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.
Posted in Dan Kervick, MMT, Modern Monetary Theory
By Dan Kervick
Imagine that the US Congress someday decides that as a matter of national security it is imperative for each American adult to be in possession of a smartphone. (Perhaps they believe that we might all need to receive an important text message from Homeland Security in the event of a major terrorist attack.) Suppose also that at the time of this decision there are 100 million American adults still without smartphones, and that the average smartphone costs $200.
According to the Supreme Court of the United States, here is a procedure Congress is permitted to follow:
Posted in Uncategorized
By Dan Kervick
According to their website, the Alternative Banking Working Group is “a group of concerned citizens, activists, and financial professionals with two goals: the first is to explore and, if possible, establish alternative banking systems that might replace the current system. The second goal is to broadly understand and educate people about the current financial system, as well as come up with short and long term plans to improve it.”
Posted in Dan Kervick, Modern Monetary Theory
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
Posted in Dan Kervick, MMT, Modern Monetary Theory, Monetary policy
By Dan Kervick
Imagine a world and a society in which 500 people own everything – absolutely everything. These blessed few live in the Citadel, a mighty bastion of comfort with fortified and impregnable walls. The walls surround the Citadelians’ collections of lavish homes, spacious and opulent gardens, gorgeous pleasure arenas, and well-outfitted factories and workhouses.
Yes, factories and workhouses. These mighty 500 pay 100,000 other people to do various kinds of work for them. The work consists in transforming some of the resources and goods belonging to the 500 owners into a variety of consumable products, and also in using some of those products along with other raw materials to perform sundry services for the 500, services that include the production of splendid works of art and intellect.
The labors of the 100,000 workers yield more delights than can possibly be enjoyed by the 500 owners as the latter live out their luxurious but all-too-finite lives. The result is that the 500 owners in the Citadel are absolutely sated. They have no need to hire any other people to do any additional work. They already possess riches beyond the limits of enjoyment and desire.
Posted in Dan Kervick, Unemployment
By Dan Kervick
This is just a brief note to the readers of New Economic Perspectives to point them to an outstanding new working paper posted by L. Randall Wray at the website of the Levy Economics Institute of Bard College. The paper is called “Introduction to an Alternative History of Money”. In the abstract of the paper, Randy beautifully captures a feature of heterodox approaches to economics that distinguishes those approaches from much orthodox economic theorizing:
Heterodox economists reject the formalist methodology adopted by orthodox economists in favor of a substantivist methodology. In the formalist methodology, the economist begins with the “rational” economic agent facing scarce resources and unlimited wants. Since the formalist methodology abstracts from historical and institutional detail, it must be applicable to all human societies. Heterodoxy argues that economics has to do with a study of the institutionalized interactions among humans and between humans and nature. The economy is a component of culture; or, more specifically, of the material life process of society. As such, substantivist economics cannot abstract from the institutions that help to shape economic processes; and the substantivist problem is not the formal one of choice, but a problem concerning production and distribution.
There is no doubt that abstraction has its purposes in science. But so much of orthodox economic debate these days seems to get lost inside the formal models of the debaters, adding pointless epicycles to models that are fundamentally flawed from the outset, and whose inherent social and psychological unreality no number of added complications can fix.
The curves of economic theory have an attractive and almost addictive visual simplicity. Some are very useful. The risk, however, is that they quickly become intellectual crutches. People addicted to the representational power of these curves can start thinking too much in terms of animated PowerPoint displays, where various actions produce automatic effects in terms of motions either of the curves or along the curves in a pure mathematical space. And as a result they may begin to neglect observation of the real-world processes occurring among actual, organic and historically given people and institutions – the processes that the models were supposed to describe in the first place. The human reality of MMT and other heterodox approaches is part of what attracted me to this new way of thinking in the first place – and helped break me of some of the bad mental habits burned into my brain from that old Intermediate Macro course I took in 1978.
Anyway, enjoy Randy’s paper!
Posted in L. Randall Wray, Modern Monetary Theory
By Dan Kervick
Matt Yglesias has described three popular contemporary political approaches to the challenge of maintaining our national commitment to “providing health care services to the elderly, the disabled, and the poor and also to bolstering the general incomes of elderly people.” One is Congressman Paul Ryan’s approach of reducing the level of the future commitment in order to bring it in line with “historic norms about the level of taxation.” The second is the liberal approach of preserving our existing level of commitment into the future, even if that means raising taxes in the aggregate. The third is “the hazy Obama/Simpson-Bowlesish center that wants to raise taxes and cut programs.”
Perhaps this short list characterizes the main political answers reasonably well, if the main political question is how to tame the budget, and shrink or control the deficit. But I would like to point out that all three answers have something in common: Not a single one of these approaches, as usually presented, contains any call for the national government to engage seriously in what one might call “investing in our future”. All three of them reflect the defeatist mindsets of different camps of worn out oldsters, each promoting a different way of giving up, making do, or just hanging on. They are all pathologies of the dismal “No, we can’t!” era in which we now live.
The promoters of these three variations on the theme of austere, hard news pessimism no doubt fancy themselves realists and responsible grownups. But they are nothing of the sort. They are burned-out casualties of neoliberalism, afflicted with dead imaginations or ideological blinders, who have forgotten what it means to grow a country and build a society. We need to move beyond their miserable and dismal trilemma. If the die-hard adherents of these schools of thought want to mope around the shuffleboard courts at the End of History Home for Final Surrender, let them. But it’s time for the rest of us to reject all three approaches and reignite our history.
Posted in Dan Kervick
Tagged Matt Yglesias, MMT, Modern Monetary Theory, Waren Mosler, William Black
By Dan Kervick
In a small, peaceful town there once lived three people: Abbie, Baker and Carlie.
Abbie was a very wealthy aristocrat, and also a philanthropist. Her fortune and position in the town were the fruit of the hard work of her ancestors, but her life was dedicated now only to managing that fortune. She lived to make the common people of the town happy, especially Carlie, who was her personal favorite.
Baker was much more selfish, and looked out for his own interests. He wasn’t terrible and mean, just obstinately self-interested. It seems he was born that way; it was in his DNA.
Abbie frequently lent money to Baker, and Baker frequently lent money to Carlie. But in accordance with the ancient and venerable laws of the town, enacted to maintain a decorous distance between the aristocrats and common people, Abbie was forbidden from loaning money directly to Carlie. Nevertheless, Abbie was usually able to help out Carlie indirectly when necessary. She found that when she lent money to Baker, Baker was sometimes more willing than before to lend money to Carlie. And if Abbie loaned the money to Baker at lower rates of interest than previously, Baker would usually reduce the rate of interest he charged Carlie in turn.
Posted in Dan Kervick
Tagged Employer of Last Resort, Matt Yglesias, MMT. Modern Monetary Theory, Monetary policy
By Dan Kervick
The Unites States government operates a fiat currency system. The government is therefore the monopoly supplier of the final means of payment in our dollar-based economy, and is ultimately responsible, in one way or another, for any net increase in dollar-denominated financial assets in the private sector.
And yet, we continue to hear bipartisan expressions of fear and angst about the budget deficit and the national debt. Both major parties seemingly agree that we are “out of money”. They wrangle over various competing approaches to shrinking the gap between tax revenues and government spending. They appoint commissions to study the government budget and recommend some combination of slashed spending and higher taxes in order to close that budgetary gap. They warn us that we will transform ourselves into banana republic status if we do not urgently address our public debt problems.
This situation should be perplexing. Why does a government that is the issuer of the national currency have to borrow that currency back from the public to which the currency is issued? And how could such a government ever experience the kinds of budgetary squeezes and debt burdens that can pose severe problems for households and businesses?
I wish to make a radical suggestion: Public borrowing is an outdated practice, and we could dispense with it entirely. Borrowing by the public treasury and the accumulation of government debt obligations are legacies of the era that preceded the development of modern fiat currency, an era when governments were primarily users of traditional means of payment that lay outside their control, and not the producers and issuers of the primary means of payment. That pre-fiat era is now dead in the US, and the chief remaining role of government borrowing in our time is to bamboozle the public, and to obscure the true nature and effects of government fiscal and monetary operations under a bewildering maze of bookkeeping ink and financial legerdemain. Eliminating public borrowing, and replacing it with operations that are simpler, more direct and more transparent, would advance the cause of informed democratic debate over public spending and taxation. Above all, the change would eliminate needless obscurity and confusion and help us all understand exactly whose bread is being buttered by the budgetary decisions made by politicians.
By Dan Kervick
Paul Krugman argues in a recent New York Times column that right-wing critics of Ben Bernanke and his colleagues are trying to bully the Fed into a misguided obsession with inflation, and that “the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing.”
Krugman is absolutely right to lament conservative pundits’ and politicians’ obsessions with inflation when tens of millions of Americans are languishing in unemployment, with all of the personal, social and economic misery and waste that unemployment entails. But his argument, which assumes that the Fed can boost employment by engineering higher inflation, is problematic. He defends the inflationist approach this way:
“For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.”
I believe this is the wrong approach. The Fed’s ability to boost employment is very limited, well-intentioned citations of the Fed’s full employment “mandate” notwithstanding. Rather than looking to central bankers and the banking system to accomplish a task for which they are not really cut out, we should turn our attention back toward fiscal policy as the primary tool for bringing the country up to full employment and keeping it there. And rather than seeking engineered inflation as the mechanism for boosting spending and employment, we should implement the MMT job guarantee proposal to achieve full employment and price stability at the same time.
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