By L. RANDALL WRAY
In this part, I’ll resume with comments on the critical contributions to the special issue of rwer. We finished Part 2 with a discussion of the shocking lack of citations to MMT literature in the critiques—especially the dearth of citations to the more academic contributions (as opposed to the summaries of MMT written for undergrads and the general public). Let me return to the oversight of contributions made by scholars such as Fullwiler and Tymoigne—who have mostly written academic pieces.
Sawyer does cite Fullwiler (although with the name misspelled! If he was my undergrad student, I would chew him out—at least get the damned names spelled correctly!). In his piece, which is largely an exposition that parallels MMT but is disguised as a critique, he wants to argue that MMT doesn’t properly distinguish between what circuitistes call initial versus final finance (Davidson has a similar distinction). But in reality, I have long used the circuit approach in my exposition—including in my own contribution to the rwer issue. The initial finance of government spending is created when the spending occurs, and today takes the form of two balance sheet credits: the deposit account of the recipient and the reserve account of the recipient’s bank. Sawyer seems to mostly agree with that. But according to Sawyer, MMT ignores the point that because bond sales and tax revenues logically follow government spending and can be seen as the funding stage. However, Eric Tymoigne made exactly this point in a 2014 article, arguing: “Put in terms of the circuit approach, taxes and bond offerings are part of final finance (funding).” So Sawyer is just wrong about this.
The problem with Sawyer’s analysis is that he then takes the distinction too literally, imagining that lack of final funding acts as a potential constraint—and he even invokes the orthodox “government budget constraint”, which is not a constraint but an identity (as explained in our textbook). This then leads to some missteps as he claims that independent central banks could just say no to providing initial finance and that “The limitation on the use of money funding of budget deficit then comes from limits on the willingness of people to hold their (additional) savings in the form of bank deposits (and for the banks to accept holding reserves with the central bank as assets corresponding to their liabilities in the form of bank deposits).” That is pure nonsense. Central banks have a laser-like focus on the payments system and are not going to start bouncing checks and producing havoc. Dealer banks stand ready to buy government bonds and must place bids to have a seat at the table. And, finally, why should the government care what form the nongovernment sector holds its net financial assets in? If they want bonds, give them bonds; if they want reserves, give them reserves; if they want cash, give them cash. In any case, portfolio preferences affect interest rates, not the government’s ability to finance or fund its spending. The spending comes first and should be seen as creating the finance as well as the funding (using his terms).
Sawyer repeats his old and tired warnings about the ELR/JG proposal. I found nothing really new in the arguments, which he laid out long ago and which Bill and I countered at the time. He continues to worry that the ELR/JG program will take jobs away from the public and private sectors and somehow depress wages while causing inflation (deflation of wages and inflation of prices at the same time????). He presumes that the program wage will be some very low minimum wage although recent proposals have used a target of $15 per hour. We have simulated such a proposal and find that the inflationary effects are minimal. Inflation disappeared two generations ago—but many of our old PK friends still worry about it.
Kregel’s paper argues that MMT has not taken sufficient account of Keynes’s theory of liquidity preference—a theory of asset pricing—and has an interesting discussion of possible payments systems of the future. I have also written on liquidity preference theory (as has Tymoigne) but I do agree that it would be useful to do this in the context of discussion of MMT. The problem—as readers of his piece will find—is that Keynes’s liquidity preference and asset pricing theory is rough going for most readers. But this is a very useful antidote to the typical Post Keynesian “horizontalist” approach that denies any role for liquidity preference theory.
Collander’s piece addresses three big ideas he finds in MMT, and agrees with two. Well, two out of three coming from a critic is pretty darned good, so I’ll take it. The third concerns application of the first two ideas to actual real world policy making. For example, he argues “Where I have problems with MMT’s focus on functional finance is when it is extended to real world government monetary and fiscal policy.” He argues that good real world policy should be both sound and functional (poor old Abba Lerner is rolling in his grave) basically for the same reason that Samuelson argued that the role of the economist is to preach the old time religion of balanced budgets: we cannot really trust our dysfunctional politicians. So it is the economist’s job to lie. But not any old lie will do. Collander goes on to emphasize the role of maintaining trust by telling good lies, quoting Keynes: “Keynes, after he looked around the room to see that no newspaper reporters could hear, replied “It’s the art of statesmanship to tell lies but they must be ‘plausible lies.’”
I guess that’s how Trump maintains the trust of his base—his are all plausible lies, no matter how implausible they might be (oh yeah, that hurricane was heading for Alabama and he has the Sharpie to prove it). As readers will know, Keynes was an elitist—not his most redeeming feature–but in any event he was talking about statesmanship, not the role of the scientist. I prefer to tell the truth and let the “statesmen” do the lying. And to hope for the day when we can run the liars out of office.
Finally let’s take a look at Mayhew’s piece, which begins by proclaiming she’s one of the “friendly critics” of MMT. (When a piece begins like that, it triggers an automatic flinch. A friendly critic would tackle this like a scientist: trying to fill holes by making a contribution to the theory—but our critics usually just want to complain.) She continues: “I am, however, a critic, because in their pursuit of policy relevance, MMT advocates too often offer apparently simple solutions to complex issues of political economy. That they do so in the cause of political relevance and journalistic attention does not absolve them…” How so? “in carrying out their analysis, MMT advocates often come ever so close to denying the endogeneity of money; they use a severely truncated form of flow-of-funds analysis; they do not employ an accurate description of the relationship of the FED to the rest of government.”
Yet another one who seems to forget that I wrote the damned book on endogenous money. She claims that MMT has eroded the endogeneity of money by insisting there is a special arrangement between the government and money.
Well, that is because there is. It is enshrined in our Constitution—which gives to Congress the sole power to issue currency. Throughout history and around the world today most governments choose the money of account (the measuring unit in which debts and credits—whether or not they are government’s or someone else’s—are denominated), issue a currency denominated in that unit, and accept back currency in payments made to itself. That sounds pretty special to me. But it doesn’t erode endogenous money—it provides the foundation for it. Since she rejects the notion of this special arrangement, she also implicitly rejects Chartalism (or State Money). Although she doesn’t realize it, that means she is the one who also rejects endogenous money—even the endogenous money approach of the Post Keynesian Horizontalists. All of them do see a special relationship between the central bank’s reserves and bank deposits; they reject the deposit multiplier story because they reverse causation: causation runs from loans to deposits to reserves. But they accept that reserves are a special “money”—with a direct relationship to the government–used for clearing. What the Horizontalists had not understood is that far more reserves are normally created through treasury spending than through central bank lending or open market purchases. That is what MMT adds. (Again, I am not claiming that this is a new contribution—I learned it first from John Ranlett.)
She goes on to reject the taxes-drive-money view: “Of course, it is true that acceptance of payment of tax obligations provides some “backing,” but it is also true that dollars in the U.S., pounds in the U.K. and etc. are “backed” by the willingness of businesses and others to accept them as payment.” That is, she adopts the P.T. Barnum greater fool theory of money: “I accept dollars because I think there’s some dope dumber than me that I can fob them off to.” Several of the critics similarly cite “trust” as the force behind money, the financial system, and government itself.
There’s no denying that trust is nice. But my trust in Trump is pretty much limited to the belief that he will continue to act like a buffoon. Don’t get me wrong, I like the long trajectory of civilization as it moved from ruthless authorities who could be trusted to enslave much of the population in brutal conditions to Medieval monarchs who could be trusted to rape and pillage with abandon to fascist dictatorships that ran concentration camps and gas chambers and on to a hoped-for-future in which AOC becomes the Democratic Socialists of America’s first President of the USA. Trust is nice but it doesn’t explain much of the history of money or of government—unless you are referring to the trust that the authorities who imposed monetary tax obligations will enforce that obligation with substantial penalties for nonpayment. Often death. Today, up to and including incarceration.
MMT emphasizes the role of trust in the issuer of the currency instead of the role of trust among users of it (which is the P.T. Barnum infinite regress story). What is the nature of that trust? Obligations to pay taxes—and many other contracts—will be enforced in the money of account, with the currency (cash as well as reserve deposits at the central bank) the ultimate means of settlement.
MMT does not argue that promotion of other kinds of trust—enforcement of equal rights and protection of recognized human rights, for example—are unimportant. Broader trust in government can increase its power—for better and possibly for worse. When she argues “To single out the power of taxation as the primary source of acceptability of our dollars or pounds or pesos in their various forms is to use a logical relationship to establish causal sequence: first taxes give value to dollars and then dollars have value in other uses” she is missing the point. Our logical argument is that from inception, a tax (or similar) obligation is sufficient to create a demand for currency. We’ve always argued that it may not be a necessary condition. We are willing to accept an alternative logic if anyone can come up with one. And kudos to someone who can not only come up with an alternative logic but can also find some historical evidence to support it. Mayhew does not—after rejecting ours, she provides no logical alternative, and ducks the challenge to find historical evidence against it, simply stating “It is beyond the scope of this essay to provide a detailed explanation of why this is not an historically accurate account of the development of the various units of account and of banking in the western world.” Why does that sound like evasion?
Another issue she raises is our supposed truncation of flow of funds. She criticizes us for citing Ritter and following Godley’s sectoral balance approach in our textbook. She prefers Copeland. We use Ritter because he uses a consolidated framework that shows the relations between sources and uses and he provides a flow of funds matrix (similar to that used by Godley). When we present the sectoral balance approach we use NIPA accounting rather than flow of funds for two reasons: first, most countries do not have flow of funds data, but most do follow international conventions regarding NIPA. Hence we can approximate the sectoral balances using the NIPA data. Second, all macro texts introduce NIPA accounting—and so do we—so it is convenient to use that framework to present Godley’s approach. While are not dismissing the usefulness of Copeland, we do not believe an undergrad text—that is already too long–is the right place.
What she wants to do is to claim that our approach “truncates” analysis of financing within sectors and puts too much emphasis on government control, arguing that we hold “that households and businesses will adjust to what government does”, and concludes that in our approach “Government will be the sector that will determine the level of national income, the level of employment, and how rapidly the overall price level will rise or fall. The private sector plays a secondary role in this analysis.”
This is not an accurate statement. First, we have presented the usual Keynesian argument that instability of private sector spending (especially investment, but in recent years consumption spending has played a destabilizing role) plays a significant role in the cycle—although, as Murphy argues in his piece, taxes can have a big influence on that (in an expansion, tax revenues increase sharply, taking income out of the economy with differential effects across households and firms). Second, what we are actually arguing is that sovereign government alone does not face a financial constraint. At the aggregate level, the private sector doesn’t really face a financial constraint, either, since spending determines income. However, at the level of each entity, there is a financial constraint. And since the capitalist economy suffers from the “anarchy of production” (it is not centrally planned), it is up to the government to act as the stabilizing force. Finally—and related to this point—the sovereign currency issuer has a special role to play as both spender and lender of “last resort”, as well as taxer of “first resort” that can put a crimp in paychecks.
We are well aware that causation is complex—the activities of the private sector impact spending and thus income and thus tax revenue. Government spending is also affected by private sector behavior; for example, some social spending is triggered by economic performance as well as by means testing and other legislated triggers. Hence, the outcome of the government’s budget is “endogenous”—we emphasize that government cannot really decide independently to run a surplus, balance, or deficit. However, it can decide to spend more or spend less on specific programs; and it can decide to increase or reduce tax rates on specific activities. But the end-of-period impact on the outcome of the government’s budget is not determined by that behavior.
Our point is just the usual Keynesian idea that government can lean against the wind. And following Godley we emphasize that the size of the deficit will always be “just right” to offset the sum of the domestic private sector plus foreign sector balances.
But sovereign government still has a very big impact over the level of economic activity at which those balances balance. And sovereign government can always maintain full employment of labor resources, as usually, defined through a Job Guarantee. If the program pays $15 per hour, making jobs universally available at that wage, then anyone who remains without a job is not involuntarily unemployed. While there could be very good reasons for them to refuse to accept the JG job offer, and while we might even want to develop policies to bring them into employment, the JG represents the minimum level of responsibility that a sovereign government ought to take to ensure a universal right to a job. We argue that this is a far better goal than pursuit of some arbitrary deficit or debt ratio. We also prefer this over a GDP growth target. However, clearly, full employment is not the only legitimate goal of good government.
Well this has already reached the blog word limit, so I’ll have to move on to the treatment of MMT by editors and conference organizers in Part 4.