Tuesday, July 26, 2011

Response to comments

Here is my response to comments made by Darwin, on a previous post.

My replies are in red.


Thanks for your irenic reply. I'll shoot to be more verbose and less blunt (as in object) this time around. :-)

I agree that there is a reason why fringe movements remain on the fringe, though I probably disagree with you on what those reasons are.

Well, FWIW, I think there tend to be various reasons, though it seems one commonality is that partisans of fringe movements often argue that they are kept on the fringe because those in the mainstream are afraid of the disruption they could cause and are keeping them out in order to maintain their own positions. (The folks I am most often very frustrated by who think along these lines are the Intelligent Design movement, who insist that evolution is a house of cards if only anyone would notice.) In academic fields, I think this is often one of the least plausible explanations. Often, I think, the true reason is simply that the beliefs of the fringe group do not in fact have huge amounts of explanatory power, if they are not outright wrong.

Well said, I guess I am so strongly convinced by the evidence, that I do not think we (MMTers) lack explanatory power. I feel that we are up against many myths that have cropped up for various reasons, some legitimate and some not so much. My goal is to reveal those myths and present evidence to the contrary so that others may be convinced as I am. I am not seeking it for my own sake or my own agenda, but for others’ sake. I think understanding money as I do will lead to less suffering in our world at the hands of long held myths about government finance.

It is quite perplexing to me why there are so many learned economists and politicians who think that our government's finances work like a household's--namely that we can go bankrupt and that therefore we should have a balanced budget amendment. I have my guesses to why that is, but no clear answers.

FWIW, the economists and politicians are probably very different groups in this regard. Many politicians seem to have very simplistic ideas of economics, but Harvard PhDs like Mankiw, not so much.  
I agree.

From what I've read of Mankiw's stuff, I don't at all get the impression that he supports a balanced budget amendment.
He doesn’t. He seems to follow the basic consensus that in periods of economic trouble the government should run a deficit and that in good times it should move towards balance or surplus. What he does seem to hold, however, is that there is a serious limit to how large a deficit a country should run for how long, and his concern in the quoted editorial is that the US seems to be pursuing a policy of spending significantly more than it takes in long term. He is right to be concerned. I am not convinced from his arguments that he understands why, however. He seems concerned about interest rates and insolvency rather than the inflation that MMT’ers say would be the symptom of too large a deficit.

If I'm following the stuff that I've read over at New Economic Perspectives right, it seems like for many MMT folks the idea is that you never want to run a surplus
(correct, because running a surplus takes away the net savings of the private sector. If the private sector wants to run net surplus or net savings, then by definition, the government balance or the foreign balance has to run net deficit) and it almost doesn't matter how big you let your deficit get, so long as you have a sovereign currency. Sort of. There is no solvency issue so long as we have our own currency, but inflation could get out of hand if we ran deficits willy-nilly. I think Mankiw is basically staking out the ground that although we have a sovereign currency (and one which is pretty much the world reserve currency at that) we can't behave like Greece long term and expect that to work out. Shouldn’t use Greece as an example because of their lack of sovereign currency. I don’t know a whole lot about Greece’s debt run-up (what led to it that is) but their problems are mostly because they don’t have a sovereign currency and no comparison can be made to the U.S. in this regard. We can and probably should run a deficit (especially now) without any solvency issues or bond market issues, but if we went crazy then we would certainly see inflation.
Darwin said...
I believe that the the point of their seemingly overenthusiastic proscriptions (including my own) is so that others understand MMT and remove the constraints of misunderstanding (for the constraints are set not by how the money system really works, but rather by people's understanding of the money system).

I'll try to dig a bit more into this in a minute, but I think the response I want to float to this is that it might well be that one of the constraints on the money system (at least in avoiding effects that we might not much enjoy) is that those responsible for managing the currency behave in a way more or less in line with the more traditional understanding of what a currency is. In this sense, while MMT may be descriptively accurate as a method of analysis (I should be really clear here and elsewhere that being self taught and dealing with pricing, I feel comfortable with micro questions in a way that I simply don't on macro, so I tend to have an approach of trusting authorities I understand to some extent rather than arguing from first principles) if the Fed and government behaved as if it were, this might actually cause it to behave in some other way.
I think what you are saying here is that if the authorities act according to what I’ll call the mainstream paradigm, then the masses will behave as if that is how it works and this is what causes a constraint. If so, then yes we are seeing that very clearly in the debate about the debt ceiling. A needless, but voluntary constraint. That is what I am trying to remove. I am trying to show that it is only a constraint if we choose it. Completely arbitrary and not based on good economics. I argue that the money system will behave as MMT’ers describe it no matter how the authority acts. But awareness of MMT understanding could lead the authorities to act in a way that would benefit the nation instead of causing it ruin.

You didn't really address any of the theory however. ... If I missed what you meant by "the bounds of reality and expectation" then please explain further, so that I don't misunderstand you.

I'm not unconscious of the difficulties of going up against a PhD student fan of MMT in an attempt to express objections to the theory, but here it goes
: (I appreciate your attempt, I think you are well-read and wrote a great response, and I am still just a student and don’t really consider myself an expert)

Reading through the MMT Primer being put up at New Economic Perspectives and at overview posts such as "MMT Explained to Mums", it seems to me that part of the argument here is that since the government issues currency, that it doesn't need to worry about where money "comes from" in issuing currency. It seems to me that so long as there is a basic expectation that a government intends to maintain a balance between its revenues (via taxation) and it's spending, this is probably true. However, if it basically says, "Look, we control the currency and we're simply going to spend how we like, pay for it via debt, and if you ask how we'll pay for debt we'll simply print you dollars," it will pay a steep price in both the interest rates that lenders will demand on bonds and the demand for dollars in general (inflation.)  
I don’t think that is what they are saying, though I see how one could take it that way. Money is created by govt spending (and by bank loans, but lets ignore that for now, because it muddies things a bit and isn’t necessary for this explanation). Money is taken or destroyed away by taxes. It doesn’t really come from anywhere, it is simply created. Excessive creation is inflationary, destruction deflationary. Govt spending through money creation allocates resources towards what is spends its money on. Taxes make sure that it can obtain those resources by creating a demand for the currency to pay those taxes. So, they (remember, the they here is the government who we elect. I grow frustrated with those who think the government is some institution that controls us. It is an institution elected by the people for the people, though many choose to abstain from their right to vote and otherwise participate) can spend how they like, but there are certainly consequences.  They don’t pay for it via debt, debt issuances are simply another drain on reserves (to help control inflation) and offer an interest bearing savings account to holders of cash or reserves. Interest rates are mostly set by the central bank (this is something I need to do more reading on, but I can try to find you sources if you want more explanation here). Inflation on the demand side will only get out of hand when resources are used up, but as it is right now, there are lots of idle resources (unemployment, unused capital, etc). So the cue for larger deficits is underutilized resources, the cue for smaller deficits is inflation and full employment.
Darwin said...
Reading through all the talk about why things are budgeted the way they are, it seems to me there are two arguments being put forward for why we should decide that deficits and debt simply don't matter for the government:

1) Full employment will be achieved via the government employing everyone to do useful stuff, and this will create so much value that it will pay for itself.
I think that they do think it will pay for itself, but that that isn’t the most important part of employing everyone who wants to work. There are many ways to provide useful work, unfortunately many people see the government paving roads that don’t need paved. I agree with them that that is not useful and not good use of deficit spending. But simply providing an income to everyone will boost demand even if they provide a little bit on the supply side our economy will be in better shape than paying unemployment insurance to people who sit at home all day and we end up squandering potential output.

2) The wealthy are keeping a lid on inflation to benefit themselves, but if we spent like crazy without worrying about how to pay for it and inflation resulted, this would basically just have the effect of depreciating the wealth of the wealthy and making us all more equal.

Of these, 1) strikes me as engaging in some weak form of the socialist calculation problem -- in other words, it assumes that the government guaranteeing to employ everyone
(willing and able to work) would result in enough useful work being done to actually make us better off because of the value of the work done would equal the value spent in employing everyone. I would tend to think that's highly unlikely, in that I don't think any one really knows what it is that everyone is most valuably employed doing. Difficult administrative decisions are required here, but again is it better to put someone to work doing something somewhat useful or to let them produce nothing at home? As such, I think the value produced would be less than the value spent, and it might even be worse than useless in some cases in that people might be payed to do things less valuable than what they would have been doing otherwise. Here I have two questions: Is working better than not working (for those willing and able to work)? And what would these people be doing otherwise? You are also getting into the issue of ‘value,’ which is tricky because of how to define it. Do you mean in dollars? Utility? Spiritual value?

 You pose many problems here to the ELR (Employment of Last Resort) proposal and it is these things I would love our debate to be focused on. I feel that if we can get past the bankruptcy concerns and all that nonsense we can focus on “okay, so we need a deficit, how do we spend it?” I think that that should be our focus and one where conservatives make many useful arguments that many proponents of MMT would rather ignore, because they tend to be very liberal. I would love to have a conversation with you in particular on these issues (taxes, specific policy proposals, etc) sometime, because you seem full of wisdom on many of these.

On 2), it strikes me that while the kind of chaos caused by high inflation (something which seems to be denied would result if the government only spent to the point of full employment, but I have real trouble imagining would not result from the policies advocated, and is the only thing which would have the advertised effect of taking down the value of the holdings of the wealthy) does in fact hurt the wealthy, it hurts the poor a whole lot as well.

I am not as good at the inflation stuff as I need to be yet, but having read the proposals of my professors I do not think inflation will be a problem until we reach max utilization of resources. High inflation isn’t good, and so it is to be avoided. High unemployment is also not good and so it is to be avoided. Recently, however, economists and politicians are more afraid of inflation (because of “massive deficits”)  that hasn’t transpired and its been 2 years+ since deficits rose dramatically. They seem to pay little attention to unemployment (I do not consider reducing deficits as a serious attempt at reducing unemployment for many reasons) and that concerns me greatly, for it is my belief that unemployment is a bad thing in and of itself, not simply for the lost output, but also because it is part of our human vocation for it is how we create just as God created us and our world. Inflation is only bad (to me) if it causes unemployment or lost output or instability, which it can, but until it does we should worry about the real problem. And since we know how inflation works (via MMT and other bright monetary scholars) we have the tools to bring it down if it gets out of hand.

For a policy proposal that you might consider more favorable than the ELR as a means of increasing our deficit I suggest watching Mosler’s address to the Tea Party 2 years ago: http://moslereconomics.com/2009/09/29/tea-party-address/

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