11 October 2019

"Modern monetary theory"

This concept is counterintuitive, and totally new to me.
Modern Monetary Theory is an economic philosophy based on the idea that all state spending is "deficit" spending, since money comes into existence when the government spends it, and when the government raises taxes, it does so in order to take that money out of existence, both in order to control inflation and to limit the concentration of power in the hands of the wealthy.
The corollaries of this are many, but the two standout ones are:
1. The government can create money to buy any good or service that the private sector isn't using without driving inflation (that is, if there's someone unemployed and the government gives them a job, that won't drive up wages because the private sector had already passed on using their labor, so the supply/demand ratio of labor to private jobs remains constant), offering full employment to everyone who wants to work; and
2. The government can create money to buy goods and services that the private sector is currently using without creating inflation, provided it can convince people not to spend that money -- for example, by creating "war bonds" that sequester the vast sums that get pumped into the economy during wartime, to prevent the workers who receive those sums from bidding against the materials that are being used in munitions factories.
These two facts are central to the Green New Deal, which proposes using a combination of a federal jobs guarantee and federal procurements of the materials needed for a sustainable energy conversion and climate change remediation to avert the climate crisis. 
The BoingBoing source for the excerpt above includes a nine-minute video of an academic lecture on the subject which is well worth watching [edited and condensed from probably a one-hour lecture].  The key concept is that the federal budget cannot be compared to a household budget; deficit spending and borrowing work differently when the entity issues the currency.

Related:
A Thorough Defense of Modern Monetary Theory
Economists worry that MMT is winning the Argument in Washington
Addendum:  For an outstanding longread on this subject, see Explain Like I'm Five: Functional Finance, written by TYWKIWDBI reader escapefromWisconsin.

13 comments:

  1. Im highly skeptical of a monetary theory that is recently developed and seemingly exists only to justify unlimited and unaccountable spending.

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    1. I'm skeptical as well, but from what I've read, the term "unlimited" wouldn't be applicable.

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    2. Theories behind MMT go back to the nineteenth century. Chartalism and Functional Finance are not new ideas. Read what Knut Wicksell had to say back in 1898: https://rwer.wordpress.com/2018/06/04/from-wicksell-to-le-bourva-and-mmt/#more-32787

      Your smear of "unlimited and unaccountable spending" is totally ignorant. MMT simply says that the inflationary rate of the real economy is the constraint on government spending, not an imaginary lack of money. Unaccountable spending is what we have right now under Neoliberalism.

      Also, MMT is descriptive of how money works in sovereign, currency-issuing states, regardless of what your political beliefs happen to be. MMT is Politically Open and Applicable to Both Capitalism and Socialism: http://heteconomist.com/mmt-is-politically-open-and-applicable-to-both-capitalism-and-socialism/

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    3. It would almost certainly drive up wages, since guaranteeing a job means that you're going to very quickly run out of things that create economic value for the economy at large while still promising a set income. Your supply of labor will increase, but now private business will have to compete against a sufficient income that demands, in all likelihood, very little work.

      And can you imagine how useful it would be for any number of businesses to know precisely how much income their customers receive? When I was in the Army, all of the housing around our base (private and government) was directly priced to our Basic Allowance for Housing, which is a publicly available chart helpfully split up by region (https://www.defensetravel.dod.mil/site/bahCalc.cfm). This kind of perfect knowledge is the enemy of a thriving economy.

      I don't see this surviving contact with the real world at all.

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    4. Funny, you make some of the same arguments I make against the UBI (a concept which is getting quite popular thanks to Andrew Yang). The private sector has numerous means to claw back windfalls when they're handed out to everybody regardless of need.

      The Job Guarantee is simply the government hiring people to do stuff rather than the private sector (which it already does). It's expressly designed by its proponents to not compete with demand for private sector employment. Whether that can truly be done, I don't know, but that is the intent. It is designed to set a "floor" under wages. The economist who's done by far the most work in this area is Pavlina Tcherneva:

      https://www.pavlina-tcherneva.net/job-guarantee

      Funny you mention the military; I always make the argument that we already have a government job creation program--it's called the U.S. Military. As the British politician Tony Benn used to say, "If you can have full employment by killing Germans, why can’t we have full employment by building hospitals, building schools?" He also said, "If we can find the money to kill people, we can find the money to help people." We've spent countless billions of dollars on military misadventures while the nations's infrastructure crumbles around us.

      It also has a precedent: both the WPA and the CCC established during the Great Depression by the Roosevelt administration. However, there was a similar guaranteed work scheme established in 1848 in France by Louis Blanc: The National Workshops. The history of that scheme is far less favorable, and I'm afraid its history provides a blueprint for how such a scheme might be destroyed: https://en.wikipedia.org/wiki/National_Workshops

      So I share your concerns about its viability. The problem is, what's the alternative? Do nothing? We've already seen vast swaths of the country immiserated by job losses (e.g in Milwaukee where I live). If automation does become as ubiquitous as many people think, simply relying on the Invisible Hand or "more education" isn't going to cut it.

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  2. This might be a helpful primer (I am the author): http://hipcrimevocab.com/2016/05/14/explain-like-im-five-functional-finance/

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    1. Outstanding. Arguments (and charts) similar to those employed by Stephanie Kelton in her lecture.

      I've added the link to the body of the post.

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  3. A brilliant theory, but it won't work in practice. Not in America, at any rate. Why? Simple. "...to limit the concentration of power in the hands of the wealthy." We live in a functional oligarchy. Money is power. Thus, those with the money and therefore the power, will not accede to anything that reduces their money and/or power.

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  4. the federal budget cannot be compared to a household budget

    How is this shocking? It's not even apples v oranges. It's a single pea v half the world's stockpile of nuclear weapons.

    Also, Paul Krugman has been screaming this in every third column for decades now.

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    1. The point being made is not that the SIZES are not comparable, but that the concepts of inflow, outflow, debt etc are not equivalent when one entity issues its own currency.

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  5. @Minnesotan: If you compare a household budget and the federal budget, nothing is the same. Income, expenditures, purchases, obligations, and yes size. So why would they be the same? It's like comparing a camping tent with a 120 floor skyscraper and wondering if they're comparable. Even the basics are very different. A government can make money out of nothing and can't go bankrupt. Try that with your family budget.

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