It is my Friday Lay Day blog and it is going to be relatively quick. There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it…
It is my Friday lay day and that means brevity, even if that is a relative concept. I have received several E-mails lately about claims that Modern Monetary Theory (MMT) economists are zealots who overstate their case and are nothing much more than Keynesians with some fancy jargon. It is lovely how complete strangers feel it is their place to write abusive E-mails to you as if you are some sort of inanimate object. But that is not the point here. Several of these E-mails noted that a prominent Australian economist had largely dismissed MMT, despite his progressive leanings, because “it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes”. Apparently, this criticism was made in the context of the Russian problems at present, which I may or may not deal with in another blog, depending on whether I get time to research a few things. The Russian situation is not central to my research at present and I do not have a lot of time to really delve into it. But what about this “long run” failing of MMT?
First, in relation to Russia or any other nation that is suffering problems that come from its external sector I say the following. MMT is not a religion. It is not a panacea. It is not a policy code. It is not a solution.
MMT is a way of thinking about modern monetary systems. I am currently working on a new book which will trace the evolution of MMT – its antecedents (the shoulders the current proponents have stood on) and where it differs, say from the Keynesian thinking that was dominant in the Post WWII period up until the mid- to late 1970s. It will be published by Edward Elgar in late 2015 and is progressing well.
MMT provides an organising framework for understanding the possibilities available to a currency-issuing government and the limitations that a currency-using government (such as a Member State of the Eurozone) faces. It allows us to understand in a deeply-grained way, the relationships between the treasury and the central bank and the relationship between the government sector in aggregate and the non-government sector.
No ‘Keynesian’ literature up until the 1990s (or beyond for that matter) provides the level of granularity that the MMT literature that we have developed over the last 20 years provides. But all that will come out in the book.
A common misconception seen in the derivative literature on MMT (which is dominated these days by blogs, social media pages and tweets) seems to think that MMT says that currency-issuing governments are omnipotent and can solve any crisis just by spending. None of the main proponents of MMT over the last 2 decades has ever made statements to justify such a view.
A nation that has a narrow industrial base, has one dominant source of export revenue (for example, oil) which experiences significant price volatility, and relies on imported food faces significant real constraints if the export revenue collapses.
Then superimpose politically-motivated embargoes on that nation’s ability to import goods and services and the situation becomes highly problematic.
Even if that nation’s government issues its own currency, all that means is that it can buy and bring into productive use any real good and service that is for sale in the currency it issues.
It cannot buy imports that are for sale in another currency. It cannot set the terms that govern the exchange of its own currency and other currencies it might need to buy those imports.
Such a nation then may turn out to be very poor in material terms if its export revenue fails and the currency-issuing government cannot easily expand the real resources available to alter that state. The government can only ensure that all the real resources it can purchase are being used to their maximum, if that is a desirable outcome. But that is the limit of its currency-issuing capacity.
A nation with limited real resources has limited prospects for material welfare. That is the fact. The constraint is real and the infinite financial capacity the government might have in its own currency cannot alter that.
Modern Monetary Theory (MMT) provides no further understanding than that in these sorts of cases.
And what about the claim that “in the long run, public expenditure is paid for by taxes”? The concept of a ‘long-run’ is very mainstream for an economist to invoke and progressive economists should use the term (and underlying concept) guardedly (preferably not at all).
I discussed the mainstream notion of the long-run in this blog – The spurious distinction between the short- and long-run.
The late Polish economist Michał Kalecki, a contemporary of Keynes and who developed an understanding of how the economic cycle works in much more detail and richness than that presented by Keynes in his General Theory, rejected the notion of a long-run.
He was arguing against the classical/neo-classical notion that such a long-run state can be conceptualised where equilibrium rules and the ‘true’ nature of relationships are revealed including the ineffectiveness of government policy to alter the real outcomes that the market produces.
Any discussion of the long-run in Kalecki’s work contains no notion that the long-run is a steady-state attractor (that is, a (natural) point that the macroeconomy gravitates to when imperfections are eliminated).
Kalecki’s notion of the long-run bore no insinuation of “equilibrium” (competitive equalisation of rates of profit; realised expectations; full employment).
In effect, while his position shifted (in nuances) throughout his life, Kalecki rejected the mainstream view that there was a state we might call the long-run, which was separable from the economic cycle.
In fact, the long run trend is but a slowly changing component of a chain of short run situations; it has no independent entity …
That is the long-run is just a sequence of short-runs. And that these short-runs are all linked by path-determinancy – so you are today where you have come from. Effective demand (with investment as a major variable component) drives output and employment, but, in turn, influences investment (through expectations and profit realisation), which determines the path of potential output.
But it seems that this MMT critic wants to hang on to the notion of a definable long-run. I hope that this economist announces to the world when we get there!!
A tax is a particular policy tool. What MMT demonstrates is that it is one way in which fiscal policy can reduce the net worth of the non-government sector.
The transactions (building on yesterday’s blog – Central banks can sometimes generate higher inflation) – that accompany a tax payment are as follows:
1. The individual being taxed experiences a reduction in their bank deposit accounts and an equal decline in their net financial worth as a consequence.
2. The bank where the individual’s account is located reduces the individual’s deposits as it reduces its reserves.
3. The central bank, on behalf of the treasury, reduces private bank reserves and credits the treasury tax account (which, conceptually, for a currency-issuing government is intrinsically a rubbish bin!).
So tax revenue has specific meaning in terms of its effects on non-government net worth. Recall, that if the treasury issues a bond to match a fiscal deficit, the transactions that accompany that operation do not result in any reduction in non-government net worth – the individual purchaser of the bond experiences a reduction in bank deposits (asset loss) but an equal gain in bonds (asset gain). The operation is thus a change in the composition of non-government financial assets.
In that sense, a bond issue is a fundamentally different type of operation than a tax.
Further, if the central bank was to purchase the treasury debt then it just credits one account held by treasury (cash) and debits another (bond liabilities) and that is all there is too it. A shift in accounts within the government sector.
Neither operation (relating to bond issuance) is like a tax and so it would be misleading to claim that they represent a tax.
From – Table 1.1-Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2019 – we can get a pretty good idea of what has happened over a very long historical period.
Here is a graph of the difference between cumulative tax revenue and cumulative federal spending in the US since 1789. The US started to run fiscal deficits systematically in 1931 and since then has run deficits 85 per cent of the time. Every time they had tried to run surpluses a recession has followed.
Note the gap widens after the early 1970s, which of course is when the Bretton Woods system of convertible currencies and fixed exchange rates was abandoned and the US government adopted a fiat currency system.
It seems that public spending is not paid for by taxes over a long period of time. Funny about that!
I could write a lot more but today is my lay day! So that is it.
The US has finally abandoned its ridiculous policy towards Cuba, although probably for the wrong reasons given that the US President claims they are acting “because it will spur change among the people of Cuba, and that is our main objective”.
As if the US has any legitimate claims to be the model that other nations might wish to follow. But that is another discussion.
Ry Cooder, one American who defied the US boycotts to record in Havana in 1997 gave an interview to Time Magazine this week (December 17, 2014) – Cuba Decision ‘Is What We’ve Been Hoping Obama Would Do’.
Our leading export is this myth of democracy we have. That’s the leading edge of our export efforts. So how can we say to the American people, You can’t do it? The people will go when they want to go! A lot of people went. It’s a trend, a tendency, something that can’t be stopped. The more people want to join up with other people-Pete Seeger suggested that music was a bridge between classes. He used folk music as a bridge because it’s common to people and it’s easy to learn. He could have people singing together within five minutes. And I’ve seen that happen many times, but never so graphically as within this Buena Vista thing. You may be afraid of Cuba. Are you afraid of Rubén González when he plays the piano? No? Well that’s one less thing you’re afraid of.
The next step is (as Ry Cooder notes) for the US to “get rid of Guántanamo” and prosecute all the CIA torturers and politicians that let them get away with those human rights abuses.
Anyway, the changes will probably make things better for the Cuban people so to celebrate that here is my song for today from The Buena Vista Social Club – Candela (Fire).
You can groove to the double bass alone much less the rest of it.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2014 Bill Mitchell. All Rights Reserved.