Piketty, MM & MMT, Marx

OVER AT EQUITABLE GROWTH: DEPRECIATION RATES ON WEALTH IN THOMAS PIKETTY'S DATABASE: MONDAY FOCUS: JUNE 9, 2014 by DeLong

Monetarist vs Fiscalist by Simon Wren-Lewis

Henwood tweets: 

@rortybomb @delong my political coda was out of Marx. I’d be happy never to see another critique rooted in value theory though

QE and the Green Lantern Left

Naked Capitalism is circulating this piece by Paul Gambles, managing partner of the MBMG Group.

Smith buries the lead:

Foremost among those economists is Prof Steve Keen: a long-time proponent of the alternative view, endogenous money. Having co-presented with Prof. Keen, I've been taken with the way that his endogenous money beliefs stand up to 'the common sense test.'

MMT

John Quiggin: MMT: Noted by DeLong

John Quiggin: MMT:

My brief summary is that MMT pretty much coincides with traditional Keynesian views in the context of a liquidity trap, but that I reject the claim commonly made in popular presentations of MMT, that increased government spending doesn’t imply increased taxation…. MMT… is based on the idea of functional finance.…

What happens… if governments decide that an increase in public expenditure is warranted? Assuming that levels of money creation and debt issue were already set appropriately… there is no obvious reason for them to change. But then… the increase in public expenditure must translate, dollar for dollar into an increase in tax revenue. Perhaps there is an explanation for why an increase in desired public spending would change the settings of macro policy in the direction of more money creation, but if so, I haven’t seen it…. 

There are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example. There are various possible mechanisms by which this outcome occurs, but the central point is that the monetary base is typically around 10 per cent of GDP…. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero. And, except in crisis conditions like those of the present, zero interest rates will lead fairly rapidly to inflation in asset prices and ultimately in consumer prices…. 

The higher the debt ratio, the stronger the incentive for the government to default or inflate their way out of trouble, and therefore the higher the interest rates they will face. At some point the capacity to borrow runs out.

sectoral modeling

Embracing Wynne Godley, an Economist Who Modeled the Crisis by Jonathan Schlefer

“cheap” or “dear” money

Friedman’s Dictum by David Glasner

In his link, DeLong quotes 

Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History ... is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard.

"endogenously determined" - "produced or grown from within."

Endogenous money

Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a 'printing press' for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements - expected growth in the money supply reducing the real purchasing powerof money and expected increases in productivity increasing the real purchasing power of money.

This means that participants can affect the value of currency in a number of ways:

• Investment choices to invest in 'non productive' money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
• Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of 'supplier led inflation', effectively reducing the real value of currency.
• Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

This all adds up to the conclusion that participants have the power to affect the value of currency, albeit via less direct and potentially less effective mechanisms than simple printing of money by the central bank (exogenous money creation.)

Banks and the Monetary Base (Wonkish) by Krugman

Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment. 

And the crucial thing is that there are no puzzles or misunderstandings here. Tobin and Brainard got it all straight half a century ago, and anyone who thinks that there’s a big flaw in their reasoning is almost surely just getting caught up in his own word games.

Competition for loanable funds

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.^[16]

To compete for deposits, US savings institutions offer many different types of plans:^[16]

• Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any time.
• NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
• Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
• Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
• Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
• Individual retirement accounts (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
• Checking accounts — offered by some institutions under definite restrictions.
• All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.
• Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.

MMT

Guest post: Dual mandate — right goals, wrong agency? by Stephanie Kelton

MMT and never say never

Warren Mosler, a Deficit Lover With a Following by Annie Lowrey

Still, even for those with some knowledge of economics, the tenets of the modern monetary theory can make your head spin. The government does not tax its citizens to pay for federal spending. It taxes them to ensure they use the dollar and to help to regulate demand. Since the government prints the dollar, it can never run out of money and it need never balance its budget, not even to prevent the crowding out of private investment when the economy is humming along.

I have a problem with the hyperbolic claims. It's Keynesiansism with some suspect claims tacked on employing the word "never." Perhaps it is a straw man. But they are right that we shouldn't be worrying about the deficit and that fiscal policy could take the place of monetary policy. The problem is politics and a corrupt elite. But monetary policy has offest fiscal austerity to some extent so I don't understand the MMTers who denigrate the focus on monetary policy. The more mainstream economists are right to focus on it.

Reconciling Modern Monetary Theory with the Wisdom of Mark Thoma by Dean Baker

Stephanie Kelton has a comment.

On a different point: MMT supports tax increases and/or spending cuts to address demand-pull inflation. No different from, say, Abba Lerner or Marriner Eccles. 

The real point of departure for MMTers and textbook Keynesians is, I think, very much bound up in the loanable funds theory of the interest rate (the former rejecting and the latter accepting it). From that follow all sorts of differences re: fiscal sustainability. Scott Fullwiler has written brilliantly on this. 

Wikipedia entry on loanable funds

Fed Watch: 14,000 by Tim Duy

Fed Watch: When Deficits Become a Problem by Tim Duy

JW Mason comments:

I'm afraid Tim Duy is wrong, Randy Wray is right, and Krugman is contradicting himself.

It is one thing to say that the **flow** of demand for current output caused by large deficits can be inflationary. It is a different thing entirely to say that the **stock** of debt is an independent constraint on policy or a factor in interest rate determination. 

Yes, if a government spends far more than it collects in taxes, this can lead to aggregate demand aggregate supply constraints, driving up prices. MMT has always said this. But what matters is the size of the output gap. The relationship between the government budget balance, the output gap and inflation is exactly the same whether the debt-GDP ratio is 20% or 200%.

I don't know what to make of this. Mason is a smart guy but I don't understand what he's saying and Duy and Krugman have been wrong before.

But I don't trust the MMTers! Intellectual snake oil salesman with dodgy rhetoric about how deficits don't matter and claims that they never said that.

What is Mason saying? That the limit is set by how much in taxes the government is able to collect?

Unexpected inflation is in effect sort of hidden surprise tax increase in that it devalues the contracts creditors hold from when they originally drew up the the debt contract.

Likewise an extremely slack labor market is in effect a tax on workers in that it weakens their bargaining power and enhance the "threat of the sack."

See Michal Kalecki.

Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory by Thomas Palley

As DeLong says, it's a tautology.

(via Thoma)

Chartalism

Critcisms

Criticisms

Chartalism and Modern Monetary Theory has garnered wide criticism from a wide range of schools of economic thought. New Keynesian economist and Nobel laureate Paul Krugman has stated that the MMT view that deficits never matter as long as you have your own currency is "just not right".^[27]

The main response by MMT economists to the abovementioned criticism is to point out that the positions taken by critics betray a misunderstanding of MMT. Although critics often represent MMT as supportive of the notion that "deficits don't matter",^[27] MMT authors have explicitly stated that that is not a tenet of MMT.^[28]

Austrian school economist Robert P. Murphy states that "the MMT worldview doesn't live up to its promises" and that it seems to be "dead wrong".^[29] Daniel Kuehn has voiced his agreement with Murphy, stating "it's bad economics to confuse accounting identities with behavioral laws [...] economics is not accounting."^[30]

Murphy's critique specifically employs a hypothetical example of Robinson Crusoe living in a world without a monetary system, and shows that it is in fact possible for Robinson Crusoe to save by forgoing income, thereby illustrating that despite what MMT economists argue, government deficits are not necessary for individuals to save. However, what Murphy terms saving in his example would traditionally be called investment - to introduce saving into the example would require more than one economic agent, a unit of account money and corresponding borrowing. MMT economists have pointed out that the central tenets of MMT theory only aim to describe the economy of a society with a monetary system, that employs a fiat currency and floating exchange rate.^[28][31]

Murphy also criticises MMT on the basis that savings in the form of government bonds are not net assets for the private sector as a whole, since the bond will only be redeemed after the government "raises the necessary funds from the same group of Taxpayers in the future".^[29] In response to this, MMT authors point out that the repayment of bonds does not necessarily have to occur from taxes; a central bank attempting to hold an interest rate target must necessarily purchase government bonds. These purchases occur through the creation of currency, rather than taxation.^[32]

New Keynesian Brad DeLong has suggested MMT is not a theory but rather a tautology.^[33] Still others have said MMT "ignores the lessons of history" and is "fatally flawed."^[34]

Economist Eladio Febrero argues that modern money draws its value from its ability to cancel (private) bank debt, particularly as legal tender, rather than to pay government taxes.^[35] However, it is unclear how this is a critique, since banks rely entirely on the monetary services of the state and its chosen currency, via the central banking system.