I read an article in the Financial Times earlier this week (September 23, 2023) -…
In recent days there has been some discussion about the way different Modern Monetary Theory (MMT) thinkers might see the development of the paradigm. There has be some remarks that MMT should be explained in little steps and only then presented as a menu of policy choices so that all ideological persuasions might embrace it. There have also been statements that my US-based colleagues have agreed to that strategy and are now discounting any advocacy of full employment because the US population en masse (allegedly) find such notions repugnant. I disagree with all of those propositions. I consider that a sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed. If they don’t take that responsibility and use the fiscal capacities that they have courtesy of their sovereignty, then there will typically be mass unemployment. An understanding of MMT makes that clear. The discussion also has raised questions about the purpose of my blog and I reflect on that in what follows.
This is a more formal response to the comments made on the site Naked Capitalism. First, Yves Smith (the host) kindly linked to my Modern monetary theory and inflation – Part 1 but then provided the following guidance for her readers.
Note Bill claims MMT says what government “should” do. He really is not in a position to dictate MMT “positions” on policy (many if not most of the serious MMT writers in the US would say that MMT tells you about policy tradeoffs, it doesn’t dictate policy choices), so you need to discount his pronouncements.
Discount means to diminish the significance or importance off. In other words, the so-called serious MMT writers in the US should be heeded in preference to my own writing. We will come back to that point later – as to what my close colleagues in the US actually say in public.
In response, I offered the following observation which was posted on Naked Capitalism:
Your caveat seems strange to me. It carries the implication that I am not a “serious MMT writer” although I am one of the early developers of the contemporary literature in this area and the buffer stock analysis goes back to 1978 (very early).
Further, none of my “serious” US colleagues would disagree with any of the points I make in the post you mention. The statements and policy options I outlined as core MMT are all part of the shared understanding I have with my US colleagues (and friends).
And as a senior developer of the MMT tradition I have every right to articulate the policy implications that come from the theoretical understanding we have developed.
Someone has to translate it into a preferred set of policy options to provide traction within the public debate.
To which Yves then responded (the emphasis was added by her):
Please reread my comment. My remark was about “serious MMT writers in the US”. It merely says you are not a MMT writer in the US, not that you are not serious.
In addition. the post has comments that frankly will alienate US readers who might otherwise be receptive to MMT. For instance:
“The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.”
The part is bold is not widely accepted in the US, in fact, I would hazard most reject the idea that government should play a role in assuring full employment, much “has a responsibility” (which I read as a stronger claim). Even though that is the goal of most policy prescriptions made by economists, many people, perhaps even most, in the US reject the idea of the government having responsibility for employment.
There is an assumption re the proper role of government in your formulation which is not inherent to the MMT analysis of consequences. You can contend that this OUGHT to be the goal per your analysis earlier in the post of the costs of less than full employment, but that is still very much subject to debate here, as much as it may seem obvious to you.
Unfortunately, many people here would rather suffer in the name of small government and their belief that government encroaches on personal liberties. And they vote. Look at the reactions to the Martin Wolf post today, or my anodyne NYT op ed with Rob Parenteau, or any of Marshall Auerback’s posts. And my blog skews liberal.
First of all we should remind ourselves that Article 55 of the Charter of the United Nations, which was ratified by the U.S. Senate on July 28, 1945, says the following:
The UN shall promote higher standards of living, full employment, and conditions of economic and social progress and development … as well as universal respect for, and observance of, human rights and fundamental freedoms for all without distinction as to race, sex, language or religion.
It is my understanding, that the US Constitution – the Supremacy Clause (Article VI, clause 2) – renders this US commitment to the UN Charter (in its entirety) part of “the supreme Law of the Land” which all levels of US government are expected to enforce.
So when we are talking about full employment it is not something I have made up as a personal opinion. It has actually dominated policy making for centuries as have the ways in which governments have also tried to evade their commitments.
As a matter of clarification I see myself as an academic not a blogger. I am not in any way putting a hierarchical ordering on those roles but they are very different in my mind. The blog is my research log. It is also a teaching device. I tend to write things up that I have been working on for academic purposes. Not exclusively, but usually. My blog is an extension of my academic work and doesn’t have a standing in its own right. It is not my sole publishing vehicle.
Academic life used to be a calling where one was granted tenure in return for defending the “truth”. We were uniquely placed to provide critical scrutiny to the ideas and propositions that floated around in public space. This was a particularly important role in economics where policies were developed by politicised bureaucracies and may not have served the broad public interest.
Academics also have very specialist knowledge that the broader community lacks and have a responsibility to disseminate that information in ways that are accessible to the public. Which is a different statement to saying that the dissemination should be in ways that the public would agree with. We also have a duty to educate the next generation of researchers and policy makers and we can fulfill that aim in a number of different ways.
Academics were insulated from the political process and could therefore speak without fear or favour and bring their research efforts to bear by making evidence-based assessments of these policy options. Further, we are not bound by short-term political agendas. A lot of research is oriented towards making a long-run contribution.
It is often the case that ideas take some time to be acceptable, especially when they are outside the dominant paradigm. So I see a lot of my work being for posterity rather than satisfying any current need. Paradigms change slowly and the alternative body of work – the competitive body of thought has to be developed slowly and disseminated broadly.
And remember what Arthur Schopenhauer said:
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
So an academic should never be driven by what is popular opinion in the USA or anywhere. I will never be cowered by public opinion. If I write or say something that alienates the public should I be concerned about that? Not if the writing is evidence-based and driven by a thorough understanding of the processes I am discussing. I am not a writer of popular fiction (although I hope to be one day as a novelist!). I am not a journalist trying to sell newspapers. I am not a blogger hoping to attracts lots of hits to my site to maximise my google advertising revenue.
The oppression of knee-jerk polling, has made our political processes necrotic. Politicians now spend all their time polling public opinion and reacting to it rather than leading and trying to shape public opinion. The shaping is now done by the highly concentrated fourth estate and the think-tanks, the most influential being the well-resourced ones with right-wing persuasions. The left never really fund rival think tanks adequately. Somehow the progressive side of politics thinks that these units will just work for the love of it and ignore that you have to pay wages and rentals etc to keep afloat.
The problem is compounded because academic scrutiny of the public debate is in decline. Under the neo-liberal onslaught, academics are now pressured to conform to new corporatist structures that manage universities around the world. As tenure wanes, the fear of losing one’s job has generally overpowered the sense of responsibility to bear witness to the public debate. You get very little intervention from academic economists these days, which is probably a good thing given how bereft the mainstream paradigm is.
But I will always assert my right to say what I like without worrying about the consequences if I think it is worth saying and it backed by credible research and comprehension.
In terms of rights – “to dictate MMT “positions” on policy”, I have never held out that I am speaking on behalf of any cabal – MMT or otherwise. I don’t own MMT. I am one of the leading proponents of it. But it is not some organisation that distributes rights of representation. I can say what I like about the work I do. It is something of a non sequitur to even construct the matter in this way.
But it seems that statements such as “The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed” are deeply offensive to Americans and my US-based colleagues would never say anything like that.
Apparently, my US-based colleagues have agreed to present MMT as a policy-neutral framework so that a smorgasbord of choice is available. The aim apparently is to get people – right or left – to understand that MMT closely describes the operational realities of the monetary system but to extend the implications of that into specific policy is outside of this agenda.
I jointly presented a Teach-In to a group of senior financial market participants and business owners in Boston last week with my close friend Warren Mosler. I certainly didn’t get the impression that it was a policy neutral zone. I also heard both of us tell the audience that the fundamental role for a government in a fiat currency system is to advance public purpose.
Over many years, the MMT writers have indicated that a basic principle of MMT is that government only should work to advance public purpose. Given the fiat-issuing government has an undisputed monopoly over the currency, we want to make sure that monopoly is not abused.
Further, and consistent with public debates for many years (reflect back on the UN Charter which captured the immediate Post Second World War consensus), public purpose includes the goal of full employment. We have recognised that this goal satisfies a rights agenda but also makes sense in a narrow economic sense – not wanting to waste real resources and desiring to maximising economic outcomes.
If you examine the body of work that has been produced by MMT writers, especially over the last 15 years you will find two consistent themes running through all of it – full employment and price stability.
So this emphasis is not something I have made up as some sort of Antipodean curiosity, which reflects my obvious lack of awareness of what the (precious) US population might find to be acceptable. It is a core emphasis in all our work.
But apparently, most people in the US would “reject the idea that government should play a role in assuring full employment, much “has a responsibility”. Well we might just ask what the hell has gone wrong with the US education system if that statement is true.
More seriously, if the public do not understand what the role that government has to play in a fiat monetary system for everyone who wants a job to be able to find one, then that just demonstrates the grip that the mainstream economics profession has had in moulding the public debate. I don’t see myself as being restricted to play within the domain set out by that corrupt and erroneous economic framework.
My role is to explain to the best of my ability how the monetary system works and what opportunities it presents the currency-issuing government. If the vast bulk of the population don’t agree at this point in time I am hardly going to compromise my message to fit in with a deficient understanding. Eventually, the ideas will become current because people will realise that mass unemployment cannot sustain acceptable standards of living in advanced nations.
These changes will come as the youth break free of the restricted cultures imposed upon them by their ignorant parents (in the same way the boomers broke in the late 1960s and forced widespread social change).
The changes will also come through environmental constraints. The only issue is whether there will be evolution or revolution. Either will do the trick.
MMT clearly provides an explanation for mass unemployment, which is shared across other Keynesian-Marxian-inspired schools of thought. But only MMT is fully stock-flow consistent among these schools.
MMT shows that if there is a non-government spending gap then there is only one sector left to fill it – the government sector. So if you want the spending gap filled then it has to become the role of the government. I call that a responsibility because I do not believe the citizenry in general do support mass unemployment.
They just haven’t been educated in stock-flow consistent macroeconomics to understand why the mass unemployment occurs. They have been indoctrinated by the mainstream economists and the press lackeys they call up to disseminate their folly to believe that mass unemployment is the fault of the victims – the unemployed.
My role is to educate people that mass unemployment is a systemic-failure and the individual is powerless when the macroeconomic constraints (deficient aggregate demand) start to bind.
Clearly you can fill the spending gap in more than one way. But it has to a fiscal initiative – a choice of government – to create the dynamic to fill it. It may choose to cut taxes or it may choose to increase spending (or both). It may increase spending by directly hiring labour (for example, a Job Guarantee) or it might inject additional spending via procurement into the private sector and rely on the increased activity occurring there. These are all political choices.
But you don’t get out of a spending gap (after a collapse in private spending) without manipulating fiscal policy (I discount the effectiveness of monetary policy).
All sides in the debate express a desire to have full capacity utilisation although they construct the meaning of that term in different ways.
The ideological element for neo-liberals is that they want a reserve army of unemployed to discipline wage costs and to provide a threat to those working but cannot admit that this is their motivation in public. So they have to conjure up weird theories that the mass unemployment is actually the outcome of voluntary, optimising decisions made by individuals who at some point in time prefer leisure to work. To further give this view weight, the mainstream implicate welfare payments as increasing what they call the reservation wage (the wage at which you are indifferent as to whether you work or not) and distorting the work-leisure choice in favour of leisure.
There is always an absolute denial that there are not enough jobs or working hours to go round. After all, the unemployed can always start a business as entrepreneurs if they really wanted to work.
Economists are among the worst of the social sciences in citing other social science research. The palpable arrogance of my profession is demonstrated by its unwillingness to consult developments in other disciplines. Why is that? Because economists think they have a complete theory of human behaviour. The reality is that the underlying assumptions made about homo economicus (rational, optimising, self-seeking etc) are not found to be motivating forces in real humans.
The emerging behavioural economics has demonstrated categorically that the assumptions that mainstream economists use to motivate their theorising are not applicable to human behaviour. Why students continue to learn mainstream economics remains one of those unsolved mysteries.
So driven by this erroneous view of unemployment, the government might choose to leave the spending gap open and adopt a belief that full employment is related to the mythical concept of the NAIRU. There is clearly a choice of which buffer stock you use to provide a nominal anchor. All the credible research evidence suggests that using unemployment as the buffer is very costly. The denials raised by the extremists in the mainstream are ignorant to the plethora of research in clinical psychology, sociology, family studies, etc which demonstrate how costly entrenched unemployment is to the individuals, their families and their communities.
Further they seem to ignore the daily permanent losses in real income arising from leaving significant proportions of the available labour supply idle in various ways and for extended periods of time. Even in narrow economic terms, mass unemployment doesn’t make sense. As noted, the mainstream just go into denial and say the unemployment problem is overstated.
But a central plank in MMT is that the use of endogenous employment buffers is the optimal way to manage cyclical fluctuations in aggregate demand and ensure there is an effective nominal anchor in place. All serious MMT writers share that view which is integral to our macroeconomic framework. There are lots of different attitudes about how that buffer stock should be made operational which reflect our different ideological slants.
However, there is no question that it is a central part of the inflation proofing capacity of a fiat currency economy and one of the first things a sovereign government should implement.
I often make the point that there is a different between the logical implications of MMT and the ideological choices you can make once you understand those implications. There is some difference among the MMT clan on how the types of policies that will enhance public purpose, which reflect our different cultural and socio-economic backgrounds. But these differences are minor.
There has been some discussion in the past about whether MMT is a theory given that it provides insights that are derived from basic national accounting structures. So it is just a stock-flow consistent accounting framework which would not qualify it to be a theoretical edifice?
The answer is to this question is clear. If you restricted yourself to understanding the accounting relationships (that is, the arithmetic) you wouldn’t get very far because you would just come up against the silence of numerical identities. What more can you say that the government deficit equals the non-government surplus? It is important, but doesn’t get us very far to say that the sum of the sectoral balances has to be equal to zero.
What drives the individual balances and how are they interlinked? Those are the interesting questions because to explore policy choices and their consequences the analyst has to be able to reason at the behavioural level. As soon as we start asking questions about the driving forces underlying the accounting we are in the realm of theory.
So MMT goes well beyond a recognition that the accounting is important and that you have to ensure your models add flows to stocks across time in consistent ways.
Those behavioural understandings also demonstrate that the government has a central role to play in maintaining high levels of capacity utilisation which in labour market terms amounts to full employment.
First, I reject the notion that the US-based MMT writers have decided to stop advocating full employment as a principle dimension of the government’s responsibility to advance public purpose. While I am not going to delineate a ranking of US-based MMT writers the main players are clearly still advocating full employment as an integral part of the development of our paradigm.
Second, I have often made the point that an understanding of MMT doesn’t preclude you from advocating mass unemployment if that is your policy persuasion. But then you are naked because you cannot rely on the usual ploys and dodges that mainstream economics uses to cover up the fact that they prefer mass unemployment for ideological reasons to advance the interests of capital.
Then you will have to openly say that and, then I would contend the advocate would feel the scorn of the populace. Once the chimera of individual responsibility was taken away from mass unemployment I doubt any poll would show that people thought it had nothing to do with a fiscally-effective role for government.
Relatedly, I am often careful to state that the basic principles of MMT can be taken up by different ideologies given that they describe the operational realities of any fiat monetary system. But what an understanding exposes are things like the democratic repressions (the voluntary constraints that governments impose on themselves to limit their capacity to advance public purpose). Once these are exposed the debate changes because the mainstream can no longer hold these constraints out as being financial imperatives.
Third, this blog will sit in cyber-space for years to come and might help future generations realise how stupid the current short-termism biases in the public debate are. So it is better to lay the body of theory and optimal policy design out in full and ignore what the current popular opinion is.
Fourth, I am not bound to any rules as to what I say. That is the freedom I enjoy as an academic. Most of my academic colleagues have run scared as managerialism has overrun our universities. I see that development as providing even more motivation to assert my right to say what I like. While my fellow MMT colleagues are in most cases also my good friends (in some cases among my closest friends) I also respect their right to say what they like.
If they no longer agree that full employment is a legitimate goal or one they should dare to speak of in public in case they incur the wrath of the US public then they are free to say that.
Finally, my blog attracts considerable daily traffic and it comes from all over the world. The US is not a particular focus of my research although it interests me.
This is not my definitive answer to all these issues but presents all I have time to devote to it today.
You will recall a couple of weeks ago that I indicated that I was going to change policies to give myself more time at weekends to spend with my family. I plan not to write a dedicated Friday blog any more and I will make the Saturday quiz available on the Friday with answers and discussion available on the Sunday.
But occasionally I will still write a special Friday blog – such as today.
The Saturday Quiz will be back sometime tomorrow – even harder than last week!
That is enough for today!