still a “monetary” theory. One wonders what MMT’s “value theory” is in ontological terms; more precisely what is its value theory in terms of the validity or otherwise of using equations of the nominal to manage the real?
I suggest you read:
“Capital as Power” by Shimshon Bichler and Jonathan Nitzan.
“The Autocatalytic Sprawl of Pseudo-Rational Mastery” by Ulf Martin
“The Aggregation Problem” by Blair Fix.
Then we can discuss the lack of real dimensionality of the numeraire (modern money) and why that might be a problem in managing real systems. Think about dimensional algebra. We can discuss the idea of attempting to aggregate in non-commensurate dimensions, and even in likely non-existent dimensions. The numeraire is non-existent as a real dimension and existent only as a pliable (non-objective) social-fictive “dimension”. Social-fictive dimensions follow rules (as per game theory). They do not not fundamental laws as per the physical, chemical and biological laws discovered by science. Using arbitrary axiomatic rule systems with social-fictive “dimensions” to manage fundamental law-bound real systems with real dimensions is a fraught process. The best procedure in that case is to be heuristically and qualitatively guided by an ethical system and not by ritual calculations in a non-dimensional or fictive-dimensional numeriaire.
MMT is “talking about” the topic of real systems but I am not at all convinced they have grappled ontologically with the issue of superseding our current management of real systems with purely nominal systems lacking real dimensions; meaning the use of values and equations denominated in the social-fictive “dimension” of the numeraire. While a theory remains “monetary” in dimension, it cannot properly grapple with the real.
Thermoeconomics, or biophysical economics, may be attempting to grapple with this very problem if it is seeks to develop a thermodynamically based currency, for example. But this is a difficult arena and as yet undeveloped.
MMT is on the right track as an interim, pragmatic solution to our current problems, if it takes the heuristic and qualitative guide of humane and ecological ethics as a starting point. It does do this. Then, if it manipulates the nominal numeraire according to the requirements of humane and ecological ethics and scientific advice rather than according to the dictates of large accumulations or private capital, it is still on the right track. It does do this. That’s two ticks so far. However, if MMT does not go on to question the ontological validity of the numeriare itself (which MMT in fact is programmatically re-re-distorting towards its own goals and away from capitalism’s goals, and which attempt I applaud) then it still stands in the position of being unable to complete its project.
Money (numeraire) circulation and all its market and financial operations is the very life-blood of capitalism. We cannot defeat capitalism while leaving its circulatory system intact. Eventually MMT or its succession theory must, in a model centered on complex real systems, and utilizing sciences from thermodynamics to ecology, obsolete money itself. True democratic and ecological socialism can never exist until money is obsoleted. This will prove to be a necessary but not sufficient condition for democratic socialism.
What does ‘full utilisation of resources’ mean in this context? For example, does this concept of ‘resources’ include human capacity for labour and, if so, does ‘full utilisation’ of them mean that people should be worked as much as they are capable of? For another example, does this concept of ‘resources’ include factory and workshop machinery and, if so, does ‘full utilisation’ mean that people should operate that machinery 24 hours a day, 365 days a year?
“Full utilization” tends to refer to all the things you mentioned: labor, financial capital, real capital (factories etc.) and even real resources. This is unless the person specifying the concept goes into greater detail. I agree with you, that a simple call for “full utilization of resources” begs a lot of questions.
It turns out, as we know, that resources can never be fully utilized. There is waste, there is sustainable utilization, unsustainable utilization, optimal utilization, ethical and unethical utilization, reasonable utilization with regard to other criteria and and so on and so on. There are even resources we should not be using any more of now, like coal. Currently, the correct utilization of coal would be zero, it decisions were made based on climate change dangers.
I raised some other issues in another post above but as you never read anything I write you won’t read that or this, I guess. 😉
Heard Gigi & Peter on “The Economists” yesterday on rn.
Justin Wolfers then…
Listener Question?: What is wrong with economic sustainability without actual physical expansion?”
Simon Fowler at 4:31 pm ” … “This idea that MMT thinks growth is the holy grail is just flat out rubbish. I have not seen a single MMT aligned economist arguing that way “…
“But most of them also clearly believe that those policy goals should include moving to a properly sustainable economy, not simply continuing to mess the entire planetary ecosystem up with our current policy approach.”
Ikonoclast at 6:47 am “It illustrates that they are still the mental prisoners of growthism.”
Simon, Ikon, J-D – Id be interested in your reactions to Gig Fister & Peter Martin. They understand economics, but do not seem to understand they could change the water they are swimming in.
Listener Question?: What is wrong with economic sustainability without actual physical expansion.
– Foster says because people will continually innovative we want more stuff new ways and humans are competitive.
– Martin – zero resources restrictions and growth. We cant stop growing because we make iphone / cars with less resources and are virtual service. We can keep growing forever – productivity. I dont think we should stop growth.
Play from 24.55
Why you shouldn’t need a degree to understand economics
Don’t shoot me, I am only the messanger.
And I’d be also be interested in JQ’s review of Justin Wolfers’ new book “Principles of Macroeconomics” by Betsey Stevenson and Justin Wolfers present a new synthesis of economic principles for a new generation of students. Their focus on useful economics employs compelling explanations and real-life examples to help students develop economic intuition and apply it to everyday decisions. –
Section 2 – opportunity cost?
In good US economy courses now. Coming to Oz when course wrinkles and sign ups done.
In relation to the first part of the podcast (so far). I would be quite concerned about any person, like the lady economist talking, who found conventional economics “intuitive” and that they agreed with it, understood it, and were in tune with it more or less straight off. I would suspect the following pertained and/or had occurred;
(a) That person is very intelligent.
(b) That person unconsciously absorbed the assumptions of economics in our society from their own (unavoidable) immersion in society from a young age.
(c) That person, being intelligent, managed in broad outline and at a somewhat pre-formal theoretic level to reconstruct or “reverse-engineer” an internalized conventional economic theory from extant economic practice as she observed it.
(d) Then when finally confronted with formal theory it fitted well with her own reverse-engineered per-formal theories and permitted rapid agreement, assimilation and learning.
…. And if exposed to Buddhist chanting from a young age she could have become a Buddhist adept or if exposed to strong Christian teaching from a young age she could have become a Christian adept and so on. This sort of thing is not surprising. She is not questioning her embedded a priori assumptions.
Of more interest to me are people who are out of step, not people who are in step. People who reject received ideational systems even after being inculcated into them are showing potential signs of actually thinking for themselves. They may also be showing signs of lack of intelligence or neuropathology (as other examples). One has to sort through these things of course. People out of step albeit in a systematic and well-thought-through way are interesting for the way they challenge our assumptions, personal and societal.