Category Archives: MMT

Sumner’s Cold Potatoes

By Dan Kervick

Scott Sumner attempts to explain the so-called “hot potato effect” which has played such an important role in the theories and policy recommendations of the Market Monetarists.  But the explanation contains two weaknesses.  The first weakness is a muddle of inapt metaphors which seem to run together the concepts of diminishing marginal value and negative marginal value.  The second weakness is more serious: Sumner and company refuse to take cognizance of the important institutional differences between the banking sector – an unusual and limited sector of the economy where only money and money-denominated financial assets are traded – and all of the other sectors of the economy where money is exchanged for everything else that can be bought and sold.  As a result they seem to be incapable of distinguishing between realistic changes in the central bank’s patterns of doing business with the financial sector and imaginary changes in the central bank’s pattern of doing business with the rest of the world.  And they mistakenly conclude that central bank statements about the former should have a major impact on beliefs about the latter.

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And the Last Shall Be First – It Was the Peanut Farmer, Not the Tall Guy or the Iron Lady

By
Warren Mosler
(Cross-posted with permission of the author from
The Center of the Universe)

(Editor’s note: I think this reaction of Warren’s to the death of Margaret Thatcher is pretty unique and also the best statement I’ve seen of his view of why the “stagflation” of the late 70s and early 80s went away. Hint: President Jimmy Carter had more to do with it than Paul Volcker, and Thatcher is much less important to what happened next, than the Keynesian failure to handle the stagflation, and the resulting shift to monetarist economics. Here’s Warren!)

Here’s how I remember it all.

I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that President Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?

It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And i care a whole lot more about what happens next than about what happened then.

:(

(Editor’s note: So, we have ignorance about the fiat monetary system and “chance” to blame for the displacement of the Keynesians by the monetarists, the victories of Thatcher, Reagan, and neoliberalism, and the ensuing decades of increasing evolution to a new feudalism. This is the broad scope of change over the past 40 years. In viewing this change, we can’t forget what it’s done and is still doing to people. Bill Mitchell’s retrospective on Thatcher is very good on that. Don’t miss it!)

(Cross-posted from New Economic Perspectives.)

Let the Palmer House (not Fiscal House) be our Guide

By Mitch Green

Readers of this blog familiar with my previous posts know that I love trains. Sure, they’re slow. And after about twelve hours the coach cars start to get a little, well, worn. But, as a mode of conveyance they offer one time to reflect, and if you are lucky a little time to explore a new city.

Source: Wikimedia Commons

Travelling from Kansas City to NYC via Chicago, I had the pleasure of visiting the Palmer House – a fine example of the workmanship of a bygone era. Upon entering the great hall I was immediately struck by the grandeur of its ceiling. I have had the privilege to experience similar wonder and amazement in travels elsewhere, and as far as ornate ceilings this was not my first time at the rodeo – I’ve been to the Sistine Chapel, after all. What struck me the most about that moment in the Palmer House was not driven by my taste for architecture or the fine arts (which is probably ‘vulgar’ by any convention), but that it serves as a lasting example of what society is capable of achieving. Continue reading

The Quadrillion Dollar Thought Experiment

By Dan Kervick

Imagine this:  In a burst of manic, public-spirited zeal and budgetary enthusiasm, the US Congress passes, and the President signs, the following law.  (Lawyers, forgive my poor mastery of legalese and feel free to translate the sense of what follows into the appropriate terminology):

L.1  The Secretary of the Treasury shall by a date no later than September 30, 2013 consolidate all United States Treasury accounts into a single account, to be called the “General Account”, and to be held at the Federal Reserve Bank of New York.

L.2  The General Account shall be used to settle and record all payments to and from the US Treasury.

L.3  The Federal Reserve Bank of New York shall on midnight, October 1, 2013 credit the General Account with an initial balance of $1,000,000,000,000,000.00

That’s one quadrillion dollars, about 263 times the current US annual budget, and about 63 times the current US Gross Domestic Product.

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An MMT Christmas Carol

By Dan Kervick

 

SCROOGE:  Cratchit!  Cratchit, come here!

CRATCHIT:  Yes Mr. Scrooge?

SCROOGE:  Cratchit, I need you to work until midnight tonight.

CRATCHIT:  Tonight, Mr. Scrooge?    On Christmas Eve?!

SCROOGE:  Yes, indeed, Cratchit.   And you must work every day until New Year’s Day.  I’m sorry about this, Cratchit, but we have very important public business to attend to.

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Paying for Lunch – MMT Style

By Dan Kervick

A common criticism of Modern Monetary Theory is that it is a naïve doctrine of free lunches.  The critics grant that a country like the United States, which issues its own freely floating fiat currency, can always make the policy choice to issue whatever quantity of that currency it deems appropriate.  The US government can spend as many dollars into the private sector economy as it chooses, without obtaining those dollars from some other source first, and it can always pay any debts that have been incurred by borrowing dollars.  But the critics will go on to charge that MMT mistakenly concludes from these few institutional and operational facts that there are no economic limits to the wealth-generating capacities of the government.  They caricature MMT as a doctrine of manna from heaven, in which the power of issuing a generally accepted medium of exchange confers the power of conjuring real wealth into existence by prestidigitation.   In short, they see MMT as a disordered syndrome characterizing people who are experiencing massive money illusion.

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The Social Dimension of Prosperity

By Dan Kervick

In a recent interview in The Straddler, James K. Galbraith discusses some of the points he developed in his recent book, Inequality and Instability.  One of the most important of those points is that inequality leads to a stop-and-go crisis economy of credit-fueled asset bubbles.  This economy delivers large rewards to a few fortunate predators, but delivers a lot of instability, stagnation and insecurity to the rest of us.

But, Galbraith also makes some striking and important points in the interview about what he sees as mistaken places of emphasis in contemporary progressive political rhetoric.  One problem is the tendency to lose sight of the most vital systemic constituents of postwar American middle class prosperity – and also the expectations and aspirations that constituted the middle class outlook.  Continue reading

What’s The Plan?

By Dan Kervick

The politicians always seem to be the last people to get it.   But anyone who actually works in the corporate world knows that the central economic concern these days, the thing that is holding us all back economically, is not uncertainty about tax rates.  They also know the core problem is not frustration with regulation and red tape.  Nor is the problem an epidemic of nocturnal terrors about government deficits.   The problem is this: not enough customers.  And the problem of not enough customers right now is exacerbated by the fact that there is also low confidence that there will be more customers in the foreseeable future.   With low confidence that broad prosperity will return to customers, the willingness to invest and hire aggressively is limited.  And since so many businesses perceive the world the same way, the combined effect of their general unwillingness to hire is persistent high unemployment, and a self-reinforcing perpetuation of the low demand that is the cause of the unwillingness to hire in the first place.

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A Communication from Your Central Bank

By Dan Kervick

Nick Rowe recently argued that there can be certain types of products for which the market might allow multiple equilibria.  This can happen because the willingness of an individual to buy some product might depend on how many other people buy that product.  The upshot, Rowe suggests, is an unusual, non-functional shape to the demand curve characterizing the market for the product in question, resulting in two distinct equilibrium demand quantities corresponding to the same price.

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Toward Monetary Enlightenment: An Integral Approach to Macroeconomic Policy

By Dan Kervick

One staple of economic policy debate is the running conflict between those who lean toward a reliance on fiscal policy and those who lean toward a reliance on monetary policy. Continue reading