Have you studied MMT economics?
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Will MMT Economists Finally Get Their Day in the Sun?
- Thread starter piezoe
- Start date
Have you studied MMT economics?
yes, you ? of course study is relative, but I understand it well enough that you won't be able to use the rhetorical strategy of maligning me as ignorant as leftists so lazily do now, you'll have to know you're own argument and debate the merits without appealing to lore, the crowd, or the pronouncements of your precious Krugman if you want to mix it up with me (especially since even Krugman doesn't buy the MMT argument).
I'd be very interested then in your view of the argument made by Bowen, et al. (1960) in "The Public Debt: A Burden on Future Generations?" (American Economic Review, 50, pp. 701-6.) . You, having studied MMT economics, I am certain will be familiar with the MMT argument, since it, and Abba Lerner's equally well known rejoinder (1961) in "The Burden of Debt," Review of Economics and Statistics, 43, pp. 139-41. are pivotal to MMT views of deficits and government debt. I believe these arguments of Bowen, et al., Lerner, and the MMT economists are critical to a thorough understanding of differences between government and private debt and ,indeed, the question of the correctness of what seems an intuitively obvious concern, such as the one well expressed by you when you wrote, "I don't think we will have a return to sound monetary policy until the debt is normalized."yes,
Since you may have studied MMT some time ago, I'll take the liberty of refreshing your memory by summarizing Bowen et al. for you and then ask your opinion and whether you think Lerner was correct in his rejoinder, and what faults you find in the MMT criticism of Bowen, et al.
Briefly, Bowen, et al. addressed the often heard concern that government debt is a burden on future generations* . The usual argument goes something like this. To pay the additional taxes needed to retire the debt, future generations will have to reduce their consumption. (This is the intuitively obvious part, but is one's intuition correct?). I think even Samuelson, a thoroughly Keynesian economist, expressed this concern.
Bowen, and his colleagues, a decade before the Nixon shock, were responding to those who were advocates of what was termed 'functional Finance' and who insisted that the 'real burden' of government debt must be borne when the borrowed funds are spent. (The why of this is equally interesting, but to go into that here would take us astray.) Bowen, et al. said that this latter argument failed to consider the eventual affect on the future generation when the government decided to run a surplus to retire the debt. The surplus, they argued, would result in government removing more money from the economy then it spent into the economy by either raising taxes or reducing expenditures. The surplus would be used to buy the bonds held by the future generation, and the net result of this they argued would be an inevitable reduction in consumption over the lifetime of the later generation. Even if the increased taxes paid by the future generation were distributed to the the bond holders of that generation, they argued, there would still be a lifetime reduction in consumption, because consumption had to be reduced when the bonds were bought from the previous generation .
Lerner argued that there was an underlying assumption in the argument of Bowen, et al., that invalidated their argument. I'd be interested in your opinion of Lerner's view. But I would be most interested in your opinion of Bowen, et al. and especially your opinion of the arguments made years later by the MMT economists who maintain that the arguments of Bowen, et al. are flawed with misunderstandings and 'strange' assumptions.
You, it seems to me, are quite convinced that Bowen, et al. were correct, and so I would be very interested to hear your rebuttal to the MMT economists' arguments. Thankfully, we are both students of MMT, and so I needn't waste my time here restating their arguments relative to Bowen, et al.
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* Lord Skidelsky, the well-known Keynes biographer, has also advanced the view that government deficits do not result in a burden on future generations. The view of Skidelsky and the MMT economists is not that the government does not impose a burden on society, far from it, but that that burden has nothing to do with the means the government chooses to finance its spending. Whether government taxes or whether it borrows, the burden is the same.
@piezoe Though I appreciate you introducing the topic, I would rather follow political convention and ask you a few questions. As you are the one seeking the monumental change, you are the one who will be asked to prove your case, and as I am the one seeking simply to keep the system basically the way it is, I get to ask some questions. It is not incumbent upon me to disprove your case, but rather for you to prove (or at least convince us) of yours. Or ... if you prefer, since you threw down the gauntlet, I have the privilege of choosing the particulars.
So I would like to ask a few very short questions just so I understand where you personally are coming from with this. It's not a test to see if you understand the tenets of your own argument, a lot of it isn't set in stone, I just want to understand a few of your assumptions and premises.
1) Do you believe that money should be a transparent unit of account. Meaning that for the moment, whether you believe the government should borrow or not, or print money and spend it into the economy, etc ... at the moment, the very fact that the government does keep tabs on its borrowing and spending, and people keep accounts for their businesses, the amount of money borrowed into existence, etc, means that money is a kind of ledger system that to some degree creates a record of who has spent to whom, of who owes who what, for how much, and when, etc. So putting aside the MMT arguments for a moment .. do you simply believe that whatever economic system our government is involved in, should it use a monetary system that accounts honestly for the commodities it uses up, the monies it spends, the labor it employs, etc, using a currency / monetary system that is an honest measure or ledger of account.
Or ... conversely, do you feel this isn't really necessary, and that money can be created in a back room and spent into the economy and it's okay not to inform the public, not to keep an accurate transparent accounting of how much has been created, etc.
I'm not trying to trap you, I just want to understand where you are coming from. I've seen with MMT that proponents have a wide range of premises they work from that are not all in agreement with one another and I just want to understand some of yours.
So I would like to ask a few very short questions just so I understand where you personally are coming from with this. It's not a test to see if you understand the tenets of your own argument, a lot of it isn't set in stone, I just want to understand a few of your assumptions and premises.
1) Do you believe that money should be a transparent unit of account. Meaning that for the moment, whether you believe the government should borrow or not, or print money and spend it into the economy, etc ... at the moment, the very fact that the government does keep tabs on its borrowing and spending, and people keep accounts for their businesses, the amount of money borrowed into existence, etc, means that money is a kind of ledger system that to some degree creates a record of who has spent to whom, of who owes who what, for how much, and when, etc. So putting aside the MMT arguments for a moment .. do you simply believe that whatever economic system our government is involved in, should it use a monetary system that accounts honestly for the commodities it uses up, the monies it spends, the labor it employs, etc, using a currency / monetary system that is an honest measure or ledger of account.
Or ... conversely, do you feel this isn't really necessary, and that money can be created in a back room and spent into the economy and it's okay not to inform the public, not to keep an accurate transparent accounting of how much has been created, etc.
I'm not trying to trap you, I just want to understand where you are coming from. I've seen with MMT that proponents have a wide range of premises they work from that are not all in agreement with one another and I just want to understand some of yours.
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You've slightly misunderstood my mindset. I am not at the moment advocating government as ELR in good times and bad, as the MMT economists are. My view is that they are right certainly about how the Fed and Treasury work in contrast to the incorrect views of the "old school" economists who formed there views when we were on a gold standard, and have not corrected those views now that we aren't. If you go back and look at my original post you will find that I said clearly that the views of the MMT economists deserve to be heard, and not summarily dismissed as some here in these forums are foolishly doing, and with obviously no knowledge of MMT whatsoever. We ought to seriously consider the MMT economists proposals. That's different from advocating them. But certainly I could become an advocate if after further consideration they convince we that what they propose has enough chance of proving beneficial to be worth a try. We should, and must tune out , opinions of those who quite obviously have no understanding whatsoever of what they are offering an opinion on. I'll warn you in advance, if I were to offer an opinion on the rules of Major league baseball, a subject I know absolutely nothing about, I hope to god you won't pay any attention. If you know anything of baseball, it would be immediately obvious to you that I don't.
One serious concern of mine is that with the make-up of our present Congress it is very difficult, even with one party firmly in control, to do anything entirely right. That is because this faction or that will invariably insert a poison pill into any landmark legislation that would keep it from working as intended. So unless one party or the other was in firm control of Congress and also spoke more or less with one voice, which is not the case at present, we must be cautious about making major changes. If changes are not done well, in entire concordance with the intentions and theory behind them, they will be doomed to failure from the outset. Then the one's wielding the monkey wrenches will say "I told you so." And what might have been a marvelous innovation and improvement in government will be derided and either destroyed in whole or piecemeal, or else subjected to endless legislative tweaks aimed at a near hopeless task of making a bad piece of legislation work.
Now to your questions:
I haven't a clue where your question comes from, nor what you are asking, and it makes me think you really haven' studied MMT as you claimed to have. If you are asking do I believe the government is like a private business and should use the same accounting, the answer would be, no of course not. The government can not -- it would be impossible -- and does not use precisely the same kind of bookkeeping you would use in a business because the government has an entirely different set of constraints than a business has. In the end of course, in both business and government, every penny must be accounted for. A fundamental difference is that the government can print money; a business can not. The government can, and does, spend money before it obtains it as receipts from taxes, fees or bond sales; a business cannot spend money before it obtains it. A business can go bankrupt; a government like the U.S. government can not. Neither can a U.S. Bank go bankrupt, though it can fail, and many have, and require resolution if its liabilities exceed its assets.
To understand thoroughly how government accounting works at the Treasury-Fed level, one has to understand Treasury and Fed Balance sheets in isolation and in composite view. MMT economics comes out of detailed consideration of banking and treasury operations. This is a complex topic that I have studied in considerable detail; yet I am not qualified to explain or teach it to someone else. My best advice to anyone wanting to delve into the specifics would be the read one of the several excellent books on MMT. Be prepared however to spend considerable effort. I believe I gave a reference to Wray's book (Chapter 4 and 5 in that book would be highly relevant). Wray's book was published in 1998. Their are bound to be newer books available.
One serious concern of mine is that with the make-up of our present Congress it is very difficult, even with one party firmly in control, to do anything entirely right. That is because this faction or that will invariably insert a poison pill into any landmark legislation that would keep it from working as intended. So unless one party or the other was in firm control of Congress and also spoke more or less with one voice, which is not the case at present, we must be cautious about making major changes. If changes are not done well, in entire concordance with the intentions and theory behind them, they will be doomed to failure from the outset. Then the one's wielding the monkey wrenches will say "I told you so." And what might have been a marvelous innovation and improvement in government will be derided and either destroyed in whole or piecemeal, or else subjected to endless legislative tweaks aimed at a near hopeless task of making a bad piece of legislation work.
Now to your questions:
"...do you simply believe that whatever economic system our government is involved in, should it use a monetary system that accounts honestly for the commodities it uses up, the monies it spends, the labor it employs, etc, using a currency / monetary system that is an honest measure or ledger of account."
I haven't a clue where your question comes from, nor what you are asking, and it makes me think you really haven' studied MMT as you claimed to have. If you are asking do I believe the government is like a private business and should use the same accounting, the answer would be, no of course not. The government can not -- it would be impossible -- and does not use precisely the same kind of bookkeeping you would use in a business because the government has an entirely different set of constraints than a business has. In the end of course, in both business and government, every penny must be accounted for. A fundamental difference is that the government can print money; a business can not. The government can, and does, spend money before it obtains it as receipts from taxes, fees or bond sales; a business cannot spend money before it obtains it. A business can go bankrupt; a government like the U.S. government can not. Neither can a U.S. Bank go bankrupt, though it can fail, and many have, and require resolution if its liabilities exceed its assets.
To understand thoroughly how government accounting works at the Treasury-Fed level, one has to understand Treasury and Fed Balance sheets in isolation and in composite view. MMT economics comes out of detailed consideration of banking and treasury operations. This is a complex topic that I have studied in considerable detail; yet I am not qualified to explain or teach it to someone else. My best advice to anyone wanting to delve into the specifics would be the read one of the several excellent books on MMT. Be prepared however to spend considerable effort. I believe I gave a reference to Wray's book (Chapter 4 and 5 in that book would be highly relevant). Wray's book was published in 1998. Their are bound to be newer books available.
"do you feel ...that money can be created in a back room and spent into the economy and it's okay not to inform the public, not to keep an accurate transparent accounting of how much has been created, "
No, of course not. What a strange question.
No, of course not. What a strange question.
This is going to take forever if you can't just answer the question without all the hemming and hawing.
2) Do you agree that if the government spends new money into the economy (using whatever means) that it is diluting the value of money that already exists in the (abstractly) same way that corporate shares are diluted if a corporation converts(sells) registered shares as issued shares.
3) Do you agree that the above is a tax, or at least that it has the same effect as a tax, on people who hold the currency when new money is issued/spent ?
Again, I'm not trying to trap you, I'm just trying to understand some of the premises and assumptions you agree with or don't agree with.
Your understanding is like mine used to be, over simplified. Large deficits in boom times run the risk of inflation. They do pump money into the economy, do increase savings and investment, etc. But just spending money into the economy, which is what all governments do, doesn't necessarily dilute the value of money or cause inflation. It is the ratio of how much is spent into the economy versus how much is withdrawn from the economy that is important. Deficits result in more money left in the economy than is withdrawn. This can result in mild to severe inflation depending on economic conditions of employment, productivity, etc. Also the supply on money must grow in pace, not only with economic expansion, but also with population growth to prevent deflation. What many don't understand is that the best the government can do is to balance the budget, but to little spending is much worse than a little too much. If the government manages the economy to produce consistent surpluses recession will result. Austerity programs fail if they produce persistent surpluses.This is going to take forever if you can't just answer the question without all the hemming and hawing.
2) Do you agree that if the government spends new money into the economy (using whatever means) that it is diluting the value of money that already exists in the (abstractly) same way that corporate shares are diluted if a corporation converts(sells) registered shares as issued shares.
3) Do you agree that the above is a tax, or at least that it has the same effect as a tax, on people who hold the currency when new money is issued/spent ?
Again, I'm not trying to trap you, I'm just trying to understand some of the premises and assumptions you agree with or don't agree with.
By "new money" I suppose you meant an expansion of the amount of currency in the public's hands plus reserve accounts, which is what results from deficit spending. This view is correct as far as it goes, but it only goes half way. To have the complete picture one has to include taxes which move money in the opposite direction, and it is the balance between these two operations that is important. One must avoid thinking of one side of this operation without any consideration of the other side. Fiat money that the government issues represents a government liability. When money flows back to the government the money can be burned or simply wiped off the liability side of the Federal Reserves Balance sheet.
Wray, arbitrarly, describes this movement of money back and forth between the government and the public as a vertical flow of money and the flow of money between the banks and the public as a horizontal flow. Excess money in public hands can be saved and leveraged by the banks' credit activity. However, the amount of credit, and the demand, is dependent on economic conditions. The banks have surprisingly little direct influence over demand for money, and demand for money has proven surprisingly inelastic relative to interest rates. What is of special interest here is that unless the government first provides enough excess fiat money that can be saved (hoarded) there may be two little creation of bank money. (There is another route to bank money. The Fed can purchase assets.)
The level of deficits is important. It isn't too difficult to see what can happen if the government does not run a sufficient deficit to support growth in an economy. When the government reduces the deficit, net nominal savings will decline. If net savings declines below the desired level, through business operations or through sales of assets, bank borrowers will find it increasing difficult to obtain the money they need to cover their loan and tax obligations . Ultimately a business contraction will result and businesses may be forced to lower prices. If prices fall too much, loan obligations can't be met, and as bank loans go into default the banks' capital is eroded. What I have just described is the downward spiral that can result from a government not supplying enough fiat money to operate a healthy economy. Mild deficits are usually needed to support an expanding economy. This is what so many get wrong.
When the Fed embarked on a program of QE in 2009 many were convinced QE would lead to hyperinflation and that the Fed's actions were dangerously irreversible. There were many posts here on ET to that effect. Interestingly, all of these dire predictions proved wrong. The reason is clear. Very few truly understood MMT in a world of fiat money. (I can assure you I did not understand it in 2009) Obviously there are those at the Treasury and Fed that understand it, and too the MMT economists understand it. They have made a life's work out of understanding how Treasury and Central Bank operations mesh with commercial banking to keep the economy afloat. They have developed a comprehensive understanding of Treasury and Fed balance sheets. Few others, it would seem, including many mainstream economists, understand these operations in detail. Many have outmoded views going back to a prior era. We even have ET colleagues who have convinced themselves that the Federal Reserve is a privately owned by the commercial banks. To be fair, there is some validity to this view up until the Banking Act of 1935. But those days are long gone.
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Theoretically it works in a close system, but what if you have leakage? Like the trade imbalance between US and China and China won't play with your MMT system?In modern money theory, this is not a concern. Continuous deficits (small) are manageable. But the size of the deficits must be managed properly.
One might look back to the WPA during the Depression and back even further to Keynes who famously said even if you have to hire people to dig a ditch and fill it back in, do it. Keynes preceeded MMT. (MMT comes out of the adoption of fiat currency in 1971, as opposed to commodity based currency) According to MMT economists, a government should be the Employer of Last Resort (ELR) continuously, regardless of whether the economy is in recession. It fact, a major conclusion from MMT analysis is that the amplitude of the business cycle will be reduced by adoption of an ELR program, i.e., recessions should be shallow. With regard to labor, although there are some similarities between the Keynesian recipe for recession and the MMT proposal, the MMT economists conclude, in contrast to Keynes, that there are continuous economic benefits to arise from government being the employer of last resort (ELR) continuously in both boom times and recession. According to the MMT economists the work done will be beneficial and meaningful and not displace that which could, or would, be done in the private sector.
I think it takes some basic knowledge of MMT to fairly critique the MMT economist's proposal. There can be little doubt that the proposal has merit and should be seriously considered, because by now it has been thoroughly analyzed. However, as with anything where humans are involved, human fallibility must be recognized as the source of potential problems. Is it possible for such a program to be well and efficiently managed? Probably. But would it be? ? ?
I am not an economist nor have any formal financial training, so I am just asking to gain some more understanding.
Thanks.
I am not an economist either. I am a student of Economics, and have been studying MMT economics for a few years now and certainly not an expert. (Before that I studied classical macroeconomics) I will get back to you before too long I hope.. I want to think about this business of "trade imbalance" a bit more. We can say this, however, the balance which is the difference between net exports and net imports (goods and services) is only one-half of the overall picture because there is a capital account transaction that is coupled to imports and exports. That makes imports and exports by themselves something easily seized on by politicians whenever they want to mislead by leaving off the other half of the overall transaction. The other thing to remember is that when we buy or sell something in an international transaction (Import/Export) both parties get something they want. It is an exchange of money for an asset. One party ends up with the asset (either a wasting or appreciating asset) and the other party ends up with the deflating money.Theoretically it works in a close system, but what if you have leakage? Like the trade imbalance between US and China and China won't play with your MMT system?
I am not an economist nor have any formal financial training, so I am just asking to gain some more understanding.
Thanks.