What you consume or what you produce?

For some time I have been promising to write a blog about the role that manufacturing plays in a modern economy. There is a strong presumption, especially from the progressive side of the political debate that manufacturing – or what you produce – defines the capacity for a nation to enjoy growth in real wages and therefore standards of living. So when I have said in the past that I am against industry protection I usually get attacked from the left and I note that this if often coming from people who think it is cute to sound technical by saying the government should balance their budget over the course of the business cycle. As if! Neither viewpoint coming from that quarter has much credibility. I take a more experiential viewpoint. People prefer to consume than to work. What we consume is more likely to give us joy than what we produce especially if the latter is in the context of exploitative capitalist production relationships. I am painting this in black and white terms to garner your interest. Clearly it is more complicated but in general I do not think you need a manufacturing sector to enjoy strong growth in material living standards and perhaps a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being. My flame resistant suit is now in place … so here goes.

I also don’t think you should see this as my definitive statement on the matter. I am just musing today – looking back through old notes and snippets from the press.

A related argument about manufacturing concerns phobias about trade. This blog is not extolling the virtues of free trade. I support fair trade only. That is the topic of another blog.

But from a monetary perspective I don’t think worrying about external deficits is valid. I would rather advocate the enjoyment of advantageous real terms of trade while you can because if the situation ever turns sour (as foreigners start losing their desire to accumulate financial assets denominated in your currency) and the currency depreciates then you have to make corrections in your real living standards and these adjustments might have to be made rather quickly if the exchange rate depreciates quickly enough.

But I live in a nation that has made its wealth independently of manufacturing and experiences very large terms of trade fluctuations regularly. While there are distributional consequences of this our long-term per capita living standards have not been severely impacted relative to other nations. The evil hedge funds have not destroyed our floating currency and our lowest exchange rates have been associated with record budget surpluses. There is no statistically significant relationship that has been found between the fiscal stance and movements in our exchange rate. That result broadens to all nations.

I also note a commentator made the point the other day that considering exchange rate adjustments to be an aid to an external balance was a neo-classical solution and therefore the implication was that it was a morally bereft position to take for a progressive economist.

However, Modern Monetary Theory (MMT) considers floating exchange rates to be the only way to maximise the potential of fiscal (and monetary) policy in pursuit of domestic public purpose. Once a nation ties its currency to any arrangement with another country, full currency sovereignty is lost.

But it is not an exclusively neo-classical (that is, mainstream free-market) position to note that price adjustments invoke quantity changes. All economists understand that impacts emerge from changing prices and changing incomes. The neo-classical position is to maintain that the price responsiveness is much stronger than the income effects whereas the “Keynesian” position is the reverse.

So in acknowledging that movements in exchange parities (for example, a depreciation) may improve the trade prospects for the export sector and choke off some import demand is in no way a “neo-classical” position. They do not have a monopoly on recognising relative price movements as being capable of impacting on real demand and supply.

Further, one of the sub-themes here is that the austerity push in the Eurozone at present is predicated on a naive belief in trade-led revivals with competitiveness in manufacturing seemingly paramount in this strategy. I plan to examine the Eurozone situation soon – I am just accumulating data at present.

The short insight is this: despite their harsh attack on standards of living in some of the weaker EMU nations or exchange-rate tied neighbours, there is very little evidence that the strategy is working and lots of evidence to say it is not. Real terms of trade are not moving very quickly in their favour and exchange rate movements between the Euro and other non-Euro (non-tied) currencies seem to be more important than domestic cost pressures in determining competitiveness.

In the New York Times (September 4, 2010) Thomas Friedman’s article – Superbroke, Superfrugal, Superpower? – argued that the world of “too little American power” was “coming to a geopolitical theater near you”. Friedman said:

Yes, America has gone from being the supreme victor of World War II, with guns and butter for all, to one of two superpowers during the cold war, to the indispensable nation after winning the cold war, to “The Frugal Superpower” of today. Get used to it. That’s our new nickname. American pacifists need not worry any more about “wars of choice.” We’re not doing that again. We can’t afford to invade Grenada today.

This sort of stuff could only be written by an American in denial of reality and in the sense that he invokes fiscal statements (being able to afford to invade Grenada) he also demonstrates his lack of knowledge of monetary systems.

Please read my blog – It will only take 6 months – for the last time I bothered to comment on Friedman’s opinions.

The only reason America might not be able to afford to invade Grenada is because they have used up all their real resources (unlawfully) invading several other countries.

Friedman claims that the US cannot afford these wars anymore and he quotes from a recent book:

This – on top of all the costs of bailing ourselves out of this recession – “will fundamentally transform the public life of the United States and therefore the country’s foreign policy.” For the past seven decades, in both foreign affairs and domestic policy, our defining watchword was “more,” argues Mandelbaum. “The defining fact of foreign policy in the second decade of the 21st century and beyond will be ‘less.’ ”

When the world’s only superpower gets weighed down with this much debt – to itself and other nations – everyone will feel it. How? Hard to predict. But all I know is that the most unique and important feature of U.S. foreign policy over the last century has been the degree to which America’s diplomats and naval, air and ground forces provided global public goods – from open seas to open trade and from containment to counterterrorism – that benefited many others besides us. U.S. power has been the key force maintaining global stability, and providing global governance, for the last 70 years. That role will not disappear, but it will almost certainly shrink.

The US has incurred significant “costs of bailing” themselves out of the recession in the sense that they are leaving a significant proportion of their productive resources idle. This waste is the cost and it would have been better if the idle labour and capital was in use.

In other words, fiscal policy has not been expansionary enough to incur enough “costs”. The numbers on the budget spreadsheet which Friedman and his ilk always invoke in these sorts of discussions are not costs at all. There is no opportunity cost in the government writing a number in its budget. Only when these spending flows engage real resources do you start measuring the cost!

Further, apparently this decline in America’s capacity to continue in its role as global governor or peacemaker will make “the world will be a more disorderly and dangerous place …”

You mean that the last 10 years of US interaction with the rest of the world has been making it a safer place? If the US does reduce its martial excesses around the world perhaps some degree of peace will emerge. But this is off my topic and distant from my actual professional expertise so I will just leave that.

As a non-American I reject the martial influence that the US government imposes on us in the name of peace and freedom. I would recommend they withdraw their troops from all foreign soils and defend their own borders and spend the military budget on helping nations achieve full employment. I may write another blog someday about the relationship between unemployment and terrorism!

Anyway, the reason Friedman’s article took my eye is because in proposing “(h)ow to mitigate this trend” Friedman says:

… we need to get ourselves back on a sustainable path to economic growth and reindustrialization, with whatever sacrifices, hard work and political consensus that requires.

Reindustrialisation – promote the growth of manufacturing as the engine of growth. This argument comes up everytime there is a recession. Each time it is largely flawed.

But it remains a powerful “working class” narrative and allows all sorts of racist and xenophobic arguments to command “respectability” in the public debate. Almost all the arguments are spurious.

Former Cambridge economist, Nicholas Kaldor set out four observations which became known as Kaldor’s growth laws, which supported the proposition that a nation’s standard of living depended on its level of industrialisation.

Three nations defied these laws – Australia, Canada and New Zealand – which became and stayed rich by exploiting agriculture and primary commodities in general. That is a strong lesson which is normally ignored.

Kaldor’s growth laws (which were just correlations) indicated that:

  • The growth of the GDP is positively related to the growth of the manufacturing sector (the share of industry in GDP is rising).
  • There are increasing returns to manufacturing (Verdoorn’s Law) – so the larger the sector the lower the average costs with learning by doing an important source of these gains.
  • The productivity of the non-manufacturing sector is positively related to the growth of the manufacturing sector. Allegedly, the non-industrial sector has diminishing returns to scale so if increase all inputs proportionately, you get a less than proportionate increase in total output.

Kaldor also extended the notion of circular and cumulative causation that had initially been developed by Allyn Young. The basic argument is that the process of industrialisation is cumulative. So capital goods manufacturing precedes consumer goods production and the economy moves from local sale to export sale.

Of crucial importance to this cumulative causation process is the primacy of manufacturing. The argument is based on the idea that only manufacturing can exploit the division of labour that growth permits and that increasing specialisation benefits the wider economy. This was the basis of explaining the benefits of vertical integration.

Ultimately, the growth of manufacturing drives the entire economy and increase productivity growth in other sectors via technological change. Specialisation generates increasing returns (unit costs fall) and strong complemenetarities via learning by doing.

Once products are cheap enough and of sufficient quality, then export markets open up and provide a relief from the saturated local markets.

This is what was considered to be a virtuous cycle where productivity increases would drive costs lower which would stimulate further growth as long as aggregate demand was strong enough to absorb the production.

Ultimately, export-led growth models are traced back to this (flawed) idea. There was not real understanding presented as to how this process evolves.

Further, Kaldor’s observations were never concretely established by the empirical literature. You might want to read the article in the Economic Journal in 1975 – What Remains of Kaldor’s Law? – by fellow Cambridge economist Bob Rowthorn who was also sympathetic to Marxian interpretations.

In explaining how Kaldor “found a strong positive relationship between productivity growth and employment growth in manufacturing”, Rowthorn shows how Kaldor “followed an inappropriate statistical procedure” and “he used a misleading sample of countries”.

More recently, many progressive people were influenced by the 1987 book (published by Basic Books) Manufacturing matters : the myth of the post-industrial economy written by Stephen Cohen and John Zysman. Their basic argument is that manufacturing and services are complementary (whereas other progressives argue they are substitutes) and so without a strong manufacturing sector you cannot have a sophisticated services sector.

In Chapter 2, Cohen and Zysman argue that:

There are … other kinds of linkages in the economy, such as those which tie the crop duster to the cotton fields, the kethchup maker to the tomato patch, the wine press to the vineyards (to return to our focus on agricultures [as a parallel]). Here the linkages are tight and quite concrete … the linkage is a bind, not a junction or substitution point. Offshore the tomato farm and you close or offshore the ketchup plant. No two ways about it.

In his book Protectionism (page 114), Columbia University’s Jagdish Bhagwati noted that as he read that paragraph he was eating his favourite English marmalade and wasn’t aware that “England grew its own oranges”.

But the debate is regularly aired. In the recession of the early 1980s, it was fear of Japan and the NICs (South Korea, Singapore, Hong Kong and Taiwan). Today it is China and India.

In the early 1980s, for example, the former US Vice President, Walter Mondale, who at the time was lobbying to become the 1984 Democratic Presidential nomination was a pursuing “a more strident and protectionist theme” than in his earlier days.

The New York Magazine (January 30, 1984) ran a story – Is Mondale the Man and recounted how in the early 1970s he was a free trader but by the time he sought the Presidency as a Democrat he had become converted to “protectionism” as part of his “new look”.

In 1970, he was quoted as saying “Protectionism is no solution … [it’s a] … Pandora’s box … ]that] … openly invites higher prices to the American consumer and serious retaliation.”

By 1984, he was quoted as saying “I am not a sucker … From now on it’s going to be fair … We’re all going to play on a level table … If they lowball us, we’re going to lowball them.”

On October 13, 1983, the New York Times ran a story – Washington: Mondale’s Tough Line – where Mondale outlined his protectionist stance. He said:

We’ve been running up the white flag when we should be running up the American flag … What do we want our kids to do? Sweep up areound the Japanese computers?”

Interestingly, Mondale later became the US Ambassador to Japan in the Clinton Adminstration and was full of praise for them.

Consume or produce?

Is it necessary to produce goods if you can consume them via trade? Much of the argument rests on whether there are learning and efficiency gains in services. The cumulative causation argument suggest that firms improve by receiving feedback from customers and if this capacity is spatially separated quality suffers.

Hence you need to have a localised manufacturing sector.

This is another positive externality generated by local high technology manufacturing. It is also an important feature of localised clusters which are either horizontal or vertically integrated along the production chain.

Clustered development is said to further entrench the increasing returns to scale and the transfer of knowledge and provide competitive trade returns.

But it is not clear whether the production and the specialised services (design, etc) are the source of the gains. It is true that a lot of the now outsourced services were formerly part of the manufacturing firm and service-based firms (engineering, design etc) are still dependent on the production-segment of the industry for growth.

In the UK Guardian last week (August 30, 2010) Jagdish Bhagwati wrote that There is no proof that economic health depends on manufacturing. His argument is that there is no solid evidence and indeed conflicting evidence relating to this proposition.

Bhagwati said:

Economists long ago put to rest the error that Adam Smith made when he argued that manufacturing should be given primacy in a country’s economy. In the second volume of The Wealth of Nations, Smith condemned as unproductive the labours of “churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.” We may agree with Smith (and Shakespeare) about the uselessness of lawyers, perhaps, but surely not about Olivier, Falstaff, and Pavarotti. But the manufacturing fetish recurs repeatedly, the latest manifestation being in the United States in the wake of the recent crisis.

He reflects on Kaldor’s law and says that the observations were “clearly at odds with the massive technical changes sweeping across the retail sector, and eventually the communications industry, which soon produced Fedex, faxes, mobile phones, and the internet.”

You might want to read an address that Bhagwati gave to the World Trade Organisation in 2007 where he outlines the “semiconductor chips versus potato chips” argument that also is rehearsed in the Guardian article.

He notes that semiconductors are “fitted onto circuit boards in a mindless, primitive fashion” while potato chips can be “produced through a highly automated process”. But this impacted on the consume or produce argument. He said:

Many proponents of making semiconductor chips also presumed that what you worked at determined whether, in your outlook, you would be a dunce (producing potato chips) or a “with-it” modernist (producing semiconductor chips). I have called this presumption a quasi-Marxist fallacy. Marx emphasized the critical role of the means of production. I have argued, on the other hand, that you could produce semiconductor chips, trade them for potato chips, and then munch them while watching TV and becoming a moron. On the other hand, you could produce potato chips, trade them for semiconductor chips that you put into your PC, and become a computer wizard! In short, it is what you “consume”, not what you produce, that influences what sort of person you will be and how that affects your economy and your society.

I have some sympathy for this argument and will elaborate on it in later blogs (if I get time).

The vital part of the argument that I support is that increasing returns, cluster development etc can also come from within the services sector.

While many believe that nations can only support the growth of high value-added services if they also have strong manufacturing sectors the evidence is not convincing. In the past, the computer industry has been cited – that was before the manufacturing part was shipped off to China and India.

Please read my blog – Protect your workers for the sake of the nation – where I promised to consider this issue.

It is often thought that the rise of manufacturing sectors in poorer nations steals jobs from the richer nations. So at present China is undermining the opportunities for industrial workers in the US and elsewhere. But this ignores the fact that “a majority of China’s exports to the US are produced by US-funded companies and huge profits go back into American pockets … half of China’s exports came from the processing trade – where imported components were assembled at factories in China and 60 percent were made by foreign-funded companies or joint ventures with foreign partners” (Source)

Some US researchers at UC Irvine studied this question and in 2009 published – Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod. They examined who benefits when there are large investments in new technologies and infrastructure in a global economy.

They were seeking to see whether investment in the US (perhaps as a fiscal stimulus measure):

… will create more jobs outside the U.S., because many high-tech products currently are manufactured offshore … The same could turn out to be true of alternative energy, hybrid/electric cars, and other new technologies. While these investments have other merits beyond their job-creation potential, it is worth looking at how innovation in a global economy creates jobs in the U.S. and elsewhere.

They used the iPod as a case study and “looked at which companies and countries capture financial value” from their production. They found that in 2006, iPod’s “accounted for about 41,000 jobs worldwide” (27,000 outside the US). The “offshore jobs are mostly in lowwage manufacturing, while the jobs in the U.S. are more evenly divided between high wage engineers and managers and lower wage retail and non-professional workers”. China had the largest share of off-shore jobs.

They found that “the iPod supports nearly twice as many jobs offshore as in the U.S., yet wages paid in the U.S. are over twice as much as those paid overseas.”

In relation to who benefits overall, they found that:

We found that the largest share of financial value (defined as gross margin) went to Apple, which captures a large margin on each iPod. Although the iPod is assembled in China, the value added in China is very low … So it appears that innovation by a U.S. company can benefit both the company and U.S. workers, even if production is offshore and foreign suppliers provide most of the inputs. However, there is no guarantee that U.S. firms will keep engineering and other white collar jobs in the U.S. in the future.

The computations on a $US300 iPod suggests that China retains $US4 of value-added yet the whole value is billed against China’s exports.

So the real debate in this situation might be about a fairer distribution of income within the US and more public employment rather than seeking to constrain trade.

It is clear that once the computer industry split its high- and low-wage components across national borders that the traditional manufacturing arguments about clusters etc faded.

Even the claims (by people influenced by the likes of Michael Porter in the The Competitive Advantage of Nations that linkages between the production and associated service have to be within national borders do not bear scrutiny. Sure enough the development of a product usually requires an accompany service to be established (equipment servicing, systems design and maintenance, training, consulting etc).

But it doesn’t matter where the good is manufactured for this service function to be viable. We make very few cars in Australia relative to the total market but there is a huge service sector associated with the motor trade.

Even the development of so-called service-enhanced products is not dependent on having a local manufacturing sector. Companies can specialise in design, customisation, delivery chain dynamics etc and sell those services locally or abroad. The cluster can be within or across national borders. These high level services are more likely to emerge in a nation with a strong commitment to public education than one which adopts fiscal austerity strategies and dumbs-down its workforce in a race to the bottom.

Trade and Protection

Many progressives (and others) think that manufacturing is an essential vehicle to improve trade deficits, which they erroneously consider to be problematic.

It is a reality that currency speculators will usually chase relative margin. But the notion that a current account deficit is something that is a problem is well-rehearsed in the orthodox economics literature and public debate.

We have been instilled with the notion that exports are ‘good’ and imports are somehow ‘bad’. However, if we take a material perspective (which all economic measures do and this debate is no exception) then exports are a real costs and imports are a real benefit. If we can persuade the rest of the world to send more ships packed with goods to us than we have to send to them then we are relatively (in real terms) better off!

So to repeat: exports are a cost. They constitute real resources that we send away and cannot consume ourselves.

The issue about us buying imports is this. If we buy more imports than we sell in exports then in net terms we are using up ‘purchasing power’ and that means that we will not have enough private spending capacity to purchase all of the domestic goods and services which we could produce if we fully employed everyone and everything (capital).

The solution – the national government has to run budget deficit (net spending) of sufficient magnitude to fill this spending shortfall. The benefits of this are obvious but typically lost on neo-liberal economists: (a) we have full employment – only frictional unemployment of short duration remains; (b) we enjoy the benefits of higher government spending – both households and private producers benefit from better infrastructure, better public services, and such AND/OR we enjoy lower taxes; (c) we enjoy access to the commodities from abroad – that is we can consume BOTH whatever we can produce AND whatever the rest of the world wants to (net) send us.

That does not sound like a trade rut to me. A rut is something you never want to get stuck in. The only problem with the deficit in net exports is that the Government does not have an appropriate policy response – it should be running higher budget deficits to ensure there is sufficient aggregate demand to plug the output gap and thus push us to full employment.

And what of the warning about currency markets abandoning our currency? From a ‘money’ perspective, the fact we can ship less and receive more (trade gap) reflects the fact that foreigners have a current desire to net save in $A financial assets. The only way they can realise this desire is to net export to us hold the net $A as cash or financial securities denominated in $As.

It does not have any connotation that we are dependent on foreign borrowing to maintain our ‘profligate’ importing. It just means that offshore investors want to hold $A financial assets. Our trade gap ‘finances’ that desire. Everyone is better off! We get lower priced imports provided as foreign producers compete among each other for our business (to get the $A).

So what about when they ‘abandon’ the $A? Despite all the fear rhetoric that pours out daily from the spokespersons with vested interests from the financial markets, all they are saying is that there may come a time when the foreign investors lose their desire to hold $A which means they will either spend them here or not sell us products to begin with – which means the current position we enjoy in real terms (more imports, less exports) will move more towards a balanced trade position.

It could mean some adjustment in foreign currency markets as the $A is sold down – this is reality but not a financial crisis for Australia. It just means it is harder to buy imports at the previously attractive terms.

In my view progressives (including many Post Keynesians) also get it wrong. They talk about ‘exporting jobs’ to cheap labour countries. Domestically, the appropriate use of fiscal policy (deficits) is the way to ensure that we all have enough spending power to purchase both our own full employment output and anything the foreign sector may wish to sell us to meet their savings desires.

If we do not like the labour or environmental practices of some of our trading partners then we can deal with that by government to government dialogue, which may mean the Australian Government (legitimately) bans some imports and/or provides consumers with adequate levels of education and information so that we will also not purchase unfair traded goods.

Is there any role for tariffs? Not generally, they are massive profit subsidies to capitalist interests and provide disincentives to invest in best practice, high productivity, high real wage capital.

Some industries might be considered to be of strategic importance – such as the steel industry – in times of war you need to build tanks (do you anymore?). In that case, tariffs still are not useful. Once again a straight Government decree that defence contractors have to buy local steel would be sufficient. Non-strategic steel would then be cheaper but we can still wage our wars!

In the late 1970s a major Australian government report (I can no longer find the reference to it) said that the levels of protection to car manufacturing in Australia were so high that the Australian government could “save” outlays by closing the industry down and paying the same wage bill to the workers. Meanwhile all the rest of us consumers were getting cars that were of no quality or reliability match to the Japanese imports.

I also think that as a private capitalist industry closes and moves to where there is cheaper labour that presents an opportunity to the nation to harness that labour in more productive and forward-looking sectors. It does require a policy framework based on what I have called a Just Transition approach.

Economic restructuring at a regional level is always painful and the decline of manufacturing usually hurts specific cities/regions. In a Commissioned Report that I co-authored modelling the transitions away from coal-fired power to renewables, we noted that a just transition policy recognises that people and ecology are both important.

But in general, the just transition policy approach can be applied to any industrial restructuring. A just transition ensures that the costs of economic restructuring and the shift to new industries do not fall on workers in declining industries and their communities. A just transition in any declining region requires government intervention and community partnerships to create the regulatory framework, infrastructure and market incentives for the creation of well-paid, secure, healthy, satisfying environmentally-friendly jobs with particular attention to appropriately meeting the needs of affected workers and their communities.

Please read my blogs – The Budget (what else) and a parrot or two and Would the Job Guarantee be coercive? – for more discussion on this point.

Conclusion

I recognise that this debate is an emotional one and this blog doesn’t address all issues.

But I agree with Bhagwati’s sentiment that “financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention” but as he says this does not make a case for expanding manufacturing again.

As he notes:

Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services. Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available. The case for a shift to manufacturing remains unproven, because it cannot be proved.

Most advanced nations have seen a sharp shift in the composition of industry towards the services at the relative (and in some cases absolute) expense of manufacturing. The approaches by governments in different cases has been very significant.

In the Anglo-speaking nations we have seen the services sector largely develop as a low-wage, precarious employment sector with little innovation or clustering. Most of the service sector growth has been in the private sector.

In nations like Norway, they have seen a rapid rise in the service sector too. But the government has played a major role and created many high-skill, well-paid and secure service sector jobs in the public sector which have allowed complementaries and productivity gains to be made elsewhere in the economy.

This should be the focus on nations rather than become obsessed with keeping dirty jobs that only involve them in a race to the bottom with developing nations like China in terms of wages and conditions.

That is enough for today!

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This Post Has 126 Comments

  1. It seems the issue with Exports is we Export X amount at foreign country’s request where we should export X – C

    C being what we consume. Is that the logic where Exports are a cost comes from?

  2. I think I see an irony for Australia in “exports are a cost, imports are a gain” mantra. As an exporter of crude electricity for factories (thermal coal and uranium), crude steel (iron ore and metalurgical coal), crude aluminium (alumina and bauxite), crude plastic (oil and gas) as well as a host of rare earth minerals used in electronics plus crude fibre (cotton and wool), our exports can only be considered a cost to us in the sense that we DON’T manufacture much. We export the crude materials and buy them all back in a greatly value added form.

    I think I’ve mentioned this before.

    Also, didn’t we have a fairly strong manufacturing sector before the rise of the neo-liberal era?

  3. Sennex, I think the logic behind “exports are a cost, imports are a gain” is that when we export, we are swapping real resources that we could have used ourselves for bits of coloured paper and blips on computer screeens. When we import the reverse occurs and we get the real, useful things and foreigners get our intrinsically worthless bits of paper and blips on computer screens.

    I still stand by my observation though.

  4. Lefty I think Bill’s already answered your question particularly by reference to the relative reliability of Japanese and Australian cars.

    I dont think Australia’s manufacturing could be described as strong.

  5. But have we or have we not ever HAD a relatively strong manufacturing sector though Will? That was my question. As in: “has manufacturing ever been a significant sized employer in Australia”?

    And when did we stop manufacturing cars? I drove past a huge car manufacturing plant in Adelaide not so long ago. The fact that they are foreign owned does not negate the fact that the manufacturing is done here.

    Meaning that we in fact do have the expertise to manufacture good, reliable cars, albeit that someone else had to teach us how and we do it under licence.

    Though I do have a feeling that they are all larger cars which are purchased for the government fleet and exported to the Arab states if I remember correctly.

  7. My problem is that I totally agree with your statement: ” “financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention” but as he says this does not make a case for expanding manufacturing again.” However I find fanciful the idea that financial services can be scaled back whilst the amount of wealth constantly increases (which is what long term deficit spending equates to surely). If there was a huge amount of private wealth but it was all managed by non-professional DIY investors/speculators then that might be even more destructive than a bloated financial services industry. Keeping them in check could entail a government financial restriction department the size of the alternative financial services industry. To me the only way to deal with the problem would be by enough taxation to annul the private wealth so that the budget balanced over the long term.

  8. Bill (or anyone else),

    Have you noticed that the USA is starting to net save vastly again and that the export sector + budget deficits do not appear to be offsetting the increased savings? Don’t you think the current budget deficit in the USA is too small to fend off recession if the private sector continues to net save at these levels?

    Thanks so much.

  9. Bill thats way better than TV.
    Lefty, Bill has pointed out before that if we get the goods to consume and all the exporter to us gets is bits of paper (e.g. AUD, USD) then the importer (us) is better off. Even better for you Yanks because everyone loves your useless paper USD.

    Mining is the same as manufacturing. There is a cost of production to produce a good for someone else to use. In the case of coal it’s not much use to anyone until it is “Manufactured” into pure tonnes. Try selling the stuff in the ground to a bridge builder and you will find it’s worth nothing to him.

    If the World had no borders we wouldn’t be so worried about exporting jobs. We would be focused on consuming enough goods to support people with low living standards.

    Depreciation of the AUD can happen very quickly sending lots of small importers to the wall overnight. Is this a cost we must accept for the privilege of having a floating currency? I would be comfortable with small business failures as part of adjustments by external holders of useless paper AUD if all business loans were made non-recourse. Limited Liability Companies were supposed to do this job but some “bankers” discovered you could demand Personal Guarantees and second mortgages over some poor small business person’s house. This effectively transforms a Limited Liability Company into a risk free borrower at higher interest rates and profits than housing loans.
    Anyway the fact the AUD can move so far in either direction quickly is not a business plan. It means we are reactionary. Not sure how you budget for that.
    I think it was Paul Z Tozer who said non-working willing workers is a resource not a liability. China is working on that now in an impressive manner. It was Taleb who said the whole thing is a complex system and beyond our comprehension .Fun trying though. Obviously Taleb hasn’t met Bill yet.
    First surf in weeks today so Happy as tonight. Cheers Punchy

  10. Manufacturing weakens in the United States – good sign that the external world has done some damage and MMT says – the Chinese can manufacture and we can do something else and let the Chinese do the manufacturing. Why – because the government is not revenue constrained and that the “progressives” unnecessarily worry about this.

    The issue about us buying imports is this. If we buy more imports than we sell in exports then in net terms we are using up ‘purchasing power’ and that means that we will not have enough private spending capacity to purchase all of the domestic goods and services which we could produce if we fully employed everyone and everything (capital).

    The solution – the national government has to run budget deficit (net spending) of sufficient magnitude to fill this spending shortfall.

    The trouble with such arguments is that we live in a world where money is credit not fiat. When one starts putting words such as debt, borrow, finance in quotes as in “debt”, “borrow”, “finance”, one loses track of all the information present in a nation’s Flow of Funds. It is true that the government can relax policy but … but … such a strategy (the one quoted above) leaves one with increased indebtedness to the rest of the world. But the MMT position is that “we do not borrow in our currency”

    Doesn’t matter what one’s definition of money is – just pointing out the usefulness of one versus the other. Independent of what the definition is, sooner or later the indebtedness or (“indebtedness” in the MMT definition) to the rest of the world increases without a limit and the interest payments too. MMT hand waves this away by saying that a nation can grow fast or some such thing … or … the currency is flexible etc. (forgetting the fact that growth adds more to trade deficits, perhaps accelerating the process!).

    Back to the real world, nations face huge constraints on fiscal policy. They try to err on the right side so that their currency is acceptable in international markets. Nations – their leaders recognize that the International Money Market can give them troubles. Some nations such as China have gone and played its cards so well that it has led to issues in the US.

    Can’t stop commenting on this, can I ;-).

  11. Ramanan

    Where do you get this.?…..”sooner or later the indebtedness or (“indebtedness” in the MMT definition) to the rest of the world increases without a limit and the interest payments too.” How does it increase without a limit?

    It seems to me the limits are the same in a monetized and a non monetized economy. Your arguments seem to be based around ignoring the money and looking at the real goods we eventually will be asked to pay back. Why will we eventually be asked to pay them back? We should keep our economy to the point where we can and are producing something worthwhile and this involves keeping everyone employed to maximize our potential. I dont however think a day MUST come where we will have to settle all those real debts. As long as our trading partners are capable of providing what we want without hardship on them selves the relationship is sustainable ad infinitum. It seems one of the ways to avoid hardship on them is for us to stop electing politicians who see the world in zero sum terms and wish to force austerity on their citizens, making them poorer consumers. Cutting our trading partners’ incomes via shrinking payments for their goods is a sure fire way to create hardship for our trading partners.

    I think China playing its cards so well has not led to issues in the US, its simply exposed us as poor card players. We’ve gotten lazy and think since we invented the card game we dont need to work at it any more, well others have learned the game better than we.

  12. Hi, Bill-

    Thank you for this post. The whole re-industrialization mantra smacks of fighting the last war, not to say referring back to Stalinism. Economics should concern itself with whatever it is that humans want to consume, and if manufacturing has been an outstanding way of making useful consumable goods and raising standards of living for the average person, then that is great.

    But saying manufacturing is the key ingredient to future growth is like saying farming is the key to future growth. As farming gets more efficient, we get all the food we need from a lower share of labor and GDP, and we can go on to devote human labor to more interesting things, like education and blogging! While our desire for manufactured goods is more elastic, (though perhaps not, considering gourmet delicacies and organic, eco-farming, etc.), it is not infinite in relation to other services, etc. we might also like. Homes in most developed countries are over-flowing with manufactured goods.

    On foreign policy, however, I would disagree with your assessment of US policy. Despite the miscarriages in Iraq and elsewhere during the cold war, the world needs a powerful sponsor of peace and democracy. How has Europe remained docile and peaceful over the last half-century? How has Japan stayed likewise peaceful, and out of Australia’s hair? Only with the security umbrella provided by the US. It is easy to take such things for granted, but they don’t happen by accident. The natural condition of international relations is anarchy, leading to conflict and war. History seems pretty clear on that. It takes a Rome to provide a pax Romana.

    Lastly, you raise an interesting point about the worth of financial services. Clearly there is some worth there, but many services can be characterized as frauds. This area seems particularly rife with non-competitivenes, control fraud, cozy government relations, assymetric information, etc. I guess that is why money-lending and usery was held in such low repute back in the day. Hopefully you have some future blogs brewing on the matter.

  13. “Money is credit, not fiat”. I think this sums up the current crisis and struggle over the next phase of globalization. Will there be any significant degree of decentralized, public control of monetary operations? Or, shall we succumb to the ideology of privatization and permit private interests to determine measures of value?

    Obviously, we are more than halfway to this point – I think the popularized “currency crisis” meme is a head-fake to convince the public to allow more and more private control of money. Europe is in the grip, the US is next in line.

    I think you are on a dangerous path, Ramanan – I fail to see the “sooner or later” dimension of your argument, unless you believe the crisis is always going to be “later”, in other words will never actually materialize as anything other than a threat.

    Unless we are worried about running out of numbers (I am only half-serious here), I don’t see the problem. I think one could reasonably argue that the US stimulus should have been closer to $2 or $3 trillion, instead of the less than $1 trillion. Would that really bring the world to an end? If so, then how?

  14. pebird,

    “Will there be any significant degree of decentralized, public control of monetary operations? Or, shall we succumb to the ideology of privatization and permit private interests to determine measures of value?”

    One sector (atleast) has to be in deficit, for others to be in surplus and indebted forever. Don’t worry – only the government has the ability. That role has to be played by the government.

  15. If money is only credit (which I assume also means a debit somewhere?), then how will net financial assets increase? Via crisis and write down of debt with constant reserve expansion (via Bernanke’s brilliantly tested techniques?) This is MMT perverted for the benefit of financial institutions. It is also not a real economic crisis (based on material conditions), but certainly has real effects.

    I also don’t get the “pay them back” point. The imports have been paid for – instead of glass beads they accepted pieces of green paper (or green pixels on a computer screen). The problem with a unbalanced trade deficit is the possibility of the importing country refusing to sell to you, not to demand your first born.

    BTW, for the US readers out there, happy Labor Day. The manufacturing blog post was very timely.

  16. Greg,

    Thats a little difficult to see.

    But imagine – a nation runs a trade deficit and the public sector deficit has to be at least that for the private sector to net save. However, trade deficits take away employment. So the public sector has to run a higher budget deficit. This leads to higher income but imports are dependent on national income. So an even higher deficit is needed. Meanwhile as you imagine the whole thing moving forward in time, the external sector has accumulated financial assets in your currency and gets paid interest. Exports on the other hand is dependent on demand in the rest of the world – not the local demand. The only way this process goes is for the public debt to keep rising relative to the gdp. Sooner or later, the currency markets will lose confidence and decide to plummet. When the currency markets are falling, the nation has to take harsh measures whether it is politically a good choice or not.

    Of course, one may argue that while one imagines these sequences in time, the nation is growing as well – so that the public debt/gdp doesn’t rise forever. In my view this situation cannot ensure that.

    Not all nations can be in current account surplus. The only way to resolve this is for nations to redecide on how to trade with one another and take concerted action on fiscal policy.

  17. pebird @3:50,

    Yes, if you have issued IOUs in your own currency, you don’t “pay them back” except issuing more IOUs. So it would seem that nations can play this game. The loophole in this argument is that you haven’t considered what happens to your currency in the meanwhile. Certainly, you cannot expect the rest of the world to like you if you keep playing this game. So you pay them back by selling goods and services because that is the promise you make to your creditors for allowing them to have you import essentials.

  18. The problem I see is that the concept of money as IOUs. This implies that exporters’ profits are deferred/unrealized as credits (loans). In which case, why did they engage in the transaction initially? Was there some kind of implied bargain that the currency will be worth X for some period of time? At what point are profits realized? What is capital in this context?

    What if all the US has to do is produce a market that can consume the world’s output? I am exaggerating, but if we abstract the US in this example to represent an “exploiting” nation, and the rest of the world as the “producing value” nations – what is the difference between that and Marxist classical thinking? You seem to be saying that this is untenable, in a similar sense that Marx said that capitalism is untenable – just abstracted to nations instead of social classes.

    Certainly we can’t expect workers to keep playing this game, surely the bosses will “pay back” the workers for that expropriated value. I don’t think so.

  19. “Money is credit not fiat”.. Money can be so confusing! I thought “money” was created on the vertical axis (endogenously) and “credit” belonged to the horizontal part. Ramanan, thank you for correcting me!

    As for indebtedness: I assume you mean that trade partners should not accumulate too much paper (in my trade deficit I get cheap goodies, they get more of my currency (in one way or another)). Sticking to the US and China, surely you know that the Chinese dollars are a Fed savings account, they can’t do anything with those dollars. What exactly is your point?

    As for people who advocate a strong manufacturing home-base, 1) cheap manufacturing jobs are disappearing worldwide, 2) maker-bots are advancing faster than people appreciate. I mean, all worked up about “we need manufacturing jobs!”, you naturally fall back on what you know or what influenced you most. It’s all too easy to forget that those memories are out of date.

    Off topic: http://www.psyfitec.com/2010/09/breaking-guild-of-macroeconomicists.html Describes “economics” as ‘hardly a science’ and compares it to a medieval guild. When people noticed that medieval guild doctors didn’t actually /cure/ anyone, they ran for quacks and half-crazies. That pack also contains the most interesting, innovative ideas.

  20. ‘”financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention”‘

    Couldn’t one also argue that 3 levels of Australian Government is grossly wasteful, unproductive, counterproductive and lacks any sort of free market to keep it lean and prevent excessive taxes to perpetuate its existence?

    Interesting the viewpoint from some that Australia is good at manufacturing, or ever was. I guess you have to have a frame of reference. Do we make good cars? Maybe. Do we make good cars in comparison to Germans? Nope. Do we mine iron ore, have lots of it and won’t miss a few billion tonnes? Certainly. So we are broadly exporting what we are good at and what we have plenty of. Not because the Government has directed us to do so but because there is a market for it and Australian industry can cut a decent profit, hire lots of people and not lock up resources that could be better served elsewhere.

    Interesting also is how Americans persist with their auto industry because they believe they make the best cars in the world. They don’t and their cars are crap, hence why out of 36 award categories recently local vehicles scored only 5 wins and 3 of those were for muscle cars. Outside of Fannie and Freddie, the US auto industry still owes the most to the US taxpayer from bailouts.

    In Australia it is nice to be able to export that which is plentiful and efficient to export but this clearly is not the case everywhere. Note also that education is one of our greatest export earners. Is that depriving Australians from a full education? I wonder.

  21. Ramanan,

    As I’ve already tried to explain to you elsewhere, regardless of the fact that imports may rise with deficits, as long as each round of the govt’s deficit increase has some positive net effect on domestic employment, then there is a finite point at which the deficit can stop having reached full employment. This is obvious. Think about it for a little bit–it’s simply not possible for it to be otherwise. (And anyone else reading Ramanan’s comments here, PLEASE think this through.)

    As such, your argument amounts to “markets are irrational so in an open economy even with flexible fx crazy things are likely to happen to happen to the currency and then to the economy.” The MMT position is “that is certainly a possibility, but there are good reasons for other, less crazy things to happen, even good things in many instances, when the govt sustains a full employment economy even in the open economy case.” Thus, you are in fact the one arguing the extreme position, tail-end-of-the-distribution-case-as-the-most-likely here, not MMT.

    Best,
    Scott

  22. I generally liked the article. I wanted to comment on Australian mineral resources. I felt the article suggested Australia did nor require manufacturing, because we have ample mineral resources to trade for overseas goods and services.

    I am not an economist, I would want to understand 3 basic questions:

    Q1. What products and services does Australian society equate with an appropriate wealthly lifestyle? What qty and distribution of products and services is sufficient?

    Whether it be: Good food, motor car servicing, dvd players, hot stones massage, day trading or pokies. We must consider what is essential, useful and desired by society.

    Q2. Which goods and services can Australia produce in-house? which are imported? what quantities?

    Q3. What surplus commodities, services or goods can we trade for the imported items?

    While the answer to Q3 may be. Yes, we have loads of coal, gas etc. These are finite resources. It is smart to think of long term alternatives. It could take 10-20 years to develop infrastructure and skills for alternative exportable goods

    On another note.

    I don’t want to sound rude, but to a laymans ear. A lot of the talk here is along these lines. If I push this button, that happens, if I push that button this happens …. oh dear, that wouldn’t be good. What if I push those buttons?

    Would it be bettter to ask the fundamental questions, before discussing the efficacy of various systems? I suggest developing a more logical framework before diving into a comparison of different systems and mechanisms.

  23. The problem for me is that the trade deficit can continue to increase as SF has stated, but the system is run by politicians. We have seen that they will do anything to stay in power and thus will promise everything. There is no point at which one can say ‘the deficit is too large’ in the above. IE the system can be perverted and a crisis can be caused. It isn’t really an economic problem, its political. If everyone were rational, reasonable human beings, there would likely be no problem. Having a limit on the deficit that all can see, provides the check/balance to limit the system running out of control. As an unconstrained system when run/controlled by politicians and other overly greedy people who inhabit the financial system, it will go out of control.

    Or do I misunderstand?

  24. Scott,

    I am not arguing markets are irrational. Not at all. A nation cannot keep running trade deficits for pieces of paper – you cannot expect a nation’s currency to be acceptable if keeps running trade deficits. On the other hand, it is possible that the nation is growing and there are other good things happening in which case, there is a foreign inflow to compensate the effect of the trade deficit. A nation may find it easy to finance its trade deficit. However, this cannot keep happening forever.

    In fact I think the MMT position is extreme – not having thought about issues such as sustainability in the context of an open economy. You can come back and say “the sky hasn’t fallen it” but that is in a situation where governments behaved differently than what you are proposing. They have been taking austerity steps to curb demand.

    Let us analyze the US:

    The current account deficits are in the range $600-$800b every year and keeps adding to the net liabilities to the rest of the world.

    Relax fiscal policy and try to increase the national income, and you have higher imports and less change in exports. The trade deficit widens. Not an outlier event.

    The balance on the current account is worsened by the trade deficits but improved by the net receipts from the rest of the world. So even though, the United States is a debtor to the rest of the world, the net interest payments has been in the opposite direction. However that is the situation at present. Trade deficits accumulated over the next 5 years or so is likely to reverse this. In fact, the opposite is an outlier.

    Imagine even with 9.6% unemployment, the trade deficits have not come down – what happens if only fiscal policy is used to reach full employment! Not arguing against fiscal policy – but pointing out to the fact that exports can help reach full employment.

    As I’ve already tried to explain to you elsewhere, regardless of the fact that imports may rise with deficits, as long as each round of the govt’s deficit increase has some positive net effect on domestic employment, then there is a finite point at which the deficit can stop having reached full employment

    Yes in one given year, deficits can be high enough to counter the employment losses due to trade deficits. Next year you will need an even higher deficit. That increases trade deficits even more. It can be argued that growth will nullify the effect of this, but whats your model ? For example, it may turn out that for given import propensities, a growth of only 6% is needed. On the other hand it may turn that that a growth of 15% is needed. It may turn out that in year 1 a growth of 10% is need and 11% in year 2, 13% in year 3 etc.

    As far as the adjustment to trade deficits – i.e., become a surplus nation through exchange rate is concerned – any appeal to market correction is mere wishful thinking.

    Also, the sustainability issue is about exploding interest payments as well. If you think that interest payments to foreigners can keep growing faster than the national income till the end of time, then there is no argument is there ?

  25. “A nation cannot keep running trade deficits for pieces of paper – you cannot expect a nation’s currency to be acceptable if keeps running trade deficits.”

    You are ignoring the other side of the equation. You are assuming that exports to a country are somehow voluntary by the exporter. Almost certainly they are as locked into exporting as the importing nation is on imports.

    The current exchange rate between the US dollar and any other currency reflects exactly how much the rest of the world considers the currency to be acceptable. That exchange rate will change as it becomes more or less acceptable in aggregate.

  26. “You are ignoring the other side of the equation. You are assuming that exports to a country are somehow voluntary by the exporter. Almost certainly they are as locked into exporting as the importing nation is on imports. ”

    As if a poor nation can only import oil by issuing IOUs to the Middle East. If you come out of the simple separation of the sectors of the world into government, domestic private and the rest of the world, you will know more.

    Yes exports are voluntary. The exporter exports stuff and can easily exchange it in his/her currency through the banking system. The exporter need not have an innate desire to save in the foreign currency.

    In fact you are ignoring the volitional decision of the importer.

    A debtor nation is a debtor nation – you can go in length to quibble about the nation not being indebted.

  27. “Yes exports are voluntary”

    And that is why your view is not valid, because I can pretty much guarantee that the Chinese cannot stop exporting to the US as their aggregate demand would collapse.

    The demand depends on the supply and the supply depends upon the demand.

    “As if a poor nation can only import oil by issuing IOUs to the Middle East.”

    That depends how the country is set up. It must make something of value available to the rest of the world in those IOUs to create a demand for them. Then you will get oil.

  28. I guess an alien summing up an abbreviated version of our world might say that it has three nations, A has oil, B does all the work apart from financial services and provides all the raw materials apart from oil. Nation C issues a fiat currency, provides financial services and has an army whose role is to keep nation A being ruled by a royal family who will only sell oil for C’s fiat currency and will only pay B with C’s fiat currency. The royalty of nation A need the protection of C’s army because they would otherwise be overthrown by their own people. The rulers of all three nations pay for financial services in C’s fiat currency. Nation C is by far the most affluent country (in terms of median wages and overall consumption) even though most of the wealth is owned by the rulers of A and B.

  29. Stone:
    However I find fanciful the idea that financial services can be scaled back whilst the amount of wealth constantly increases (which is what long term deficit spending equates to surely). If there was a huge amount of private wealth but it was all managed by non-professional DIY investors/speculators then that might be even more destructive than a bloated financial services industry. Keeping them in check could entail a government financial restriction department the size of the alternative financial services industry. To me the only way to deal with the problem would be by enough taxation to annul the private wealth so that the budget balanced over the long term.

    Fears about fiat currency, deficit spending and financialization being intrinsically tied together have no basis in theory or experience. Why on earth should anyone be opposed to increasing private wealth? I don’t know about you, but I happen to not be a government. The only negative is maldistribution. Modern currency arrangements give nations greater power. It can be used to enrich the already rich, or create a more rational, more just and wealthier society. What is the reason for fearing an abundance of individual investors? – probably a sign of a better, flatter wealth distribution.

    Think back to the closest parallel, the depression under FDR. FDR took the US off the gold standard and put it on a fiat currency basis, just as we have now and went in for massive deficit spending. The result was not financialization, but the reverse. A giant government financial restriction department would not be necessary, just an old-fashioned SEC enforcing laws like Glass-Steagall, and maybe new ones like a Tobin tax. A long- term balanced budget is a very bad idea. Only if there is no economic growth (which balancing budgets would tend to cause) and no population growth, does it ever make sense. In the real world, imho it would cause increasing maldistribution, which is why some of the right wing supports it.

  30. “Yes in one given year, deficits can be high enough to counter the employment losses due to trade deficits. Next year you will need an even higher deficit. That increases trade deficits even more. It can be argued that growth will nullify the effect of this, but whats your model ? For example, it may turn out that for given import propensities, a growth of only 6% is needed. On the other hand it may turn that that a growth of 15% is needed. It may turn out that in year 1 a growth of 10% is need and 11% in year 2, 13% in year 3 etc. ”

    As I explained in “interest rates and fiscal sustainability,” these are all perfectly sustainable (potentially) given that the interest rate on the national debt is essentially a policy variable. Consider, for instance, Bill’s preference for a zero rate on risk-free assets.

  31. “As I explained in “interest rates and fiscal sustainability,” these are all perfectly sustainable (potentially) given that the interest rate on the national debt is essentially a policy variable.”

    I know the mathematics of sequences, series, convergence, limits too well to believe in that statement I am afraid. Simple insertions of numbers on an excel sheet with these sequences on a column confirm this.

    As I had mentioned to you in a previous discussion, you assume a fixed deficit like for example equation (15). You can’t assume a constant deficit till the end of time. For general values of future government spending, taxes, deficits you can hardly make any statement as such.

    Endogenize the budget deficit. Consider g_k t_k etc to be some non-constant values.

    Meanwhile, I won’t persist much on this because I have done this for long time now.

  32. @ Richard: The problem for me is that the trade deficit can continue to increase as SF has stated, but the system is run by politicians. We have seen that they will do anything to stay in power and thus will promise everything. There is no point at which one can say ‘the deficit is too large’ in the above. IE the system can be perverted and a crisis can be caused. It isn’t really an economic problem, its political. If everyone were rational, reasonable human beings, there would likely be no problem. Having a limit on the deficit that all can see, provides the check/balance to limit the system running out of control. As an unconstrained system when run/controlled by politicians and other overly greedy people who inhabit the financial system, it will go out of control.

    Richard, I think you have it completely backwards. The problem is not that the politicians promise everything to stay in power. If only they would. It is the opposite. They promise pain, and have taught the people to be masochists. (My wife just met a well spoken, well educated down-on-his-luck drug addict working at a thrift store. He was very worried … about the deficit!) The politicians promise us blood, toil, tears and sweat. But there are no Nazis bombing us! All they have to do is to vote to change some numbers in a computer, for tax cuts, for setting up Job Guarantee programs, and that’s it. There should be no a priori limit on the deficit. It is not a number anybody should give a damn about, any more than the number of toenail clippers sold in Montana. We should have a deficit big enough for full employment, just as we should have enough toenail clippers to keep our toenails from being sabers.

    I don’t see much sense in Ramanan’s fears, although of course he is right when he says exports are voluntary. If Chinese aggregate demand is in danger of collapsing, then it is the easiest thing to get it back up again, as they have shown they know perfectly well how to do. They are certainly not being smart prima facie in the short run by having a mercantilist, export unemployment policy. It is smarter to just export to yourself. (They may be playing a longer, political, game. A better explanation imho is a conservative, not rocking the boat confluence of elite Chinese and American interests causing Chinese export policies which clearly hurt China and help the USA – as elucidated by MMT.) Of course Ramanan is right too when he says money is credit – all money is credit – but state fiat money is a type of credit money, so “credit not fiat” is hard to understand. Cf Mitchell-Innes’ classic articles, and Wray’s book on them: Credit and State Theories of Money: The Contributions of A. Mitchell Innes (http://www.amazon.com/dp/1843765136 ) downloadable at http://www.arno.daastol.com/books/wray/Wray,%20Credit%20and%20State%20Theory%20of%20Money%20(2004)w.doc .

    Ramanan’s you cannot expect a nation’s currency to be acceptable if keeps running trade deficits.” and As far as the adjustment to trade deficits – i.e., become a surplus nation through exchange rate is concerned – any appeal to market correction is mere wishful thinking. appear to be completely inconsistent. What is to be feared – correction or no correction?

  33. Why aren’t people more concerned about technological unemployment caused by information technology? Information technology is growing exponentially, and it not only replaces man’s labor but also his mind. The new wave of technology will be absolutely generic, adaptable to *any* task. There will be no jobs left except for high-level engineering jobs, which will themselves gradually reduce to zilch as AI ramps up (you don’t need ‘strong’ AI to replace most people, just lots of ‘weak’ AI) . Certainly it will only take a small percentage — an even less than a percent — of humanity to design everything in the material economy. It’s a diminishing employment prospect because information technology positively feeds back into engineering productivity. Eventually, nothing at all will be left of the service sector. We need to be working on an entirely new kind of economy that’s not based on selling human labor and services. Stop thinking so much about 5 years from now, and start planning for 30 years from now. Without a smooth transition this could get extremely ugly.

  34. Some Guy: I thought too much private wealth would mean asset values would be so great in relation to the true earnings from those assets that capital would end up being allocated so as to exploit asset price volatility rather than so as to maximize real earnings. In that way excessive private wealth prevents allocation of capital from effectively allocating resources. Also private wealth can swing into commodity speculation causing price spikes such as the one that caused mass starvation in 2008 http://www.democracynow.org/2010/7/16/the_food_bubble_how_wall_street. Private wealth also inevitably gets concentrated with an elite few giving them inordinate political power. I also find it hard to believe that increasing private wealth could not require a parallel increase in the workload of managing it. I’ve probably bored people by posting too many comments about this- sorry.

  35. Some Guy, in answer to “What is the reason for fearing an abundance of individual investors?”, I got the impression that an abundance of misinformed individual investors was what created the tech bubble that burst in 2000, the buy to let bubble here in the UK, ostrich farming crazes in the 1980s etc. Basically for the private sector to efficiently allocate resources there surely needs to be a market comprised of investors who are experts in the businesses they are investing in rather than those who are anything but and sharp operators out to trick them.

  36. I took the 12 trillion US federal debt and starting with a 6% increase and raising growth in debt by 1% a year. Oh my God, Excel ran out of numbers!! Oops, sorry, it was just formatting – it takes about 25 odd years to get to a quadrillion. What is the point of this pointless exercise? And I started wondering – what if the value of net financial assets in 25 years IS a quadrillion, how would it be reflected in the deficit position?

    Ramanan, I think you are combining political issues (which I think are perfectly valid and v.good points) with the mechanics. I think we are living in odd times – for example, where China runs a huge surplus, but internal consumption is nowhere near what we would expect. Maybe the Chimerica theme (netting the two countries together) is the right approach. The question is what is politically stable in the long-term.

  38. Neil Wilson, doesn’t much of the value of the USD stem simply from the fact that it is the currency used for international trade. If Zimbabwe was to create a new currency tomorrow and, as an act of support, all the other nations in the world were to agree to exclusively use the new Zimbabwe $ for all international trade, then Zimbabwe would surely have no problem getting plenty of oil. Currently I thought when China buys iron ore from Australia (for instance) it needs USD to do so. Surely that kind of requirement equates to plenty of bargins for the USA.

  39. pebird,

    Thanks for some kind words and some humor.

    Yes some people have asked me and mentioned to me about mixing political realities with underlying math – I do not think so.

    In fact such things can be analyzed in a straightforward manner by using the income = expenditure approach.

    Consider a closed economy. “Income = Expenditure” since we define them to satisfy the identity. Even though it is true of the economy as a whole, it is not true of every sector. For example the household sector generally has a higher income than its expenditure. It follows that there should be atleast one sector running a deficit, where “Deficit = Expenditure – Income”. For the government the deficit is the government expenditure (which includes interest payments as well) less the tax receipts. The deficit is financed by issuing securities or taking a bank loan. This process can go on and one sector (the government) is indebted to the rest of the sectors. With time, incomes rise and the public debt also rises. The public debt/gdp ratio rises sometimes and falls otherwise. This process can go on even with the ratio fluctuating depending on economic conditions and business cycles. The case where this ratio keeps rising forever is a bit implausible because that would mean rising interest payments.

    In the case of the open economy, let us say that a nation is running a trade deficit and/or a current account deficit. This means that the income is less than the expenditure. So for an individual (open) nation, the identity Income = Expenditure need not hold. This is financed by issuing securities to foreigners and interest is paid on it. One may have quibbles about usage of phrases such as borrowing, financing etc., but whatever terminology one choses, foreigners end up with your interest paying IOUs.

    Now nations can run trade deficits and all nations do – some frequently, some less frequently and some continuously.

    For a nation which is in the third category. Income is less than the Expenditure and it ends up issuing interest paying IOUs to foreigners. Can this process go on ? Perhaps yes, perhaps no … one can ask the question that if in the case of a closed economy, if the government – whose income is less than its expenditures – can be indebted forever why I am complaining so much about a nation being in deficit ?

    This is because in the case of a closed economy, the government sometimes ends up with a primary surplus. A primary surplus is the tax receipts less pure government expenditure. By “pure government expenditure”, one means the government expenditure less interest payments. So a government can be in deficit, yet be in primary surplus and it can be in both primary surplus and a surplus.

    In the case of an open economy, such an analogy will work if say a nation is in trade surplus but a current account deficit and combinations such as this. However if a nation keeps importing stuff, it is always in a trade defict and you add interest payments to get the current account deficit. Such a thing just leads to the nation issuing more and more IOUs. The only way to keep this from blowing is to go into a trade surplus just like the case of a closed economy where the government may go into a primary surplus.

    The debate however is about trade deficits – in addition to current account deficits. A case where a nation is running both a trade deficit (continuous) and current account deficits just leads to the indebtedness rising forever.

    One possible argument which can invalidate is if the citizens of the nation have securities in foreign nations – purchased long back and perhaps it may be earning fast enough. So there are these arguments which one keeps in mind when analysing such situations. (some of the above has to be looked on a net basis).

    The whole argument is about the claim that a nation can be net importing and this causes no issue etc. The argument provided is that the IOUs issued to foreigners is in your own currency so what can they do? My point is that a nation which keeps doing that faces pressure on the devaluation of its currency etc. This is not a one time event. The currency doesn’t devalue and stay in its new state. When a nation has troubles it will have to end up tightening fiscal policy throwing the already not-fully-employed private sector into higher unemployment. And arguments like that. The nation ends facing issues similar to Iceland.

  40. “doesn’t much of the value of the USD stem simply from the fact that it is the currency used for international trade.”

    50 years ago the Pound Sterling was the currency used for international trade. Why isn’t it any more if it is genuinely valuable to others? Others still hold gold for example.

  41. Ramanan, do you mean that China wants to destroy the world starting from the USA by running continuous trade surpluses? Or can it really destroy the USA? How? If there is a possibility to financially destroy another fully independent country with its own currency by running trade surpluses against it I am curious to hear details of such plan 🙂

  42. “IF you set the interest on the debt at zero, any size and any growth is technically sustainable.”

    That looks like something which says that zero interest rates is forced upon you, not a choice.

    Foreigners purchase private sector securities such as corporate bonds, equities and mortgage backed securities. The US Z.1 says that of the foreigners’s assets is $14T and of this ‘only’ $4T is Treasuries. Also a poor African nation cannot set its interest rates to zero. Foreigners will make a capital flight. One can complain that this conjecture is an exaggeration, but if someone has issues, he/she should explain why foreigners will continue to hold assets and not make a capital flight. Also, if aggregate demand is high and interest rates are lower or set to zero, that will lead to higher demand and more imports which the fx markets may not like.

    Fx markets play close attention to the item “Foreign Reserves” in central banks’ balance sheets. If demand is high a nation’s central bank ends losing reserves.

    Poor nations in fact have to set the rates higher not lower. This is so that it needs to purchase essentials. This attracts foreigners to public sector securities. The object is this. When the foreigner makes the purchase, he loses foreign currency in his bank account. The payment system ends up moving the funds to a local bank’s foreign bank account. The central bank or the Treasury can then purchase the foreign currency from the bank.

  43. “Consider a closed economy”

    We are aren’t we. Last time I looked we weren’t exporting or importing from Mars.

    “This is financed by issuing securities to foreigners and interest is paid on it.”

    Not necessarily. It could simply be financed by permanent non-interest bearer securities, aka cash.

    “Income is less than the Expenditure and it ends up issuing interest paying IOUs to foreigners.”

    Only if it decides to issue interest paying IOUs. A free floating currency issuing nation might simply stop doing that. Plus interest rates are imputed into the interest paying IOUs as they are generally auctioned for more than the face value, so I’m not sure how different they are to non-interest cash in real terms anyway.

    MMT shows clearly that spending comes first for a sovereign currency. If a country is importing more than exporting, then there is a net desire to save in that currency from outside that country for whatever reason. It makes sense for the country to exploit that desire for as long as it lasts surely.

    “The currency doesn’t devalue and stay in its new state.”

    No. Japan seems to suggest that the exchange rate stays stubbornly where it is regardless of what is done within a currency zone.

    A country can be indebted forever in its own currency for the fairly simple reason that ultimately a foreign holder of that currency can only get rid of the currency by purchasing an export or asset from somebody with primary demand in the currency – ie they have a tax bill in the currency that needs settling.

    So as far as I can see currency always comes back home eventually and extinguishes itself. The mechanisms by which US dollars home, when you have places like Ecuador and of course the Euro area are more complex, but I don’t think they defeat the homing principle.

  44. “Not necessarily. It could simply be financed by permanent non-interest bearer securities, aka cash.”

    Yes possible like a bank account. However the foreigner is likely to purchase some securities.

    “No. Japan seems to suggest that the exchange rate stays stubbornly where it is regardless of what is done within a currency zone.”

    Yes in fact the recent movement in the Yen has given them some headaches. They do not run trade deficits forever like the US. In fact if the Yen devalues – its better – they sell more to the US.

  45. Sergei,

    I am not saying that China is destroying the US or vice-versa. Just saying that the nations are playing such games which is not the best possible outcome for everyone.

  46. Ramanan @2:48

    The sovereign currency issuer can set its interest on its risk-free debt. I think you generally agree with this.

    Certainly, int’l investors can purchase domestic private sector debt or equities instead of investing in risk-free assets. However, you yourself set up an example in which the govt sector is running a deficit larger than the current account deficit, which means that the domestic private sector is a net accumulator of financial assets, by accounting definition. It would be rare to have Minskyan-type issues in that case in the domestic private sector (though certainly not impossible). In that example, since, it is the govt sector running persistent deficits, again, its debt service is or at least can be a policy variable.

  47. It would seem that all that is required for all low income nations to follow Australia’s lead by adopting flexible exchange rates and a primary product export economy is to live in a subcontinental sized area with 20m people in it.

    For those not living in the Treasure House of the Pacific, they would get many of the same benefits of a floating exchange rate, in the form of an economy structurally dependent upon imports, but with no guarantee of having the export revenue to be able to afford the imports that they are dependent upon.

  48. If the World had no borders we wouldn’t be so worried about exporting jobs. We would be focused on consuming enough goods to support people with low living standards.

    The sooner we recognize that borders are imaginary lines that separate us artificially, the better of humanity will be. Historically, nations pursuing their own self-interest have not been guided by an invisible hand. Rather, it has led to pretty constant warfare.

  49. All this talk and nobody even got close to answering the question in the title.

    I’ve just started to take an interest in this field.

    Is this a state of the art argument?
    Is wordy intellectual ping pong all there is?

  50. I do think it is important to acknowledge that having one Nation’s currency used for global trade creates Triffin’s dilemma. I think that has a very bad effect on the world. I think it could well have caused the Iraq war and created distortions in international trade. I think the bancor idea of using a basket of commodities for international trade currency also sounds problematical (how do you assign how much wheat vs steel etc). Would it work if each nation’s currency was a fixed 10000 units per person. Each nation’s central bank would create 10000 units when someone was born and destroy 10000 when they died. International trade would be in a basket of the worlds currencies in the proportion according to the populations.

  52. stone, the problem with the current proposals regarding a bancor concept is that it involves fixed rates that are determined by an unelected unaccountable small group of technocrats with ties to the financial sector. This deprives sovereign nations of the ability to manage their economies, specifically unemployment in contractions using fiscal policy. Without a world government and world treasury, a world central bank issuing the global currency at a fixed rate doesn’t make sense. It would be installing a command system that is antithetical to democracy at the pinnacle of the global economy – the monetary system.

    While the dollar being the the global reserve currency may carry some advantages, it also carries disadvantages. The fact that countries want to save in dollars because it is the reserve currency results in a large capital account surplus for the US and a corresponding large deficit, weakening the exchange rate. While the deficit is advantageous in that the US is trading “paper” for real resources, it is also exporting jobs and creating political turmoil domestically.

    Actually, all this is a nonsensical kerfuffle, since the US GDP is ~ 14T and China, in second place, hasn’t hit even 2T yet. Based on relative economies, the US is by far the strongest and should therefore have the strongest currency, which it quickly does whenever there is a perceived need for a safe haven.

    There is a reason that the dollar is the global reserve currency. Other countries desire it. The US economy is the giant, the US market the consumer of last resort, and the dollar is the safe haven. All the kerfuffle is about the perceived “strength” of the US currency based on the “strength” of the US economy. That is silly. Just imagine if the US decided to strengthen its currency by imposing tariffs to regulate imports. A lot of this kerfuffle is just disingenuous posturing for position.

  53. Neil,

    “They can only do that if there are some for sale.”

    So you ban foreigners from purchasing equities and other assets and you set the interest rates to zero as well ? Where does the list stop ?

  54. Ramanan:
    Canada and the US already ”ban foreigners from purchasing equities and other assets”, at least certain ones. And interest rates are pretty close to zero. What’s the big deal?

  55. I worry that consumption and production for consumption are always thought of as such virtues. To me conservation is very important. What many people would most value would be more time with their kids but job insecurity makes them work longer hours. To me, if technological progress achieves anything then it should allow people to spend time with their kids/grandparents whatever. Our current system seems to make people either work longer and longer hours and retire older and older or else make them unemployed and feel that they are worthless. I think an economy based on reduce-reuse-recycle (especially the two former) has more chance of giving long term security than one based on maximal consumption. I thought the longest lasting economic set ups were always those which put conservation at their heart (eg Australian aboriginal cultures that remained stable for 50,000 years). People say that a non-expanding currency system would be bad because it is deflationary. Isn’t that just another way of saying conservation inducing? I admire the German style financial support for workers on reduced hours much than job creation schemes that tend to do unwanted work chosen by a system of cronyism designed to consume concrete for the hell of it or create layers of administration.

  56. Keith,

    See the Federal Reserve’s Flow of Funds Accounts of the United States Z.1 – table L.107

    The Rest of the World holds $15.6T in Assets and $2.6T of that is equities. They also hold Mortgage-Backed-Securities – heard of German dentists lending the US households ?

  57. Hi Ramanan,
    Your original question @ 2:40 was Where does the list stop. My answer was that the existing list is no big deal. If foreigners own US, or Canadian, real estate or fast food chains or department stores,etc, I can’t imagine many people care. So let them buy them! If they want more than 2.6T of them let them buy another trillion! They are taking on big currency risk though – as I think you would be the first to point out! If they want to take control of strategic resources or industries – that could be a problem.
    Finally, if German dentists are foolish enough to hold US mortgages, that’s their problem. Currency and solvency risk – I sure wouldn’t do it!

  58. stone: To me conservation is very important.

    What is underpriced is overused.

    First, there is the low productivity of energy use in the US compared to Japan and the EU. The statistics are striking (see figure 2). The EU and Japan are about 50% more productive in the use of energy than the US. Put differently, the EU and Japan manage to produce about 50% more with one barrel of oil (or its energy equivalent) than the US. This difference by far exceeds the difference in labour productivity between the US and the main European countries.

    The reason why the US appears to be so much less productive in its use of scarce energy is well-known. Energy is not priced correctly in the US, i.e. energy’s price does not sufficiently reflect the environmental costs of its use. Using tax policies, European countries have been more successful in pricing energy in a way that comes closer to reflecting environmental costs. In a sense, one can say that there are structural rigidities in the US preventing prices from reflecting the true scarcity of energy.

    Structural rigidities in the US and Europe

  59. Keith: If foreigners own US, or Canadian, real estate or fast food chains or department stores,etc, I can’t imagine many people care. So let them buy them! If they want more than 2.6T of them let them buy another trillion!

    Japan tried this with RE in the ’80’s and got trounced.

  60. Keith,

    I don’t see why Germans are foolish to hold Mortgage-backed-securities. Okay – the markets fell but they may still have been making money. If some Japanese holds Apple stocks, he can hardly be considered foolish.

    It is oft forgotten that the US is a debtor nation. Increase current account and it becomes a bigger debtor. This debt has to be serviced. Running current account deficits increases both the indebtedness to the Rest of the World and the cost of servicing this debt. There is no automatic mechanism to reduce this other than taking discetionary steps to improve the external position of the United States – i.e., net export becoming a driver of growth. Any attempt to argue that exchange rates will take care of this simply misses the point. I am reading a wonderful 1994 book by McCombie and Thirlwall – Economic Growth And The Balance of Payments Constraint. The authors put forward two concepts – price competitiveness and non-price competitiveness. The former has its nice effects but the latter is equally important. These concepts are nothing new – they are the price elasticities and income elasticities. However the authors go into details about the story around these things.

    So, explanations where it is suggested that exchange rates take care of this is simply the neoclassical model in a new bottle. I understand that flexible exchange rates provide tremendous benefits but you cannot ask the fx rate to do the magic.

    The rest of the world doesn’t accumulate assets by just purchasing it through capital flows. It also accumulates them by exporting stuff to the US. You are suggesting that it is risky for them – but what about the risks to the US itself ?

    The United States is in a unique position of having such high indebtedness to the rest of the world. Most nations cannot even think of doing so. However one cannot bet that the United States be in that position. The indebtedness to the rest of the world keeps rising in such a scenario. 30% now, 40% soon etc. US assets held by foreigners also pay dividends and coupons. Miraculously, the foreigner assets held by the US citizens have paid higher income and the cost of servicing the indebtedness to foreigners has not blown up. However it is easier to see that this cannot be the case forever. Run more deficits and sooner or later income to foreigners will turn out higher than income received from abroad no matter how big the interest differential may be. Once it turns negative, it just trends one way – the “U.S. income payments to rest of world” minus “U.S. income receipts from rest of world” keeps rising forever without a limit and with no mechanism for it to come down.

    Fiscal policy helps short term but worsens the external situation. Not saying that fiscal policy is bad – in fact the opposite. Fiscal policy can be a huge blessing if nations do something about their external trade.

    Back to your point about letting the foreigners accumulate assets by running a trade deficit and its irrelevance. That can be intepreted as “no problem, let us be more indebted to the foreigners” 🙂 Such a strategy leads to exploding servicing of the debt to foreigners! You can keep crediting the foreigners’ bank account and the foreigners will keep depreciating your currency. That’s “trade indiscipline”

  61. Tom Hickey, I totally agree with you about profligate use of oil. I think it is worth remembering that Nixon adopted an expanding currency system specifically so as to suppress the oil price. I suppose if Nixon had not, then the US might have resorted to colonizing oil producing countries and that might have been even worse than the current mess.

  62. stone: the US might have resorted to colonizing oil producing countries and that might have been even worse than the current mess.

    Uh, that is precisely what the US is doing, It is called “neocolonialism,” and it has a lot to do with the origin of the “global war on terror.” The GWOT is “blowback,” as the CIA calls unintended consequences. 🙁

  63. Quote: “The evil hedge funds have not destroyed our floating currency and our lowest exchange rates have been associated with record budget surpluses. There is no statistically significant relationship that has been found between the fiscal stance and movements in our exchange rate. That result broadens to all nations.”

    And that is why you will never see it coming because economies are driven by dynamics and cannot be modeled based on pasted statistical information.

    Quote: “However, Modern Monetary Theory (MMT) considers floating exchange rates to be the only way to maximise the potential of fiscal (and monetary) policy in pursuit of domestic public purpose. Once a nation ties its currency to any arrangement with another country, full currency sovereignty is lost.”

    Tell that to the Thai. Tell them how well a floating rate worked for them. A floating rate denies all sovereignty because the value of currency is not determined by law but by a market process and market processes are by definition.

    Sovereignty n. pl.

    1. Supremacy of authority or rule as exercised by a sovereign or sovereign state.

    By definition, the only way State can take sovereign action is by law and the fixing of rate according treaty is the only process that is under public law. A market driven process is not under the dynamic of prescribed law by definition. A market process is not an “exercise” of a state. Please stop abusing the English language by calling a floating rate system a sovereign system.
    If a floating a rate is so good and stable then why is there so much importance given to hedge funds and why do consider a this system to be more stable than Breton Woods given the relative lack of speculation and massive development during that period where as development today is stalled with no long term develop except in China where they have a fixed peg?

    The historical record is clear and proves you are wrong as sovereignty and globalism have never been friends and floating rate systems are what Imperialists have consisted demanded against protection.

    Quote: “Three nations defied these laws – Australia, Canada and New Zealand – which became and stayed rich by exploiting agriculture and primary commodities in general. That is a strong lesson which is normally ignored.”

    Bill is totally wrong and rewriting history in a similar fashion to Friedmen. Australia history shows us the largest increase in Australian wealth was during the 1939-1974 aka the “long boom.” During the War, Australia greatly increased its manufacturing based supplying the Allied forces with munitions and other supplies. After, the domestic manufacturing was then turned created motor vehicles, metal processing, TCF (textiles, clothing and footwear) and chemicals and the goal was “import replacement.”

    When domestic manufacturing failed to increase productivity the import policy was put in place and the build up the Japanese economy was the result. But with the manufacturing decline when the Japanese economy was rebuilt the import market started to decline and Australia has been falling the Neoliberal model since the Hawke Labor government who floated the Australian Dollar. Since the floating all of the real wealth of country has been privatized and gutted are one can see by the condition of the water management systems and the decay of the power grid. The “long boom” was the result of manufacture and anti “imports” protectionist policy and basis of Australia’s was this period. You are simply misinforming people because your belief in MMT floating rate religion.

    MMT is simply the Keynesian Arm of Neoliberal Imperialism. I could go through the history of the other countries and show the same thing. The pattern is simple there’s a post war boom with increased manufacturing then the Bretton Woods system collapse and there’s a decline. After that a Reagan like figure imposes Neoliberal policies and speculative bubbles are unleashed under a floating rate system while manufacturing declines in the west and people monetize the wealth with privatization schemes.

    MMT teaches people to destroy wealth and then statistical models to show that de-development results in GDP growth.

    Quote: “Is it necessary to produce goods if you can consume them via trade? Much of the argument rests on whether there are learning and efficiency gains in services. The cumulative causation argument suggest that firms improve by receiving feedback from customers and if this capacity is spatially separated quality suffers.”

    No this not the argument and I suggest you read Hamilton and the actual protectionists before you spew historically illiterate nonsense that you learned from graduate school. The reason for manufacturing is the effect it has on the creative process of capital formation.
    The argument without skilled people who know how to build stuff you won’t have the intellectual power to the new kinds of jobs that create economic diversity and economies of scale based on what Friedrich List called “intellectual capital.” Consumer based economies lead to diminishing returns because consumption creates nothing but skilled production is its own reward. The argument is not a multiplier effect in the services but in capital formation and kinds of work become possible to do thus creating new jobs and specialization. It’s called the “flying geese model.” I suggest you debate Erik Reinert or Ha Joon Chang and learn something about economic development. MMT is monetarist bunk as far their policies suggestions which aren’t informed by either science or politics aka the real economy.

    Economies are based on work not money. Production is process that requires imaginative and problem solving and without the imagination human economy will become less dynamic and rigid like a surf system and thus stagnate. What is the surf system? It is economy of agriculture and servants. It’s a service or rather servant economy and it destroys the creative human spirit. I refuse to live Bill’s consumerist feudal servant society and prefer a meaningful work so that a man can die know he did something of lasting importance like building well drilling equipment for Africans and physically altered matter to create physical value for other human beings.

    Physical Law tell us you cannot consume without work and you cannot increase the amount of work you can do without the ability to produce things. MMT denies the laws of Physics and says you can have a free lunch i.e. eating without working.

  64. stone: “I worry that consumption and production for consumption are always thought of as such virtues. To me conservation is very important.”

    The economy runs upon consumption of goods and services that we provide for each other. In that light, consumption is a civic virtue. Conservation is not necessarily at odds with consumption. As an example, Tokugawa Japan, shut off from the rest of the world, embraced conservation and still experienced economic growth. Our modern Western experience of pollution and depleting resources has been around for only a few hundred years, a blip in human history. It is, as my grandmother would say, living off of savings. We cannot continue willy-nilly along this path. We can make things and do things for each other and practice conservation, too. 🙂

    stone: “People say that a non-expanding currency system would be bad because it is deflationary. Isn’t that just another way of saying conservation inducing?”

    What do you want to conserve? Historically, deflation is socially reactionary, leading to the concentration of wealth and power and to the maintenance of that concentration, to poverty and serfdom for the multitude of people. I recently read that the European Dark Ages were deflationary. Makes sense.

  65. Septus 7 I really want to better understand your argument. My naive impression of the Thai 1997 crisis was that the peg to the USD was what enabled the hedge funds to mount the speculative attack http://en.wikipedia.org/wiki/Thai_baht. I thought that the peg was only dropped after the speculative attack was impossible to withstand (as with UK coming off the ERM on black wednesday). Hong Kong managed to withstand the attack they were subjected to in the Asian financial crisis by the Hong Kong government buying Hong Kong equities. Are you suggesting that some such protective scheme could have been achieved by the Thai government or for that matter the UK government on Black Wednesday (I realise that the speculative attacks on Thai and UK were from currency short selling whilst the Hong Kong attack was simultaneous currency and equity short selling)? I guess the influx of “hot money” in the lead up to the Asian Financial crisis was what should have been somehow prevented so as to not create the possibility of it suddenly being sucked out in a speculative attack.
    Your argument amount people valuing their achievments more than their consumption certainly chimes with my personal experience. I kind of feel we are like collie dogs wanting to be kept busy. A collie dog given loads of dog food and nothing to do is totally miserable. The problem is that many people are being unwillingly forced to do work they do not value in order to satisfy other peoples work ambitions.

  66. Min I totally realise that a non-expanding money system absolutely requires redistribution of money from the wealthy back to potential consumers. Otherwise as you say it leads to serfdom. A non-expanding money system together with money redistribution sounds ok though. I think that what is needed is for the overal global economy to avoid running a structural deficit. My impression is that the global economy should ballance. To my mind it does not matter so much if the taxation is mostly in one country and the spending in another so long as globaly there is no increase in private wealth AKA asset price inflation. To me a global structural deficit is in effect a surrender of sovereignty to Goldman Sachs, Landsdowne partners and their ilk. I wonder whether multinational corporations and global financial markets need to be subjected to some multinational tax system. I get the impression that structural deficits are like CO2 emissions- the countries running them generally are not those suffering the consequences.

  67. Septus7, I reread your comment-are you advocating a return to the Bretton Woods gold backed USD system? Isn’t the problem that that system ground to a halt due to Triffin’s dilemma ie it was great whilst it lasted but could never be more than a temporary phase? To my mind what is needed is a long term stable system. Are the Chinese wanting something like Keynes’s bancor to be implemented? I think if that includes gold then there will certainly need to be a windfall tax on Vincent Cate! (sorry Vince 🙂 ).

  68. Septeus7,

    Working in agriculture can be very creative imo, same for architecture, building and construction, arts, food service, infrastructure, healing, etc, There are many ways for us to satisfy our creative desires without exporting necessarily no?.

    Making widgets that are then sent abroad is I guess one other way to achieve creativity, but to me there are many more opportunites right in the domestic economy.

    Resp,

  69. Septeus7 shows a good understanding of things though I would recommend a better usage of language. Not sure if he is advocating going back to Bretton-Woods but good points on the history.

    An economist named Harry Johnson once said that the greatest disservice Keynes did to the profession is to not start from the open economy.

    Matt – If one talks of a world where one doesn’t export, one is living in an imaginary world. Try telling it to Steve Jobs. Keynes once quoted Lenin as saying that there is no better way to disappoint a nation’s citizens than to degrade its currency. Of course you can say things like “Keynes’ theory was Gold Standard” but doesn’t help. Keynes said many illuminating things and several things that may not make sense. Purely evaluating him on the latter is not intellectual. At any rate, money was not exogenous in the Gold Standard. There is no contracting/expanding of the monetary base happening because of balance of payments in fixed exchange rate regimes – as suggested by the Mundell-Fleming Thesis and espoused by the MMTers. The rules of the game never applied.

    Quote: “The evil hedge funds have not destroyed our floating currency and our lowest exchange rates have been associated with record budget surpluses. There is no statistically significant relationship that has been found between the fiscal stance and movements in our exchange rate. That result broadens to all nations.”

    And that is why you will never see it coming because economies are driven by dynamics and cannot be modeled based on pasted statistical information.

    Excellent point. I agree with this. It is like saying in 2006 that debt levels don’t matter. The reason there is no relation found is because nations have taken discretionary steps to improve their external position. Fiscal policy is great in the short run but worsens the external position in the long run. Its completely easy to miss this because economists end up using the Keynesian multipliers which are one-period multipliers and stock-flow inconsistent. Of course that doesn’t mean fiscal policy is bad but it has to be complimented with discretionary steps to improve the trade performance. Nations which have grown have actually done this. They did not rely on “no relation” and relax fiscal policy and hope that the trade improved.

    Economies are based on work not money.

    Yes I agree with this as well. Economies are also based on the Schumpeterian entrepreneur.

    Physical Law tell us you cannot consume without work and you cannot increase the amount of work you can do without the ability to produce things. MMT denies the laws of Physics and says you can have a free lunch i.e. eating without working.

    Excellent point, though I’d phrase it differently. Extrapolated, MMT seems to suggest that a nation can stop exporting. This seems to be doubly free lunch. The exporter gets paid and is happy and the importer nation can just relax fiscal policy. How is this free lunch possible – the answer is that the exchange rate movement will ruin you at some point or the other!

    The fact that the Chinese cannot create the dollars is taken to mean that they don’t lend and “we don’t borrow”. The typical answer is “Where did the Chinese get the dollars to buy Treasuries”. It’s an abuse of the symbiosis the United States and China have with each other. Of course, as recent media articles suggest, this is under pressure. Protectionism rules! In the other parts of the world, nations face huge restrictions on running a trade deficit and have to “finance its trade deficit” whereas the MMT position is the opposite. Try telling it to a central banker. The importer finances the exporter according to MMT!, forgetting the fact the importer becomes a debtor.

    Such things are seen simply in the Post Keynesian approach where money is credit-led and demand-determined. The international position and fortunes of a nation is determined to a significant extent by the table “Rest of the World” in the Flow Of Funds. Since, “money is credit”, a nation which owes a lot to the rest of the world is in serious trouble unless it does something about its trade performance or if the external creditors allow the game to go on and the since nothing is permanent, the latter – cannot be hoped to go on forever.

  70. @ stone (9/11, 8:40)

    What you are bemoaning is largely the result of large scale substitution of rent-seeking (land rent, monopoly rent, and financial rent) for productive investment. The problem is essentially one of distributing demand, which requires distributing incomes and preventing the sequestration of capital as well as its allocation to non-productive uses. With proper distribution, the price of materials (commodities), goods and services, and assets do not get out of balance, and wealth does not accumulate at the top because it is not funneled there.

    Money is the lubricant for transactions. It not only allows for pricing in markets but it increases the velocity of transactions. One can picture this in terms of a milling machine, in which the lubricant is recirculated and directed at the cutting edge. This is how an economy should work. The whole machine needs to be lubricated with money and the focus also has to be on the cutting edge, for example, technological innovation and key marginal effects like changes in population and productivity. Moreover, state money allows the people through their elected government to use state monies to promote public purpose, including managing distributional effects consequent on money use to achieve distributed income, hence, distributed demand and a supply system that serves this.

    The way to accomplish this is fairly obvious. Setting objectives that insure distributive justice human rights, and ecological sustainability, aligning incentives with these objectives, putting regulation, oversight and accountability in place to prevent cheating, and using fiscal policy to provide the right amount of money to harmonize supply and demand, along with balancing public purpose with private interests, over time and in the face of changing conditions. We are now in the era of the global economy, so nations must increasingly cooperate instead of just compete in order to achieve optimal effects for all and to create an enduring and sustainable balance between peoples and resources.

    Philosophically, politically, legally, and economically, we know how to do this through an operational approach. The problem at present is a more moral one instead of result from ignorance. So far, humanity has not been able to do this owing to flawed character and misplaced devotion to narrow self-interest as much as ignorance of principles, even though everyone would be far better for it, and the world as a whole would be better place.

  71. ” The exporter gets paid and is happy”

    Doesn’t it depend on the currency of the transaction.

    if it is the exporter currency, then once the transaction is complete they are secure in their assets. The net importer however will suffer with the currency slide as they have to work harder to obtain somebody elses currency.

    If it is the importer currency, then the exporter has a bunch of the importer country’s fiat currency. The slide will hit them financially long after the transaction is complete. The importer however won’t see an effect until they go to the market for more real stuff.

    So ignoring the exchange rate is better for those countries with a lot of offshore assets denominated in the currency. A decline in the exchange rate should cause them to be quickly repatriated, slowing the decline.

  72. Ramanan, I believe that the problem lies in failure to date to think in terms of the global economy. Keynes was clearly doing that with his proposal of the bancor. It is now generally recognized, I think, that global finances are at the heart of global disharmony. However, instead of approaching this from a monetary perspective, I would look at it from a resources-objectives perspective, which is what an engineer would do, unlike an economist. The problem is not allocating scarce resources (now all resources are scarce even clean air and water). The problem is allocating scarce resources intelligently to achieve common objectives with a view to serving humanity and upholding human rights. Thus, this is essentially a philosophical issue rather than strictly an economic one.

    As Aristotle wisely observed, a small mistake at the beginning becomes a great mistake at the end. We need to focus on what kind of world we want to create and design a global economic system that support the necessary infrastructure and distributional mechanism to achieve that world. This is an engineering problem, and therefore an operational approach is called for. While the goal is optimization, this must be approached heuristically with swift adjustment based on feedback.

    The is a social problem first and foremost, so it requires an organic rather than a mechanical approach. Organisms are characterized by purpose, e.g., to grow and reproduce. Human organisms exhibit purpose through interest, motivation, and incentives. An optimal society is one in which by acting in own’s (enlightened) self-interest one is also acting in the interest of the whole, and vice versa. The challenge is to design such a system and to implement it especially through general education and life-long learning. Of course, this would involve completely redesigning entire cultures, so it not going to happen overnight. But that is is the direction that is needed.

    The immediate question is what can practically be done at present to begin moving in the desired direction. MMT has operational proposals. I take it that we are here to discuss those proposals, critique them, and come up with alternatives. Therefore, I agree that it is necessary to understand the operations of the presently dominant nonconvertible floating rate monetary system. The enquiry is best directed at identifying the strengths and weaknesses of various systems.

    I am not convinced that the MMT notion that floating rates are the solution to all problems in that I am not willing to take it on faith. But I have read the pro’s and con’s, and so far it seem to me that virtually all the problems have resulted from a mixed system in which floating rates were combined with pegs and currency boards and accumulation of debt in a foreign currency. As far as I can determine floating rates adjust very quickly owing to the size, liquidity, and transparency of the foreign exchange markets. This seems to be to be the optimal way to establish parity through near instantaneous arbitrage based on all available information and probabilities.

    As far as I can tell, it seems to me that the disadvantages that you point out are based not on the fx system but on other matters, many of them related to the demand and distributional effects. Of course, under-developed countries are going to have problems, but that is only superficially due to the need for foreign currency. The problem is with the imbalance injected into the global system that goes by the names neo-imperialism and neocolonialism. The US and China are having relationship problems, but this is due to China pegging its currency to the dollar, and the problems the US is experiencing are only peripherally related to the China trade.

    What I am saying is that I think the focus is misplaced in looking for the culprit in fx. I just don’t see it there, but I am always willing to be convinced. But I don’t that the problems in the global economy stem from fx. Economically and financially, it’s mostly a demand distribution/productive investment problem, as MMT says. The “grease” is not getting evenly distributed and therefore to where it is needed, so some parts are freezing up, causing shortages, while other parts are running too fast, resulting in bubbles.

  73. A few things about Nicholas Kaldor. He was touched by genius. He advocated endogenous money in the 1970s. Kaldor also introduced the term “Stylized facts”. In the article titled Keynesian Economics After Fifty Years from the book Keynes And The Modern World 1983, he has the following to say:

    Diagrammatically, the difference in the presentation of the supply and demand for money, is that in the original version (with M exogenous) the supply of money is represented by a vertical line, in the new version by a horizontal line, or a set of horizontal lines, representing different stances of monetary policy

    He also knew that given a monetary policy stance, the government or the central bank cannot decide on what portion can be financed by cash and what portion can be financed by issuing debt – opposite of what James Tobin thought.

    As it is, a highly developed banking system already provides such facilities on an ample scale, since it is prepared to accommodate the public’s changing demand between different types or financial assets by altering the composition of the banks’ assets or liabilities in a reverse direction, If the non-banking public wishes to switch its holding of gilts for interest-bearing bank deposits. the banks are ready to supply such deposits at the minimum of inconvenience, and at the same time to place their surplus funds into the gifts which were previously held by the public. Similarly the banks provide easy facilities to their customers for switching balances on current accounts into interest-bearing deposit accounts, or vice versa. Hence, while the annual increment in the total holding of financial assets of the private sector (considered as a whole) is nothing more than the mirror-image of the borrowing requirement of the public sector (in a closed economy at any rate), neither the Govermment nor the banks can determine how much of this increment will be held in the form of cash (meaning notes and current deposits) and how much in the near-equivalents to cash (such as interest-bearing demand deposits) or in various forms of public sector debt. Thus neither the Government nor the central bank can control how much or the total financial assets the public prefers to hold in the form of ‘money’ on one particular definition or another.

    – in the The Scourge Of Monetarism, 1982

    I think this quote is lovely

    The only truly exogenous factor is whatever exists at a moment of time, as a heritage of the past.

    – in Economics Without Equilibrium, 1985

  74. Neil,

    “If it is the importer currency, then the exporter has a bunch of the importer country’s fiat currency. The slide will hit them financially long after the transaction is complete. The importer however won’t see an effect until they go to the market for more real stuff.”

    You are assuming a “two-country” model. China may export stuff to the UK and convert it to USDs.

  75. Neil: Doesn’t it depend on the currency of the transaction.

    Currencies can be converted nearly instantaneously, and most exporters do just that, unless they are importers, too, and have an immediate need to use that currency.

    The objection is, what about China and the US; aren’t the Chinese locked into an unfavorable trade? Not at all. If they want to export to the US in quantity, then they have to be wiling to save in US dollars to fund the offsetting US capital account, and if the dollar goes down, well, that’s just the cost of doing business on that scale. They knew this beforehand, or should have. It’s simple accounting and fx adjustment.

  76. Ramanan: Extrapolated, MMT seems to suggest that a nation can stop exporting. This seems to be doubly free lunch. The exporter gets paid and is happy and the importer nation can just relax fiscal policy. How is this free lunch possible – the answer is that the exchange rate movement will ruin you at some point or the other!

    Not sure that MMT says this. What MMT says ( as I understand it) is that the Chimerica trade will continue to work as long as China desires to save in US dollars. When it does not, they it will just decrease exports, or drop the peg and allow prices to normalize, and US imports of Chinese goods will level off.

    In fact, everyone involved financially expects this to happen naturally as China develops its consumer economy over the coming decades. The US strategy is to enable China to develop its consumer economy ASAP by allowing it free access to the US market at a discount (the peg) so that eventually the US will have access to a billion Chinese anxious to buy from US companies. The great success of the US auto industry at present is taking place in China. Same with many American brands like Nike.

    “Go west (to the Far East). Thar’s gold in them thar hills.” The US is constantly emphasizing that it is a Pacific nation and US business sees its future among the outsized populations of China, India, and Indonesia. Unfortunately, the US is still overlooking Latin American for the most part and treating it like a colony.

    Moreover, people fret about the US “losing its manufacturing base” and “stopping exporting.” This is contradicts the facts. The US still has a huge manufacturing base, and US companies own or have stakes in factories all over the world. Moreover, the US is a major exporter. People forget that the US economy (~14T GDP) dwarfs all other nations. China is in second place with less that 2T GDP. We have to keep this in perspective.

  77. Tom,

    Yes Keynes had plans such as Bancor but if one doesn’t like the idea, one cannot say that “Keynes got it wrong”. He said several great things about open economies.

    As far as floating rates are concerned, I don’t have any issues with them per se. On the other hand, I do have issues about the story around trade deficit. Just increase the fiscal policy and the problems will be solved kind of approach. There is absolutely no talk of the volitional decisions of the importer to choose a foreign product over a domestic one. There is a tremendous pressure on the domestic industry and the MMT solution to just solve this by fiscal policy is completely incorrect I believe. It just worsens the global imbalances and screws the local producers, if you don’t mind the usage of my language (cant find a better word!). But then this blog post argues that we can do something else! Amazing.

    Now coming to the usage of fiscal policy – how you view what money is absolutely crucial here. One can keep saying that we just credit the bank account of foreigners forgetting that at some time that the indebtedness and interest payments keeps blowing. The United States occupies a unique position but one can bet on this. Other nations can’t even think of doing anything like this. Its like inspiring a soccer team that it doesn’t matter if your opponent team has Zinedine Zidane. Nations finance their trade deficits unlike what the MMTers say. The fact that their indebtedness is in their own currency doesn’t change the game too much – just postpones the problem or one hopes that future trade surpluses will reverse the imbalance.

    Its just that its easy for the United States – atleast till now.

  78. Tom,

    Will come back on some points. Look at the graph here on the left on manufacturing

    link_http://www.nytimes.com/2010/09/10/business/economy/10manufacture.html

  79. Isn’t the problem that that system ground to a halt due to Triffin’s dilemma ie it was great whilst it lasted but could never be more than a temporary phase?

    Similar concerns are re-emerging, and US policymakers agree in principle that a change is needed. However, it is also pretty much agreed that this shift is not going to come quickly, since the US economy continues to dwarf all other countries. This is immediately apparent as soon as there is instability in the world and everyone rushes to the dollar as the safe haven. Moreover, including commodities in a basket advantages resource-rich nations.

    There is no obvious solution presently available, as far as I can see. What appears to be happening now is various ideas are being floated. The most dangerous idea is that of a global institution composed of unelected an unaccountable technocrats being in control. This is a command system and it is also anti-democratic. That needs to be nipped in the bud.

  80. Tom,

    “Not sure that MMT says this. What MMT says ( as I understand it) is that the Chimerica trade will continue to work as long as China desires to save in US dollars. When it does not, they it will just decrease exports, or drop the peg and allow prices to normalize, and US imports of Chinese goods will level off.”

    Well I do remember an exchange with WM at his blog where he said something like if we stop exporting that will be a victory for us. Maybe he was exaggerating.

    Also imports reduce employment we know. Now, let us think of it analytically. Let us call G – the government expenditure and θ the tax rate. Let us define G/θ as the fiscal stance. For a given fiscal stance, imports reduce employment. Relax the fiscal policy – or increase the fiscal stance i.e., increase G/θ call the former G_1/θ_1 and the latter G_2/θ_2. It increases the national income and reduces employment but increases indebtedness to the world. Increasing the fiscal stance also deteriorates the trade imbalance. Now, my definition of deterioration is higher trade imbalance, the MMTers definition may be different. The long run effect is the same whether G_1/θ_1 or G_2/θ_2. However, in the latter, you have higher indebtedness to foreigners. All the stimulus is wasted in purchasing foreign products! – There is no free lunch.

    If the currency doesn’t fall, interest payments to foreigners starts building up moving toward an unsustainable path.

    If the currency falls, there is no automatic mechanism for exports to improve except due to price elasticity effects but that is unlikely strong. There needs to be a discretionary effort to improve exports – which is against the “exports are a cost” stand.

    Phrases such as “desire to save” are just part of a sentence – don’t carry so easily technically. I do not and neither do the citizens of my nation run a trade deficit with some nation because they wanted to save in my currency. My nation runs a deficit because the citizens couldn’t produce what the others did.

  81. Sorry should be “reduces unemployment” not “reduces employment” in the third para (Line 4)

  82. Tom Hickey, I think the crux of our different viewpoints is that I think that so long as capital for investment is scarce, then allocation of capital by people purely motivated by greed can act to form an efficient effective economy for social good. To me that system brakes down once it becomes more lucrative for money to be employed manipulating money rather than being employed in the real economy. To me it is simply a glut of money for investment that leads to that malign transition. You appear happy to just have the state take over all of the role of resource allocation for the real economy. My impression is that the state finds that extremely hard to do well especially alongside a huge growing glut of private wealth seeking to influence it.

  83. Ramanan, I agree that “desire to save” is perhaps not the clearest phraseology, but it is accurate economically and financially in the sense of a decision to hold something. Most exporters don’t want to hold the currency of the country to which they are exporting unless they have some reason to do so. They prefer to hold their liquid assets in their own currency, usually, but not always, if that currency is less stable than something else they can “save” in. Some prefer the Swiss franc, for instance, and that is their base currency in terms of which they operate. But large importers have to repatriate to pay expenses and for what they wish to consume themselves in their own country.

    China is a special case, a Michael Pettis has observed. It does not want its exporters to repatriate for fear of creating inflation. So it borrows dollars at home and holds them, that is, “saves,” in US tsy’s. It does this for two reasons. The first is that it desires to hold dollars. It has the option of holding any currency it wishes, or else doing something else with the funds like buy stuff. The second reason, related to the first, is that it has a symbiotic relationship with the US it wishes to culture. The US is happy to accept real resources from China now in expectation of having access to a huge consumer market in a few years. Everyone is happy except the US workers whose jobs get outsourced. But that’s just how the world economy works. There are winner and losers. The mistake of the US has been not more actively redistributing those human resources since the invisible hand has become a tightly clenched fist in this respect.

    All the stimulus is wasted in purchasing foreign products! – There is no free lunch.

    Exaggeration? There may be some leakage, but “all”?

    If the currency falls, there is no automatic mechanism for exports to improve except due to price elasticity effects but that is unlikely strong. There needs to be a discretionary effort to improve exports – which is against the “exports are a cost” stand.

    My spouse sells stuff on ebay internationally. I can tell when rates shift pretty quickly by the changes in her international orders. I was actually quite shocked to see how sensitive buyers are. Ebay buyers pay in dollars, so she has no exchange decisions to make, but I am positive that if she were paid in foreign currencies, she would shift to dollars immediately, – or to euros or Swiss francs depending on fx trends. She also sells imported stuff and is very sensitive to price changes when buying in bulk, since she makes her money buying wholesale and selling retail at a markup. The price is ultimately sensitive to what the retail consumer will pay and she is well aware of that, so for her it is a matter of the margin, which is determined by wholesale price, and for imports that is determined by fx. Of course, she is not operating alone, so I hear about what the market is doing. It is really quite sensitive, and the arbitraging is intense.

    I also have friends that are importers. They read the fx reports first thing and as soon as the exchange rate meets their criteria they place their orders. They are well aware of consumer demand, their inventory, and their margins, so they can act immediately. I think you may be underestimating this adjustment of rates and the consequences of it for international business. Being aware of the exchange market, they are also likely to save in the currency they think they will do best in holding.

    While this is admittedly anecdotal, I suspect that fx adjustment is pretty swift, and the reaction of export/import markets is as well.

  84. stone: I think that so long as capital for investment is scarce, then allocation of capital by people purely motivated by greed can act to form an efficient effective economy for social good. To me that system brakes down once it becomes more lucrative for money to be employed manipulating money rather than being employed in the real economy.

    I think you are wrong in this presumption. Having less capital available is not going to guarantee that it goes to productive investment. There will continue to be a strong tendency toward rent-seeking through land rent, monopoly rent and financial rent based on historical precedent. A primary problem in the past has been with rentierism, and Keynes announced that one of his objectives was to reduce this pernicious influence that is parasitic rather than contributory. Feudalism was based chiefly on land rent. Industrialization was based on chiefly monopoly rent, while land rent tagged along, and the contemporary economy is based on land rent, monopoly rent, and financial rent (vide the increasing role of FIRE as a sector).

    You appear happy to just have the state take over all of the role of resource allocation for the real economy.

    Huh?

  85. Tom,

    I agree there is some sensitivity – not denying that. Perhaps they had already made up their minds to purchase and made the purchases when the exchange rates moved in their favour ?

    A technical way of doing this is to write down price elasticities and income elasticities of imports, exports etc. I think the only way for the United States to become a net exporter is to first have a deep devaluation of the dollar and for the other nations to have a sufficiently high income. The neoclassical model is simply supply-demand with no talk whatsoever of income. The Keynesian stand on the other hand is that income matters. Just because prices fall doesn’t make the consumers buy the stuff – they are limited by their incomes.

    Not only this, but the rest of the world has to agree to purchase the export. Plus action needs to be taken to improve the export position. Perhaps nations can end up going into an austerity partly intentionally or otherwise. Thats why Keynes was too good. He had figured out these things – though he remained confused about many things.

    Not an exaggeration about the leakage. Its a model specific statement. Shocking. But useful. However it shows how useful it is to model these things dynamically. The sectoral balances are what they are now. There are complicated things going on in the economy and we don’t know what the effect of the stimulus may be. Check the last two pages of this article

    link_http://www.theglobalcrisis.info/docs/ppt/pdf/GennaroZezza.pdf Income distribution and borrowing A “New Cambridge” model for the U.S. economy

  86. Ramanan: Look at the graph here on the left on manufacturing
    link_http://www.nytimes.com/2010/09/10/business/economy/10manufacture.html

    Yes, a fall from 30% GDP to 11% GDP. But 11% of a 14T GDP is still larger than the entire GDP of most economies in the world today. And that is with the US in recession and operating greatly under capacity. The US manufacturing base is huge by any standard, and no country is going to approach it in the near future. The growth rate need to do this quickly is beyond reach.

    There is just no way that the US is going to compete in manufacturing using less than highly educated and highly skilled workers in the global economy that permits labor arbitrage and free flow of capital. And there is no way that this can be stopped other than temporarily. The balance point could be a sharp rise in transportation cost, such as might result from an energy shock. But that, too, would be medium terms. In the long run, there is going to be wage equalization and that means a fairly long period of global labor surplus, with lower wages for workers in developed countries. Moreover, developed countries are also moving toward robotics and automation.

    Again, I come back to the global economy. The real resources are available to provide for global prosperity in a sustainable way. The challenge now is to remove the institutional blockages preventing this from happening. Economically, this is essentially a demand/income and supply/productive investment/innovation problem, not inherently a financial one, although the solution is fiscal, that is, supplying the right amount of money in the right places to enable the global economy to develop smoothly.

    I don’t particularly like the “imports are a benefit and exports” are a cost model any more than I like the “exports are a benefit and imports are a cost model,” although I think that the former is correct at present institutionally. But this is another form of mercantilism that detracts from the smooth transition to a global economy, in which we are all in this together. Better to think in terms of distributive justice in which the dynamic equilibrium of supply and demand result in shared prosperity. Otherwise, we will never get there and will continue to hobble from crisis to crisis, punctuated by wars, as power elites jostle for position – to which history testifies.

    Institutionally, the global economy is being run by the wealthy and powerful chiefly for their interests, with trickle down or hand outs for the rest. Labor arbitrage is keeping wages (incomes) low. The wealthy think this is great because it increases profits and keeps goods inflation in check. However, this lowering of income results in constriction of demand, which in turn results in overcapacity. To make up for this, the game plan was to substitute debt for income, and that blew up since it was unsustainable. Now everyone is trying to export their way out, and this is unsustainable, too.

    The MMT solution is to increase demand by increasing incomes, first, by stimulus, and then through institutional changes such as the JG, financial reform, etc. It seems to me that the MMT solution is promising, and I don’t see the reliance on floating rates as a weakness in it. Yes, problems will arise if countries take a mercantilist approach, but changes in rates will force changes in behavior. According to MMT as I understand it, the solution is for countries with problems to get their houses in order by increasing demand domestically through fiscal policy. There is also nothing preventing countries from abandoning “free trade” and “free capital flow” when conditions warrant, that is, when “free trade” and “free capital flows” are being used parasitically. I don’t think that one can critique MMT’s positon on fx ceteris paribus, when MMT’ers have specifically proposed operations that affect fx.

    What is needed is institutional change, and this requires a change of mind and heart. As I said, it is a moral challenge, as well as a political one. The real problem is with the controls being in the hands of the wealthy and powerful, whose objective is to allocate as many resources to themselves as possible by rigging the system. That has to change. It is just cheating, and it is made possible by corruption and capture.

  87. Dear Ramanan (at 2010/09/12 at 0:24)

    You are now in the realm of making things up and verballing the proponents of MMT.

    You say:

    MMT seems to suggest that a nation can stop exporting …

    Where does anyone of the main academic (published) contributors say that?

    You say:

    The importer finances the exporter according to MMT!, forgetting the fact the importer becomes a debtor.

    The exporter can only sell and accumulate financial claims on the local economy if the “importer” demands the product. Sales require a demand to motivate supply. The willingness of the importing country to buy provides the currency that the exporter desires.

    You say:

    Such things are seen simply in the Post Keynesian approach where money is credit-led and demand-determined. The international position and fortunes of a nation is determined to a significant extent by the table “Rest of the World” in the Flow Of Funds. Since, “money is credit”, a nation which owes a lot to the rest of the world is in serious trouble unless it does something about its trade performance or if the external creditors allow the game to go on and the since nothing is permanent, the latter – cannot be hoped to go on forever.

    Where does anyone of the main academic (published) contributors say that a nation which owes a lot to the ROW not encounter serious problems if their export performance fails?

    Where do we say that if the external creditor decides they do not want to accumulate financial claims denominated in the local currency that the local economy will be fine and can avoid a (possibly) painful domestic adjustment?

    Where do we say that things can go on forever without changing preferences?

    You won’t find anything in my writing that supports your now exotic (and convenient) rendition of our work.

    Further, what we do say is that in terms of the external sector a sovereign government never has any financial constraint paying its debt obligations (to foreigners) which are denominated in its own currency. Never, ever!

    I think in pursuit of your prosecution you are now getting ahead of yourself and straying from the facts.

    best wishes
    bill

  88. Ramanan, in my view the developed countries, especially the US, need to be net importers for quite awhile in order to provide space for emerging nations to generate the demand/income needed to develop consumer economies. This, along with global labor arbitrage, is going to put downward pressure on wages in the developed world, especially the wages of less educated and less skilled workers. Governments need to acknowledge this and address it with fiscal policy that stimulates demand, regardless of deficits, e.g., with a JG. If there is concern with interest on the national debt, then go to no bonds. There are ways around these economic problems and fundamentally they involve maintaining demand in the developed world while building it in the underdeveloped world, as well as directing global demand toward sustainability and removing the obstacles to optimal functioning of the global economy, such as financialization and capital sequestration. this has to be a whole package, just as a budget has to be oriented toward accomplishing objectives directed by purpose.

    The real problem is situated where all all problems lie – in the people’s minds, individually and collectively. Being cognitive-emotional problems, they need to be addressed as such, through “therapy.” These cognitive-emotional problems manifest through memes and memeplexes, conventions, and institutions. These are the things that need changing. I look at a lot of what MMT is doing as part of that therapy, for example, replacing myths with operational understanding and scientific (reality-based) methodology. A lot of our present conventions and institutions are myth-based. This narrative needs shifting. A new paradigm is called for in the global era. The old paradigm of competing nations and alliances is no longer appropriate and needs to be superseded with a new vision for globalized humanity.

  89. Hi Bill,

    Some answers:

    Comment #15 by WM here. link_http://moslereconomics.com/2010/07/14/small-banks-being-crushed-by-feds-game-of-musical-chairs/

    (I can see the headline now- ‘US takes emergency action to curb exports’ when that happens the battle has truly been won.)

    Of course that was a blog exchange – not a carefully drafted report but …

    As to the point about the demand, and “Sales require a demand to motivate supply”. yes even I have been saying that. Do not see a disagreement with that point @8:19.

    Quote: “Where does anyone of the main academic (published) contributors say that a nation which owes a lot to the ROW not encounter serious problems if their export performance fails?”

    Here. The article “What A Long Strange Trip It’s Been – Can We Muddle Through Fiscal Policy ?” by SK, LRW

    … And, for such a country (even Turkey) both a budget deficit and a current account deficit are indefinitely sustainable. It makes no sense to argue that the USA (or Turkey) needs to borrow to ‘finance’ its trade deficit

    Quote: “Where do we say that if the external creditor decides they do not want to accumulate financial claims denominated in the local currency that the local economy will be fine and can avoid a (possibly) painful domestic adjustment?”

    Again comment #15 but one could say that it is a matter of interpretation. However, points such as the $A example above says nothing about the troubles it could create.

    Regards,

  90. Ramanan, I don’t think that saying a monetarily sovereign country can run budget deficits and trade deficits “indefinitely” implies “without any limitation.” I understand it to mean that absolute amounts and arbitrary ratios are irrelevant. The limit on budgetary deficits is inflation and the limit on trade deficits is downward instability of the exchange rate or devaluation. Just as people will flee a currency that this inflating, so too will they flee a currency whose exchange rate is plummeting. No one disputes this, as far as I can see. The question is what the optimal way to prevent these occurrences may be, and the optimal antidote should this occur, recognizing that a number of factors may impinge, including external shock. It seems to me that MMT addresses this instead of suggesting that inflation and devaluation cannot happen.

  91. Dear All,

    On reflection – it often seems (to me at least) that the focus of a lot of the discussion amongst commentators here misses through oversight and distraction, the essential global MMT tenet – the significance and meaning of access to ‘real sustainable resources’. And the potential of each person to actually effect and be the change, that they themselves would welcome.

    It remains a fundamental reality (and at times of heightened insanity an actual reality) that the entire monetary system can be (is) scrapped. People simply go back to bartering. Granted this would be incredibly tiresome and cumbersome in a modern setting, but the reality remains to remind us of something: the monetary system is simply an ethereal and conceptual record. Like magnetic imprints on a hard-disk drive, the record can easily be erased, corrupted, digitally ‘enhanced’ or reset – and yet the real resources remain! At the root of everything, we are simply discussing how we use and care for the skin of this earth: the atmosphere; the rivers, lakes and oceans; the land, and all of the denizens of the planet – and each other. There is not another blue, green and white jewel of a living orb quite like ours even light years around; each human being too is absolutely unique – as different as we are in expression and as similar as we are in essence there is nobody else to fight with folks, and nobody else to get it together in the known universe extant – living on this earth could always be something to celebrate and enjoy. Why should this be possible only for little children, all of you sophisticated smart and clever people – who generally have so little imagination you turn everything into a sweat-shop, shopping mall, factory or war-zone; and parade around with big fat egos and fancy wear? Idiots!!

    Just imagine if all of the animals paraded down the street with bloated bellies and weird costumes, full of phantasies, swollen egos and imaginations about themselves – wouldn’t people laugh at these poor creatures and tell them to return to their nature?

    A conceptual system is just a conceptual system. If we create such conceptual systems, we should always ensure that we remain outside of them, to deconstruct or modify them at will – else we become their slaves! People seem to spend so much time living in their conceptual worlds they begin to relate to them as absolute reality. Living in a little bubble that the mind creates for itself is not absolute reality. We play like children on the face of this earth an often deadly and inhumane game and just call it reality – whilst all around us whirls an endless Universe that tells us every moment of every day and night, we haven’t got a clue? Excuse me: we don’t even know who we are! People ask: “Who am I – where did I come from – whither do I go – what will happen to me – what am I meant to be doing in my life?” and then the social conditioning kicks in and we chase whatever few golden balls are rolled though the world as though these (according to the formulae given to us by the world) will satisfy. As though ‘society’ knows what we should be doing. Fat chance!

    You can dream up a conceptual system to actuate anything that you want make happen in the physical world, limited only by the reality of natural Law. Fair enough – if you are actually in the driver’s seat, and not intent on harm! However, the big ones like the ‘civilisations’ that come and go; the smaller ones like ‘culture, politics, religion, science and economics’ – are all free wheeling. I don’t mind that at all: anybody who understands remotely the creative process knows that is how it is meant to be. It’s just when somebody gets up an claims to be able to steer the whole she-bang I get concerned. Idiots – and those who believe them are just as foolish! Of course, everybody knows this if you mention it. And that is probably why you can never fully justify the utility and verity of any conceptual world to people at large, regardless of their limited capacity to think things through (or the media’s capacity to manufacture their truth for them). There is however, some touch-stone within all of us that likes or dislikes, accepts or rejects – regardless of so called ‘logic’ – based entirely on feeling. Some things resonate only with a deeper sense of Self, and must invoke feelings of harmony, beauty, joy and clarity in the human heart to be welcomed and accepted. Discrimination through logic is merely conceptual (am not saying logic is not required to drive a bus or make a banana cake)! Is not this dichotomy between the mind/intellect/ego and the human heart the very hearth of the living creative flame that is humanity? We should all feel free to move easily and consciously among conceptual systems.

    There are so many reasonable people on this blog and elsewhere that balk at the idea of the MMT approach to a deficit, whether internal or external. They seem to worry endlessly like Scrooge about monetary (conceptual) issues, rather than focus on the reality of the sustainability, use and distribution of real resources. Human beings are real while the monetary system is not. Many commentators would agree – based on the reality of the touchstone mentioned above; and perhaps in concurrence with some favoured conceptuality as they have constructed it in their minds – to ideals of say essential equity, welfare, education, health, livingness, the rule of law and the regulation of predatory behaviour: yet resist the deconstruction of an ideology that has allowed greed and corruption to flourish dangerously in the world, because of a misconstrued loyalty to the conceptual monetary system as it exists today. There are so many minds present on MMT blogs, far more intelligent than mine (that actually understand the language of economics ) – that could be incredibly creative in their own right if the possibilities and potentials of the reality of creating something anew were more real to them.

    On reflection I think even some of the conceptual adversaries on this blog who often agree, would find even more in common than they note in difference if they simply changed the direction in which they were looking. If you swing a magnet around all the little filings realign themselves to the new polarity quite easily. I don’t know who else there is around except for people that frequent blogs like this that could possibly make a difference – everybody else are media Muppets, or manufactured from the same old neoclassical cookie cutter.

    Good luck to you all!!

    Respectfully,

    jrbarch.

  92. Tom,

    Well, one can certainly come back and say that “point x has been addressed and I am not sure why you are making it an issue” or something similar too that. However, I do not think that sustainability of running trade deficits have been addressed anywhere. Here is a stylized fact – international trade should be balanced. Of course that doesn’t mean that one strives to achieve it every quarter – it is certainly possible that one runs trade deficits for long and in fact the reality is that nations do. However it is not a sustainable strategy.

    I agree with you that the Modern Money economists have never said that the currency won’t devalue. Of course they have never said so. However that is not the end of the story.

    Economics is a difficult science and making generic statements is difficult to make. However, it is an irony that nations in trouble have to pursue an export led strategy. Recognize that. The solution of simply using fiscal policy to fill the output gap won’t work. Again, you can come up with examples of where it has worked but no such generic statements can be made such as “just increase the fiscal stance, imports are benefits”. Those are half-sentences.

  93. With regard to the US importing more than it exports, it seems to me that the sensible view might be that that could be something to be relaxed about if and only if free floating exchange rates with the critical trading partners were in place. China has a peg to the USD so surely MMTers ought to be saying that the situation is not one to relax about. The crucial step in any risk assesment is surely to work back from an unthinkable “hitting the fan” scenario and see how the current situation led to that. Think ahead 10 years and imagine the peg is still in place and China has in place bilateral non-USD trading with all its main non-USA trading partners. All the “global hot money” is held as Chinese currency anticipating the peg being lifted. Then China lifts the peg. Pay of Chinese workers with the new valuation is greater than that of US workers. With the new valuation Chinese GDP is 10x that of the USA. Surely then China would then just swap places with the USA in terms of being the reserve currency. Personaly I’m fairly ambivalent about whether USA or China would make more of a mess of trying to rule the rest of the world. I’m just saying that it seems reasonable to me for USA people to not sit back and relax in the thought that people are still accepting USD for now.

  94. jrbarch,

    “On reflection – it often seems (to me at least) that the focus of a lot of the discussion amongst commentators here misses through oversight and distraction, the essential global MMT tenet – the significance and meaning of access to ‘real sustainable resources’. And the potential of each person to actually effect and be the change, that they themselves would welcome.”

    No I do not miss this, if your comment was meant for me.

    “There are so many reasonable people on this blog and elsewhere that balk at the idea of the MMT approach to a deficit, whether internal or external. They seem to worry endlessly like Scrooge about monetary (conceptual) issues, rather than focus on the reality of the sustainability, use and distribution of real resources.”

    Not me. I think you may be missing out important issues about external trade. Just because of the sectoral balances identity in the case of a closed economy seems to suggest that fiscal deficits are good instead of bad, doesn’t mean that they argument carries over to the case of an open economy. Simply a nation’s government has to run fiscal deficits forever (generic statement, not necessarily every quarter) does not mean that such observations can be carried to the external sector as well.

    Here are two things about sustainability. Neoclassicals argue that government should strive to achieve a “primary surplus” to achieve fiscal sustainability. However, no such requirement is needed. A government need not make a discretionary attempt to achieve a primary surplus. On the other hand, a nation *needs* to take discretionary steps to balance its trade. It may feel confident for a few years to run trade deficits and current account deficits. Nations such as India are confident about these things.

    The discussion about resources etc just changes the topic. I recognize these issues but I seriously believe that there are some points missed out especially if the claim is that: even non-orthodox get this wrong or such a thing.

    I have been writing on this after a good background learning about demand side issues and supply side factors. I honestly believe your comment missed out some issues mentioned above. I wouldn’t recommend that China keep transferring resources to the US – at the same time, I understand what problems it can and has caused the United States itself.

  95. Further to my last comment: As well as a free floating USA-chineseYuan exchange rate, another precondition (to my thinking the USA could relax) would be for the Chinese holding of US-treasuries to be distributed to the Chinese population so that Chinese workers could, if they so wished, live of those rather than by making goods for export to the US.

  96. Sorry if I sound ignorant as I did not read the whole post yet but your point “a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being.” I think pays attention to the fact that the manufacturing industry in developed countries such as Australia and the USA has all but diminished due to the moving of manufacturing activities to less developed countries, so I guess those countries then have to put up with the pollution and lack of well-being. From my perspective consuming would feel better for citizens of this society, but this is making us boring, similar and lacking in creativity. The idea that we all have to buy a car, have a mortgage and dress and act a standard way (off the topic). But I guess that what consumption is to me. Shall keep reading.
    Thanks!

  97. jrbach, everyone I know tells me not cast a thought towards economics and to just leave it to the experts and watch TV instead. I do wonder whether the world would be a better place with just face to face bartering and small tribes hunter gathering. The problem is that if like me you don’t live in a such a society, you have to participate in the financialized global economy however unwittingly. On ballance it seems to me better to at least make some attempt to struggle to understand what one is taking part in. Many Germans in the 1930’s just went with the flow and didn’t ask questions after all.

  98. Dear Ramanan (at 2010/09/12 at 18:02)

    You said:

    On the other hand, a nation *needs* to take discretionary steps to balance its trade. It may feel confident for a few years to run trade deficits and current account deficits. Nations such as India are confident about these things.

    Since modern National Accounting data has been recorded in Australia (Sept-1959) the current account has been in surplus 8 times out of 198 quarters and never since September 1973. Therefore never (and increasingly never in the floating exchange rate period). So we never achieve a balance and yet our material standard of living has continued to increase since that time subject to the major domestic recessions (which were not trade originated).

    That is more than a “few years”.

    Further, the idea that governments have kept things stable because they have contracted when the external balance has expanded is not borne out by the evidence.

    Your obsession with this is patently at odds with the data of a small open economy such as my own which has had some very sharp and substantial terms of trade shocks during this period – always reversed in due course.

    MMT tells you that if the exchange rate is floating the government can always use fiscal policy to maximise domestic potential subject to real resource constraints. You are trying to say it goes further than that and pretends to deny the business cycle and/or deny that the private sector can never get into serious trouble. Clearly, the private sector solvency is at risk if there is foreign currency-denominated debt involved and export performance fails.

    But even in that situation (unless there is an absolute shortage of food – which I have specifically address in several blogs) a sovereign government can keep everyone employed and economic activity high if it so chooses. It can also orient spending to domestic activities which substitute for traded-goods and thus take the pressure of the external situation that the failing private sector behaviour has generated.

    best wishes
    bill

  99. “Currencies can be converted nearly instantaneously, and most exporters do just that, unless they are importers, too, and have an immediate need to use that currency.”

    Only at micro level. I’m talking macro ‘in aggregate’.

    I’m suggesting that when dealing with the ‘Zimbabwe’ type nations the currency of the exporter would dominate ‘in aggregate’, but with the US the currency of the importer would dominate ‘in aggregate’.

  100. Tom Hickey, about the idea that scarcity of capital is neccessary in order to lead to it being used for allocating resources in a way that is productive for the real economy:- We both agree that money needs to be dished out to potential consumers, our only disagreement is whether it is ok for money to accumulate as wealth (the MMT position) or not. Imagine a situation with a stockmarket that pays out 12% dividends and there is no spare money available to inflate the stock prices. In such a situation the companies would still be able to work just fine. That was normal in the US in the 1960’s when real reconstruction and growth was occuring. Those investing in the stockmarket would do so on the basis of the long term real earning potential of the individual stocks. Imagine dumping of huge glut of money into such a set up. The stocks would inflate on the hope that they would continue to inflate. The underlying earning potential of each individual company would become lost amongst the stochastic noise of price volatility. Instead of employing analysts who understood the business of the companies, investment would be based on algoriths that could exploit the stochastic price volatility. Only the most advanced investors could do that, the dumb money would get put in index tracker funds. Once all the money was either in index trackers or in elite high frequency trading then the index trackers would just dumbly follow trends kicked off by the traders in order that the traders could harvest money from them. Basically it would have degenerated into a situation where the stockmarket was providing no role of any use to the economy. We are already pretty close to that now surely?

  101. Further to my above comment, in order to get inovative new technologies to market what is needed is patient capital not more capital. What is needed is for venture capitalists to put in $1M a year for ten years so as to at the end have a $100M company. Having a glut of capital does not lead to patient capital. A glut of capital actually of itself creates distracting get rich quick speculation opertunities due to asset price volatility.

  102. Dear Bill,

    In giving that example, you are making a statement that external debt doesn’t matter (even if denominated in the domestic currency). Right now the external debt is 56.2% ? Your strategy will just make this number grow higher and higher. However by saying that one shouldn’t worry about ratios, and that resources are important, you are avoiding talking of this altogether. How far can this number grow – 100%, 200%, 300% ? No limits on this ? Any mechanism to keep this number under control ? As far as I know net exports are the only way to bring any reversal. A miraculous way of this happening is if foreign assets start earning a lot or if a devaluation of the currency by market forces leads to the negative income from abroad easing. The latter cannot be guaranteed to happen – at least for other nations.

    Ref_http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/8B5A531B6E67B9E7CA25778F001F5BAF/$File/53020_jun%202010.pdf tables 37 and 39.

    Also you are comparing two situations – a non-full-employment targeting government and a full employment targeting. The data set you are providing to prove something is for the former. You are proposing the latter using a data set where the fiscal policy is of the former type. I understand that you say that “Further, the idea that governments have kept things stable because they have contracted when the external balance has expanded is not borne out by the evidence.” but Australia seems to be governed by strong fiscal hawks!

    The statistical information can equally be used against what you are saying. For example, one could say that the budget has been in surplus quite a lot and no sky has fallen yet. The private balance has been negative for a long time – surely no cause for concern. Of course I myself won’t make such arguments – just pointing out to the usage of statistics.

    Quote:”You are trying to say it goes further than that and pretends to deny the business cycle and/or deny that the private sector can never get into serious trouble.”

    No didn’t say that. Just pointing out that fiscal policy is useful as long as the external sector permits it to be useful. However, relying on creditors is a dangerous strategy – exports can do the job more easily.

    I also fully understand the complex ways foreign exchange moves. For example, in the case of Australia, if there is an expansion, foreigners may rush in to purchase equities causing the currency to appreciate. However such movements hide the detailed mechanism underlying growth and its relation to the external world.

  103. Ramanan,

    An external imbalance is sustainable and can grow forever, provided that its growth rate doesn’t permanently exceed the growth rate of the domestic economy.

    That’s a lot of room in terms of current account manoeuvrability.

  104. P.S.

    There is no corresponding upper limit on stocks ratios – the constraint is on relative flows in what is effectively an infinite series of flows.

  105. JKH,

    I agree that there is a lot of room for maneuver.

    So there is some talk of ratios here which is a great thing.

    The only answer I know from PKE literature is that stock-flow norms – the ratios are within limits. Of course, in the real world, they move in all directions – and why not, the world is full of uncertainty. Of course that is a hypothesis and you can say that you don’t believe in them which is a fair point. Of course nations can do a concerted effort to take the norms to a higher level.

    The point about external imbalance is that if discretionary attempts are not made, the numbers diverge from one another.

    Let us take your example – if the external debt is just $1, it can grow faster than the growth rate of the domestic economy surely. So the absolute value of the external debt also matters.

    Also remember, a fiscal expansion done without less attention to exports policy will lead to higher current account deficits. This is because it is a reasonable assumption that imports depend on the incomes – proportionately. Exports depend on the demand in the external world. A fiscal expansion improves domestic demand but leads to higher imbalances.

    Any reference for your rule of thumb? Which number’s growth are you talking ?

  106. Also remember, the good thing about PKE is the emphasis on endogeneity of things such as public debt, deficits etc. So one has to be careful about not assuming something like the fiscal deficit is 3% in rules of thumb. If the current account deficit is 5%, this requires at least 5% of fiscal deficits and if one is not worried about exports, the fiscal deficit keeps growing because of interest payments. So one has to be careful.

  107. Ramanan at 9/12 17:41: Here is a stylized fact – international trade should be balanced.

    Exactly. This is what I have been saying, perhaps not clearly enough by saying that this is essentially a demand problem, which, I think, is what MMT is saying. The reason there is imbalance in world trade is because of mismatches and these mismatches result from demand/income deficiencies. Ideally, all countries and regions would be operating on a par and trading on that basis. However, the present state of the world is nowhere close to that, so there are horrible consequences of some mismatches, even starvation, in spite of huge global overcapacity. The problem is not supply; it is distribution, and that is a deficiency of effective demand. Remember, economics, according to MMT, is about real resources and their uses.

    “Money” is just a way of facilitating distribution (medium of exchange) and keeping score (unit of account), as well as storing effective demand (stor of value) and drawing forward effective demand (debt). Money has no intrinsic value beyond its economic use. It is just a token for real resources through which claims on real resources are represented. In an ideal society, which one would hope the global economy would underpin materially, real resources would be distributed justly and used sustainably to promote the survival and progress of humanity as a species conscious of itself and its destiny, and to cultivate its ecological home.

    My point is that we are entering the era of globalism, including the development of a global economy. The globalized world is going to reflect the economic infrastructure (institutions) on which material living is based. According to MMT as I understand it, the emphasis needs to be on creating sustainable and distributed demand/income in order to clear the present overcapacity that results in cycles of boom and bust, as well as to redefine the role of finance so that it serves productive investment instead of rent-seeking, which is prone to instability due ro excess leverage, as Minsky observed.

    My quibble with your criticism of MMT is that you seem to take some statements as absolutes, and unfortunately, sometimes it may seem that they are make with that intention. But when economists do that, they are usually implying ceteris paribus, or some such qualifier. No economist would claim that that a nation can be profligate and not suffer eventual consequences either through inflation or devaluation. No economist would rule out unanticipated consequences of external shock, either. The point is that MMT shows how to avoid this and also how to correct it, should it happen, without erring on the other side either.

    For example, while it is clear that “too much money chasing too few goods” is correct, it is only correct under very specific circumstances and it can be corrected in that case by reducing excess demand through fiscal policy, as MMT points out. On the other hand, people who understand “too much money chasing too few goods” as evidence that deficit spending is always economically undesirable are needlessly restricting demand when it is lagging and needs to be bolstered.

    The situation with fx is similar. Devaluation is an extreme case, and concern about it when there is not threat of it is as ill-advised as refusing to use a budgetary deficit to increase demand in the face of persistent disinflation that threatens deflation (as presently in the US). So too, in the US, concern about the trade deficit with China is a canard. It is, in fact, exactly what the US should be doing, and the developed world should be doing this with the emerging world as long as developing nations need to build a domestic economy with adequate domestic demand. However, instead of looking at this in the long view and the big picture of building the global economy, nations strive for advantage. That is where the mismatches and dislocations occur that lead, e.g., to currency problems. Imbalances are not always “bad” in themselves. They have to be looked at in light of conditions and objectives. For instance, if the US were to tighten domestically and seek to decrease the CAD, this could have deleterious effects not only domestically but also for the world economy without the GFC being unwound (which it is not).

    Some people think categorically that all debt is “bad.” Well, unless they are wealthy, they will likely never own a house and will be driving the same car until it fails and then buying another clunker. The reality is that taking on debt one cannot afford is a bad choice, which means having a buffer. Does that mean that bankruptcy is out of the question? Of course not. There is still the possibility of an unanticipated shock like a serious illness or natural disaster. While this is an imperfect analogy for the global economy, it illustrates the folly of categorical thinking. I don’t see MMT’ers doing that, but I do see others doing it.

  108. @ stone on 9/12 at 19:19: We both agree that money needs to be dished out to potential consumers, our only disagreement is whether it is ok for money to accumulate as wealth (the MMT position) or not.

    If I led to you to think that this is my position it is not, although this requires a clearer specification of “wealth.” One cannot logically be opposed to “wealth” in a capitalistic economy, but one can be opposed to wealth accumulation that is non-productive and non-contributory, and which amounts to capital sequestration. I am opposed to the latter, as I believe MMT is also. The world doesn’t lack adequate effective demand owing to lack of wealth or capital. There is plenty. It is just not being used efficiently and effectively. It is basically a distributive problem.

    MMT incorporates Minskian views about “financialism,” which includes the views of Michael Hudson that I have been citing. It is “rentierism” (rent-seeking) that results in accumulations of wealth that serve no useful purpose. Without land rent, monopoly rent, and financial rent, along with the political corruption involved in establishing the institutions that support this, finance would serve productive investment, which would produce incomes that would support demand for supply produced at full capacity. When this is not happening, it is due to some leakage into non-productive accumulation. MMT is opposed to such non-productive uses and would seek to end them. However, this involves not only economics but politics. There are obviously many powerful vested interested standing in the way of such reform. There are a lot of Midas’s out there and right now they are in control of the political process.

  110. Tom Hickey, I find unfathonable the MMT dual position of being relaxed about creating a ballooning glut of wealth (as that is what running long term deficits equates to) and yet having a grand sweeping condemnation of “rent seeking”. What exactly do the MMTers propose should happen to the wealth? I believe that there should be a fixed amount of wealth that is in limited supply and so is fully occupied in constructive investment. You say “One cannot logically be opposed to “wealth” in a capitalistic economy, “-I am not opposed to wealth I am just saying that it needs to be of a fixed amount. Gold bugs say gold should be the only currency. They are advocating a fixed amount of wealth just as I am. I’ve never heard gold bugs being accused of being opposed to wealth. Until MMTers put forward a coherant proposal as to how they hope to constrain a ballooning glut of wealth in a functioning economy, I’ll continue to wring my hands about the seeming folly of the whole idea (to me at least). Bill has put forward some very good recomendations for bank reform on this site but they don’t at first sight seem to constitute a way of coping with a situation where the amount of wealth is constantly expanding. What seems worse to me is that the MMTers seem to not be saying “put in place adequate safe guards then run a deficit”. Instead they seem to be saying “there clearly are no safeguards but run the deficits regardless”. My primary objection to expanding the total stock of wealth is a practical one in that it deranges the capitalist system. However I also have some other feelings that it somehow runs counter to ideals of transparency, honesty and respect for others. To me honesty means having a money system that is comprehesible to everyone partaking in it. Expanding the total stock of wealth seems to me deceitful. I believe the more comprehesible a money system is, the less prone it is to malign manipulation. My impression is that the workings of the expanding fiat money system are fully understood and exploited by elite speculators who pull all the strings and then put out nonsense in the press that you guys point out is nonsense. I have yet to comprehend why MMTers want to expand private wealth. My only grasp on this is that somehow MMTers want people to strive to accumulate wealth and MMTers believe that in so striving people will be “better citizens”. I think people should decide for themselves what kind of citizens they choose to be and if money comes into the equation then it needs to be comprehensible in order for them to make a reasoned decision. I think it needs to be understood by everyone that the price of a loaf of bread used to have the potential to earn them a certain amount of income if invested but that ratio is in constant errosion due to the expanding fiat currency hence they might as well vote for a system that takes the wealth off them or else not let money determine what they do to such an extent even if that means them not building up wealth.

  111. stone, I think you are just dreaming if you think that limiting the amount of wealth will alter distribution and use. It never has historically, and there is no reason to believe it will now. In a rigged game, the house always wins, no matter how much or little is on the table. The solution is not decreasing the amount of money but leveling the playing field.

    Conversely, MMT proposes reforming the system by removing perverse incentives, cheating, etc., and taxing away non-productive accumulation, while incentivizing productive investment that increases productivity and also sharing of the productivity gains with worker.

    We don’t have a wealth problem. We have a demand problem. It arises from inadequate income relative to capacity that results in oversupply, which manifests as excess inventory, signaling businesses to cut back, thereby reducing income, hence effective demand, consequently recession and rising unemployment. Or else workers are induced to borrow in order to sustain their lifestyle, and since this is unsustainable, there is a bust as more and more debt cannot be serviced.

    The wealth problem, if there is one, is that wealth accumulates at the top and is spent on asset acquisition and commodity speculation, which are non-productive. Moreover, this accumulation at the top creates a deficiency of demand at the middle and bottom. The solution is not less wealth but more equal distribution, so that output at full capacity can be purchased and productive investment can spur the economic growth necessary to match population growth.

    You don’t seem to want to go back to gold. After all, the gold standard did not prevent the Great Depression. So what do you propose? Right now you are just ranting about your idea of MMT’ers “wanting to expand private wealth,” which is not accurate.

  112. Tom,

    “MMT proposes reforming the system by removing perverse incentives, cheating, etc., and taxing away non-productive accumulation, ”

    I’m not sure MMT does at all.

    MMT is just a consistent description of the way monetary systems work – particularly fiat monetary systems. The theory doesn’t suggest any political position.

    IMHO what it does is provide the theoretical backing to a simple proposition – the “we can’t afford it” argument is baloney.

    Beyond that you can implement any political structure you like with it. For example putting a slightly warped head on, you could argue that rounding up the unemployed and forcing them through gas chambers is entirely consistent with MMT, since it eliminates the drain on real resources from the feckless and idle and stops their uncontrolled breeding. That leaves more available for the productive members of society. And you can always afford to build the gas chambers since the state is not financially constrained…

  113. Tom, to my mind when you say it is just a distributional problem you are talking about the distribution between savings/investments/assets versus wages/consumer prices. That is the same thing I’m talking about. Clearly if wages/consumer prices and savings/investments/assets were in unison all increased by 10x (with debts and credits too) then nothing would change. It is the ratio between wages/consumer prices versus savings/investments/assets that gets out of whack when deficit spending is on purpose set at a level that fails to increase wages/consumer prices as fast as savings/investments/assets.
    Neil Wilson, I take your point about MMT being a description of the workings not the aims. I would understand that if all Bill’s blogs were celebrating the glorious ascendancy of Goldman Sachs to total world domination. Bill’s blogs are not and that is what leaves me scratching my head.
    I really appreciate all the help I have been given by you guys in my trying to understand MMT but I’ve promised my other half not to look at economics stuff on the web again 🙂 so I’m going to leave you in peace!

  114. Neil on 9/13 at 16:54

    I’m not sure MMT does at all. MMT is just a consistent description of the way monetary systems work – particularly fiat monetary systems. The theory doesn’t suggest any political position.

    I don’t think that is quite correct, Neil. MMT does “consistent description of the way monetary systems work,” but Bill, among other MMT’ers has made clear that MMT is NOT “just” a consistent description of the way monetary systems works. If you read MMT’ers, their thought is broader than that, and often includes policy options and proposals. MMT is a macro theory, in addition to being an operational description of monetary systems. Macro theories make predications in addition to explaining, and they therefore have policy implications. Moreover, at least some MMT’ers are in the Minsky camp (Randy Wray was a student of Minsky), are well aware of financialization and financial instability, and propose corrections to the present system, based on MMT.

    I should add that there are people on the right that fully understand the MMT operational description of the present monetary system and use it for their own purposes, although disingenuously not letting on. It would not be correct to call them MMT’ers, however, since they have contributed nothing to the literature that represents MMT and which defines MMT.

  115. stone: It is the ratio between wages/consumer prices versus savings/investments/assets that gets out of whack when deficit spending is on purpose set at a level that fails to increase wages/consumer prices as fast as savings/investments/assets.

    If treating recessions with deficits were all there were to MMT, I would agree that such a proposal would just perpetuate a broken system. But that is just one aspect of MMT. In the end, the fiscal injections just funnel toward the top and also funnel externally through hard pressed nationals purchasing cheap imports right off the bat. MMT’ers are aware of these criticisms and have addressed them through taxing away rents in the case of non-productive wealth accumulation that threatens asset bid-up. Warren Mosler has proposed financial reform here. Regarding the external situation, Marshall Auerback just wrote a scathing article addressing China as a renegade nation here.

  116. “If you read MMT’ers, their thought is broader than that,”

    I’m sure they are. That’s why they investigated the issue. But I would disagree that MMT is about that.

    For example it is consistent with MMT to provide as much money as is required to prosecute the war in Afghanistan and ‘finish the job’. “We can’t afford it” isn’t a valid excuse. You need a different political reason for not pressing ahead.

    The nature of fiat money systems can be used for any political system. It would be a myth to suggest that adopting it will somehow lead to a progressive utopia. It gives just as much firepower to the opposite view because MMT is ‘how the money system works’.

    Separate from that is the argument ‘and given that, we can do this, which is a great idea for these reasons…’.

    NeilW

  117. Neil, check out this statement of purpose just posted at New Economic Perspectives, a key MMT blog.

    This website offers policy advice and economic analysis from a group of professional economists at the University of Missouri-Kansas City. We created this site in order to weigh in on the serious challenges facing the global economy today. We aim to provide an accurate description of the cause(s) of the current meltdown as well as some fresh ideas about how Congress, the U.S. Treasury and the Federal Reserve should respond. Our approach, which has been dubbed “The Kansas City School,” builds on the work of Abba P. Lerner, John Maynard Keynes and Hyman P. Minsky. Above all, we are careful to provide analyses and policy recommendations that are applicable under a modern, fiat money system.

    http://neweconomicperspectives.blogspot.com/2010/08/about-site.html

    Nothing is even mentioned about the operation description of monetary systems, and a lot of what is published there is policy oriented.

    See also Bill’s Modern Monetary Theory – a personal note for his take on this.

    James K. Galbraith’s recent Thoughts on a Plan B presents a broad policy proposal from the MMT side.

  118. Dear Ramanan @ Sep12 18:02,

    Please feel at ease! I would count you definitively as one of the ‘reasonable people’ commenting on this blog. This is because I know that human beings come in many layers; the more layers that come off the more interesting people become. I don’t think we really understand just how beautiful a being each person actually is. I try not to get caught up in conceptual layers. It is this layering shining through the creative writings of leaders in the MMT camp that I find interesting and enjoy!

    Speaking of a conceptual world most of us would have agreed (long ago when we lived in caves and wore bear-skins ) that the sky was blue and the earth green. It took a little while longer to work out where the rain came from. The important point was that the concepts matched reality. Intellection was used to discriminate between the real and the imagined, thereby deepening understanding. The trick was concentration followed by contemplation. The mind is inherently mercurial, and not as disciplined as we would like it to be: the trick is always to slow it right down, building on thoughts carefully and sequentially, always checking the imperial evidence. Then our conceptual world may reflect some temporal (temporary) or inner reality. For example, the neoclassical conceptual world is more the marriage of greed, misuse of power, and faulty intellection; rather than pure thought (which can only arise from altruistic ‘feeling’).

    If one truly desires to follow the development of MMT thought then such a study is warranted. You have to accord to the original thinkers in the field starting out (20 years ago?) the same capacity for intellection and integrity in motive as you possess. They would dearly love to find something new, conceptually useful, and temporally backed by evidence. Their work is important to them. They are also incredibly helpful with people who are genuinely trying to understand their conceptual edifice, and naturally defend it if under attack. Genuine points of inquiry or debate they often relish, time permitting; or previous coverage extant.

    I don’t really doubt people’s essential mental integrity (because of the layers). Obviously however, many just like crossing conceptual swords for the sake of battle and they are rightfully ignored as time wasters. If you are getting answers then you are respected. I do think in general, commentators need to become more skilled at asking the right questions, providing evidence, and doing their homework.

    May your conceptual world delight and inspire you Ramanan. When you walk in somebody else’s garden, to see it through their own eyes is just as enlightening as to see it through your own. Sat chit anand!

    Cheers …

    jrbarch

  119. Re: “Three nations defied these laws – Australia, Canada and New Zealand – which became and stayed rich by exploiting agriculture and primary commodities in general. That is a strong lesson which is normally ignored.”

    What should have happened in so much of the colonial world, esp. Africa and L. America. Instead, comprador elites sold out their countries to the industrial North and thus created in their countries “islands of wealth in oceans of poverty.” Corruption and Kleptocracy are at the core of third world poverty, since it is that which allowed the looting and pillaging of these lands by the great foreign companies supported by their own governments.

  120. Just a note: the “commissioned report” Bill provides a link to (“In a Commissioned Report that I co-authored modelling the transitions away from coal-fired power to renewables, we noted that a just transition policy recognises that people and ecology are both important.”) is password locked and cannot be downloaded.

  122. Tom Hickey: you say: “MMT’ers are aware of these criticisms and have addressed them through taxing away rents in the case of non-productive wealth accumulation that threatens asset bid-up.” All I’m saying is that in order to be sufficient to prevent a worsening of financialization, such taxes need (over the global economy as a whole) to be equivalent to the money spent by governments (ie budgets need to balance over the business cycle globally to limit financialization). I’m breaking a promise by looking at this type of website 🙂

  123. Frankly, I’m disappointed with this post.

    I will refer here exclusively to the part of Prof. Mitchell’s argument supported on the report
    “Innovation and Job Creation in a Global Economy”.

    It is unwarranted to conclude with the authors of the report that:

    “They found that in 2006, iPod’s ‘accounted for about 41,000 jobs worldwide’ (27,000 outside the US). The ‘offshore jobs are mostly in lowwage manufacturing, while the jobs in the U.S. are more evenly divided between high wage engineers and managers and lower wage retail and non-professional workers’.”

    As the figures contained in the report are mere estimates, based on questionable assumptions.

    More details at
    http://aussiemagpie.blogspot.com/2010/09/despairing-progressively-ii.html

  124. @ stone on 9/14 at 20:21

    Yes, progressive taxation as well as targeted taxation would have to be high unless the funneling up is reduced through some other means, such as reformed incentives. The top bracket in the US has been up to 90% and the rich didn’t go bust and the incentive for them to earn and contribute did not plummet, either. But with selective taxation of rents – land rent and monopoly rent as well as financial rent – a lot of the problem could be resolved. Reasonable gain from productive investment in sustainable innovation is not the problem, and it can be reasonably rewarded as an incentive. It’s not wealth per se that is problematic, but how it is distributed and used.

    However, as Ravi Batra observes in The New Golden Age: The Coming Revolution Against Political Corruption and Economic Chaos, the principal economic problems are not economic per se. Rather, they arise from corruption, which he finds endemic. This ties in with Jorge’s post of 9/14 at 9:03, but it is not only limited to exploitation of underdeveloped regions by the elite of the developed regions. These elites are ripping off everyone they can get their hands on and are always trying to extend their reach. This goes by the name of neoliberalism, neo-imperialism (aka neoconservatism) and neocolonialism among critics from the left (like me). Because it is not simply an economic problem, Batra contends that it will take a global revolution to correct it and he sees this in the cards. Marx may turn out to have been essentially correct after all, even though Batra is not writing from a Marxian perspective.

    From the Wikipedia entry on Batra:

    Batra rejects the basic foundations of materialist economics, including the need to consume and acquire without limit, as well as the premise that the saving of capitalists promotes the greater good through investment, itself the penultimate justification for allowing inequality to exist. Instead, Batra promotes raising the incomes of people with the sole purpose to increase their consumption, but in a balanced and sustainable way-in harmony with nature, each other and other life forms. An equitable distribution is not seen as a means to only ensure material welfare but also to secure the ability of all to develop a full personality. This is an integral part of Sarkar’s practical theory of PROUT-PROgressive Utilization Theory.

    Batra is a follower of the Indian spiritual leader P.R. Sarkar (1921-1990) aka Shri Shri Anandamurti, the founder of Ananda Marga (Path of Bliss). Recent spiritual luminaries have also predicted a new “golden age” (Sat Yuga) after the travail of a “phase transition” during which selfishness will be replaced by altruism as dominant. Notable examples include Avatar Meher Baba (1894-1969), Maharishi Mahesh Yogi (1914-2008) and Sant Kirpal Singh (1894-1974). So maybe there’s hope for us yet. 🙂

  125. @ stone
    Here is a brief article by Michael Hudson showing how taxing land rent solves the infrastructure problem, whereas the present system of infrastructure “stimulus” shovels wealth to the top and preys on the public through increased costs. This is what I am talking about.

  126. Quote: “My naive impression of the Thai 1997 crisis was that the peg to the USD was what enabled the hedge funds to mount the speculative attack http://en.wikipedia.org/wiki/Thai_baht. I thought that the peg was only dropped after the speculative attack was impossible to withstand (as with UK coming off the ERM on black wednesday).”

    The Asian crisis started after the Thai government decided not to defend their currency i.e. leave it pegged and that started a huge chain reaction that destroyed many currencies including ones that were floating such as the rupiah. The fact is that none of the speculative attacks could have taken place without a global floating rate system. There was no George Soros during Breton Woods because such operations were banned under the treaty rules for bank transfers.

    Quote: “Septus7, I reread your comment-are you advocating a return to the Bretton Woods gold backed USD system? ”

    No, I don’t believe in “backing” a currency because a currency is backed by the physical economy of the nation and taxes. I am suggesting a system that has never been tried namely a fixed parity fiat. Exchange rates are not allowed to bid upon but are decided according the rules specified according to treaty. The paradox you mentioned wouldn’t happen in my system. My system is like MMT except we only float when we restructure if an imbalance occurs due to some error and then we get back to peg ASAP. We don’t allow speculation so we don’t have to hedge because we have long term development credit agreements.

    Quote: “Working in agriculture can be very creative imo, same for architecture, building and construction, arts, food service, infrastructure, healing, etc, There are many ways for us to satisfy our creative desires without exporting necessarily no?.”

    Who said anything about exporting? I believe in a manufacturing base for domestic consumption not exporting. China’s big mistake was overbuilding export capacity at the expensive of domestic consumption by driving down internal demand. Now, they are locked into Chinamerica and because American leadership is about as good the French military in WWII they are stuck with our depression almost much we are.

    On subject of the creativity, I am not referring to some novelty but rather creativity in the scientific sense where the discovery of scientific principles by the imagination allow for man to transform matter to his purposes without the culture of physical production i.e. manufacturing. The culture that says in order to have it I must work for it creates a sense of value human being have in that they can change their capacity to work i.e. if work is valuable then working better is more valuable and the culture of improvement breeds imagination which is basis of the real economy.

    What we needed to do and I’ve been saying this since 2008 is to issues 1 trillion of credit yearly for a “great project” infrastructure (Transcontinental Maglev, or NAWAPA, 2000 Public Hospitals) and CCCs for jobs and we have domestic manufacturing produce the trains, the lifts, the power plants. We can export after we have build up excess capacity for core infrastructure and consumption domestically. We simply go back to the American system see http://en.wikipedia.org/wiki/American_System_%28economic_plan%29
    My only problem with MMT is floating rates and Keynes idea that consumption is all there is to man’s economy. Keynes idea comes from British Imperial doctrines described by Jeremy Bentham and are against any classical understanding of a sovereign republic. I suggest you read Michael Hudson’s book “America’s Protectionist Takeoff” and the writings surveyed. It will open an entire new world of economics to you.

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