Post Brexit UK is seeing higher skilled labour entering from non-EU countries to support a range of services (public and other) – success
It's Wednesday and so before we get to the music segment we have time to…
It is Wednesday and so I am only writing a few thoughts today for the blog, preferring to spend the day writing other more detailed academic material and doing final edits on our next Modern Monetary Theory (MMT) textbook (current publication date with Macmillan, November 2018). But I wanted to briefly reflect on the discussions over the last week about trade which seem to have sparked some emotion and disagreement. In particular, there has been a lot of misrepresentation of the MMT position and also a lot of mistaken reasoning. After that I will go back to listening to some post minimalist piano music.
MMT economists are not unique in their focus on real things rather than nominal things, although we certainly differ from the mainstream in that there are situations where the nominal level is crucial to understanding the consequences of a change.
Let’s start with that statement.
When we talk about material living standards, we tend to consider the real domain.
So, for example, if my income is $1,000 per week and the one good I buy to satisfy my consumption pleasure is $100 per unit, then I can by 10 units a week.
The nominal is the $1,000 and the $100, the real is the 10.
Now, if the price goes up to $200 per unit and my income doubles, then the question is: Am I better off?
The answer in material (real) terms is no. I still can only access 10 units per week. I am abstracting here from any long-lived effects (negative mostly) of producing those 10 units.
The link between mass consumption and environmental decay is clear and a separate discussion.
So while the nominal aggregates have doubled (including my income), the real equivalent has stayed unchanged.
Now imagine that the price remains at $100 per unit and I am forced to take a pay cut to $500 per week. I am clearly worse off in both real and nominal terms and would resist that cut.
If all people were forced to take that cut then total spending would fall – and recession would eventuate unless some other spending source (for example, government) filled the gap.
Now imagine that two scenarios:
1. My nominal income remains at $1,000 and the price goes up to $200 per unit.
2. My nominal income falls to $500 and the price remains at $100 per unit.
Which option would I prefer?
Both are equivalent in real purchasing power terms.
Mainstream economists believed that the two cases are equivalent because of the purchasing power implications.
However, Keynes (and Marx before him) and then later Post Keynesians (and MMTers) disagreed with that conclusion.
And in doing so, had to argue that there are nominal considerations that transcend a simple focus on the real.
In Scenario 1, the nominal income remains at $1,000, while in Scenario 2, the nominal income has fallen to $500. Yet because my real purchasing power is seemingly the same in both cases why would I prefer Scenario 1?
The answer lies in the way financial contracts are typically expressed.
If I have, for example, a home loan mortgage which sets the weekly payments as $X per week (that is, in nominal terms) then irrespective of the real equivalent of my nominal income, I have to deliver $X per week before I can do anything.
So a cut in my nominal pay will squeeze my capacity to service my outstanding nominal liabilities, and may render me insolvent.
In Scenario 1, that still might happen but at least it gives me greater discretion to cut out other non-committed spending choices and maintain my financial solvency.
Both cases involve real cuts to my standard of living but one of the cases gives me much more latitude in the context of my nominal financial commitments than the other.
This is why Keynes (and others) said that workers might be preparated to acccept a real wage cut but resist cuts to their money wage levels if it was rendered by a rise in the general price level rise.
They resist cuts to their money wages because it compromises their nominal commitments more.
There were other reasons Keynes believed it was preferable not to cut money wages but that is another story (relativities etc).
So, there are circumstances where nominal aggregates matter.
When it comes to trade, MMT focuses, initially on the real layer of the analysis.
Thus is is undeniable (and I am surprised to read all those who are torturing themselves trying to deny it) – exports are a cost and imports are a benefit.
Giving some real thing away is a cost. Getting some real thing is a benefit.
That doesn’t equate, as I have been reading the last few weeks, in a conclusion that MMT’s preference is for a nation to have a current account deficit.
It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use.
Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.
In a world where we produce to consume – not for its own sake – then receiving goods and services is better (real terms) than sending them elsewhere.
Now, I understand that we can have a spiritual debate about mass consumption. Is is really an appropriate path to happiness?
I wrote a bit about that in this blog post – The mass consumption era and the rise of neo-liberalism (January 7, 2016) – so my views are known on that issue.
The religion as the opiate in Marx’s day has been replaced by mass consumption in our era.
The era of mass consumption after the Second World War diverted attention of workers from the production process to the shopping centre, which took over where religion left off.
There was an abundance of mass produced goods like never before and the new consumption boom also meant that the distribution of national income had to shift so that workers could purchase the ever-growing flow of goods (and then services) into the shops.
In this sense, real wages grew with productivity and the problem of capitalist realisation was averted. A period of relative calm emerged and the shopping centres crammed with all manner of goods functioned as the sedative.
This was the period before the financial deregulation began and capital had yet to discover that it could have it both ways: it could suppress real wages growth and still realise the surplus value on the ever-increasing volume of output it was producing by simply loading households up with debt.
The financial engineers would come along a little later to facilitate that new era of financial capital. But during the full employment era, capitalism was forced to share the spoils more evenly and mass consumption and real wages growth was the manifestation of that accommodation.
And then we entered the neoliberal era and all that follows.
So, while I can easily say, that in real terms, exports are a cost and imports are a benefit, I am fully aware of how that plays in to these broader social change issues.
Which then brings me to the next claim that has been raised to challenge the exports are a cost and imports are a benefit story.
How can I say that a nation is ‘better off’ if it is digging up valuable minerals and shipping them to foreign destinations in return for plastic junk from China?
First, I agree that there are massive environmental considerations that have arisen in the era of mass consumption. I do not personally support a mass consumption mentality.
The plastics in the oceans are proving to be a crippling problem for the World with little solution other than to stop using the products.
But then I could easily say that eating animal protein is massively destructive for the planet not to mention the cruelty and subjugation of the animals themselves to satisfy an unncessary human craving.
So, if we are going to ban plastics and make judgements about the ‘quality’ of imports, then I hope proponents of that view become vegetarian, if not vegan, immediately.
I don’t mean to trivialise the issue of ‘bad’ production.
I clearly support tight regulation and environmentally sustainable resource allocation.
I also clearly advocate rather tough tests on trading relationships – the fair rather than free trade stance.
For example, I would not trade with China at all given its appalling human rights record. But then I live in a country which, itself, tortures refugee status applicants and has tried its best to wipe out our indigenous citizens. So it is complex.
Second, there is a sort of elitism in the argument that these imports are just junk and cannot be considered benefits.
Who is making that judgement?
I am sufficiently an economist to think that people buy things that they think will give them ‘benefits’ and giving up the nominal notes and coins (or digital transfers) voluntarily involves then swapping something they value less for something they value more – the real thing.
If all these imports are not beneficial, as some commentators are asserting, then why do people give up income to purchase them?
I can pontificate from on high and make all sorts of moral claims that these goods and services are not beneficial. And presumably I won’t be buying any of them.
But what right have I, in a ‘free’ society, to then make claims about the judgements of others in these sorts of transactions?
Okay, I know all about the literature on supply-determined demand. Deceptive advertising, social conformity and all the rest of it clearly influences what we purchase and so we don’t really act independently of how the supplier wants us to.
But if that is the logic then all goods and services, whether they be imports or not are clearly not beneficial because we have been duped into thinking they are good for us by advertising and the like.
That is not a very fertile path to follow because it really gets us nowhere.
The next argument presented is that by saying exports are a cost it means the same thing as saying they are a loss.
Well, in the obvious way, again thinking in real terms, they are a loss because the real resources embodied in the exports are not available for use by the nation.
Which suggests the motive to export. The only reason a nation would want to export and incur the costs involved is to generate a higher rate of return.
Which means that the cost is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.
But it could also be for different motives – to accumulate financial claims in the currency of the nation.
One might argue though that there is an irrationality in the second motive. Why would a nation, once it has satisfied its penchant for imports continue to pursue a strategy that generating ever increasing external surpluses?
If that is the government’s strategy (and one could suggest Germany fits that bill) then they are deliberately depriving their citizens of a higher material standard of living. They are either working too hard, being paid too little and underconsuming.
But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal with trade.
In general, a nation hopes the costs of using our resources as exports will not become terms of trade losses – in real terms.
A trade deficit is a sign that the real terms of trade are working in favour of the deficit nation. That is standard MMT and, in my view, unassailable.
Unless you adopt the view that imports are not beneficial. And good luck running that line.
Sure enough there are nominal consequences.
Foreigners (surplus nations) build up financial claims in the currency of the deficit nation.
They might buy up all the real estate. Well, only if the government lets them.
Many nations have rather strict rules about what foreigners can buy. In Australia, for example, it is difficult for a foreigner to purchase existing real estate. There are loopholes and the laws should be tighter but they do currently constrain foreign purchasing.
The point is the nation state can legislate whatever restrictions they like.
They might sell all their currency holdings in one fell swoop and destroy the currency. They might. But then they would be deliberately creating massive losses for themselves, which I am confident they will not.
And if these funds end up in the hands of speculators the nation state can lock them with capital controls if it so chooses. Even the IMF supports that strategy these days and acknowledges it is effective.
More problematic is that foreign interests may seek to use their financial clout to manipulate the political system and the public narrative view media domination etc.
Again, regulations can militate against that sort of trend. Strict campaign funding rules, media ownership rules etc are required to prevent these sorts of complications.
And finally, what of the claim that external deficits automatically lead to a hollowing out of the industrial sector and the nation ends up a consumption unit (consuming junk) and sedating its population with a Job Guarantee, once all the skilled jobs shift to Country X?
The corrolary claim is why would MMT advocate that sort of destiny?
First, MMT does not advocate that at all. MMT provides the framework for understanding the consequences for macroeconomic policy choices.
The centrality of the Job Guarantee in MMT does not equate to it being held out as the panacea for everything. We have been clear on that for 20 or more years now.
The Job Guarantee is the basic macroeconomic stability framework upon which other policies are then designed and implemented.
Second, having said that, there is nothing in MMT that says we support a deindustrialisation process and perpetual current account deficits.
MMT helps us understand very clearly, clearer than previous economic theories, what sort of things will be possible when there are current account deficits.
For example, as a result of our work, people should now realise, that if a nation has a current account deficit and the private domestic sector desires to spend less overall than their income, then the government sector has to run a fiscal deficit at least proportional to the external deficit.
Otherwise, recession will occur.
As that understanding permeates the political debate, it will discipline the communications within the nation and purge some of the ridiculous statements that are made.
For example, a politician would not be able to say that the government can run a fiscal surplus in that context without also acknowledging that the only way the economy could continue to grow would be for the private domestic sector to be accumulating ever increasing levels of debt (once other stock adjustments were exhausted).
But there is nothing in MMT that precludes a very forward-thinking industry policy being developed and implemented to expand domestic industry, spawn innovating research and development, upskill the workforce, build export capacity and all the rest of it.
A nation can do all of those things if it has available real resources or can get them from abroad.
MMT tells us that in those circumstances, there would be no financial impediment for a government building national industries, funding research and development, providing first-class universities and apprenticeship training and the rest.
If a nation with its own currency slides into oblivion by closing its manufacturing sector, cutting career public sector jobs and relying on low-paid and precarious service sector jobs for employment creation, then that has nothing much to do with enjoying a positive real terms of trade (that is, running current account deficits).
It has a lot to do with the political choices made by the legislature.
I might not write about trade for a while.
I have been playing the 2010 album (FatCat Records release) – Infra – this morning by post-minimalist composer/pianist Max Richter, who I have featured on this site before.
The album intersperses Outer Limits-style static audio with single piano and his usual array of melodic string orchestration.
This is the track called Infra 6 and is hauntingly simple yet very evocative.
I love playing it on my own piano (minus the Outer Limit-type infra sound effects!).
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
This Post Has 117 Comments
Perhaps one aspect missing from the discussion is the centrality of income to consumption
choices.People get the real goods their nominal income affords.Yes preferences can be expressed
even with limited nominal income but none of those choices are’ free’.
So while i have no problems with imports being gains it does not put the importers ‘on top’
as the original blog put it.It does as others say make importers dependent .
The customer is only on top when they are rich enough to access all they want.Which
is why exporters incur losses so the owners and top executives can accumulate nominal
wealth so the wealthy and their offspring can lay claims to the worlds real resources.
In a perfect world, imports and exports would be valued both for the use value that they give to the exporter, and also the use value they give to the importer. Trade would be seen as a means to satisfy the needs of the world at minimum cost to the Earth’s finite resources. Trade would not be a competitive tool but a cooperative tool.
“Giving some real thing away is a cost.”
So why is every country on the planet striving to export?
Why do exports abound?
“How can I say that a nation is ‘better off’ if it is digging up valuable minerals and shipping them to foreign destinations in return for plastic junk from China?”
If minerals are as valuable as Bill says they are, what’s the point of keeping them in the ground?
Australia has 10s of billions of tonnes of iron ore, well beyond its needs.
Should Australia close down a $50billion a year export industry that employs 50,000 people?
“Australia has 10s of billions of tonnes of iron ore, well beyond its needs.
Should Australia close down a $50billion a year export industry that employs 50,000 people?”
MMT as I’ve read it leaves a lot of room for private-sector decisions.
Australia could dig the ore up, smelt it into iron, purify that into steel, and make, oh, automobiles. So that my favourite bloggers could replace their dirt-rat Suzuki (4WD, I suppose) when it finally dies. Somebody should mention this to some Australian industrialist. Shout-out to A Town Like Alice.
“So why is every country on the planet striving to export?
Why do exports abound?”
Globally the trade balance has to net to zero, therefore exports don’t ‘abound’ at all relative to imports (which logic tells us match exports exactly).
Dear Henry Rech (at 2018/05/23 at 8:50 pm)
Frankly, all your questions have been answered by myself or others, whether you like the answers or not.
Your input is now reaching the unhelpful stage and I will not approve any more of this type of comment from you.
“So why is every country on the planet striving to export?”
Running an export surplus is a good way of pushing unemployment and poverty outside the borders of your nation onto other nations, as long as they are running on the same defunct monetary theory.
However when those net import nations adopt MMT, start accommodating the excess saving, eliminating the unearned income and enjoying a higher standard of living at foreigners expense then we will see a rapid shift away from ‘export-led’ policies towards a more balanced approach.
“And if these funds end up in the hands of speculators the nation state can lock them with capital controls if it so chooses. Even the IMF supports that strategy these days and acknowledges it is effective.”
There may be a wee problem with EU member states. Here’s Article 63 of the Treaty on the Functioning of the European Union:
Note the bit about “third countries”.
Yes. Exports are a real cost. Import are a real benefit.
It isn’t a free lunch. Justice requires the transaction be settled, at some point, value for value. I insure payment is received for the things I buy. I want my accounts settled.
I believe Warren is right, investment creates savings. Savings is just the true accounting of investment.
On the national level running a CAD is a blessing – IF the deficit country is in need of financing of investment. If opportunities for productive investment exist and are desirable and not made because of the lack of resources, domestic savings are inadequate, a poor country, the inflow of savings will enable the purchase of capital goods and technology, vaulting the country toward prosperity. Both sides win.
When a foreign country sends its savings here, if domestic investment is not increased, then domestic savings must be reduced. That shows up as unemployment as people are put out of work, industrial facilities closed. The investment here has been displaced by the investment in another country.
Most of the trade deals aren’t designed based on national economic good or goals. Some groups of very wealthy and powerful individual and corporations seek their interest and compromise the nations welfare without a thought. And for diplomatic and economic leverage they compromise. I say this for some of the poster who speak in terms of nations, as though the leadership actually has the well being of everyone in mind.
I post not to correct but truth. The wealthy and powerful hate truth. They ignore, but hate MMT. When and if you manage to engage those interest of a public forum, you better be prepared for everything they can throw at you.
“Giving some real thing away is a cost. Getting some real thing is a benefit.”
Trade is a zero sum game with comparative advantage the driving force. Saying “giving some real thing away” is like saying a football game is over at half-time. If there is no other option (the buyer of the “thing” is the only buyer) then the buyer gets current goods, the seller gets future goods. If what is being produced is not demanded (at a price) then there is no trade and the economy suffers as a result. The advantage may be to the buyer since the seller may never complete the deal and never receives any goods in return–but that could be their choice. The introduction of currencies pollutes the trade discussion and, as we have seen, screws up the politics of trade.
I get the point that exports are real costs but how does MMT view the idea that a country should hold foreign reserves? Am I naive to think that they are surplus (pardon the pun) to requirements where a nation floats it’s currency? If foreign reserves ARE desirable then the main way to accrue these would be to export? I’m thinking of an emerging economy here. Starting out, is it absolutely crucial for a country to have a stock of foreign reserves?
Any help would be appreciated.
“… exports are a cost and imports are a benefit.
Giving some real thing away is a cost. Getting some real thing is a benefit.”
The above phrasing is infelicitous, for it can be easily shown that “giving some real thing away” may be associated with a benefit, and “getting some real things” may come at a cost.
On a more specific level: why should exports generate ONLY costs (in the form of sacrificing real resources)? Consider the case of cross-border know-how transfer: this kind of exporting may actually bring benefits to both exporter (learning experiences to be made use of domestically) and importer (enhanced knowledge) simultaneously, say: by solving a problem in the know-how-importing country, the exporter is able to figure out and instantly communicate back home how to finally solve a domestic problem.
Exports need not require sacrificing real resources in the sense of these being no longer available to the exporting nation in a regrettable or disadvantageous way as in the case where domestic demand is insufficient to exploit increasing returns to scale. The resources are not wanted at home, while being able to generate more domestic wealth by being offered abroad.
The idea that every transfer of resources from an exporting country to an importing country has ipso facto an impoverishing and only an impoverishing effect on the former strikes me as unconvincing. These resources may well be put to better use as part of a roundabout and interdependent cross-frontier flow rather than remaining tied up domestically. Thus, the dichotomous perspective expressed in the above quote also ignores the dynamic gains from trade (stimulus to competition; the acquisition of new knowledge, new ideas and the dissemination of technical knowledge; the possibility of accompanying capital flows through foreign direct investment, and changes in attitudes and institutions).
When looking at exports and imports from the point of view of costs and benefits it would seem to be more fruitful to treat each category as a bundle of costs and benefits, rather than insisting that the category of cost can only be applied to exports (but not imports) and the category of benefit can only be applied to imports (but not exports). After all export and import tend to be interdependent, being often mutually beneficial while both are capable of generating costs.
I do not know much about international trade, and I have some questions…
Like Bill said, when a person/company exports, it gives away a real resource. In return, it receives a financial resource: currency, be it local or foreign currency. Why would any company be willing to do that kind of transaction? Probably because it finds the transaction beneficial somehow. It is willing to hold currency instead of the real resource for some reason. If the company is not doing anything wrong (producing illegal goods, relying on slavery or executing some kind of fraud), who are we to judge the company’s desires?
Is such transaction a bad thing, a sacrifice? Does it harm a country’s economy or society? Should it be prohibited by law? I can’t understand whether that is Bill’s point, I am confused.
It feels that there is nothing wrong with the transaction itself. The problem would be if the company is relying on low-paid and precarious service sector jobs, or if the company is producing illegal goods or something like that, but such things would continue being a matter even if the company did not export its produces… I thing I’m getting something wrong here, don’t know
Lector, Andre, the point is that what Bill & MMT & Functional Finance & accounting say is so simple and obviously true that it repels the mind. You need to get it straight once, to understand that you always understood it! The point is that everyone agrees with all the provisos, but you can’t say everything at once. Trying to say and do everything all at once –> realy dmub misteaks.
MMT & FF is building arguments up with rigor close to a formal proof in mathematics or logic or constructing a working computer program. So it says these extremely simple things which must be interpreted in a very strict way, and then says something else in a strict way, and then puts it all together.
First, there is absolutely nothing new & different involved with exporting and importing from domestic transactions. It is already all in that quote about commerce from Mitchell Innes I cited in the last thread.
Along with “exports are a cost, imports are a benefit” (real) you should also say
“Payments for exports are a benefit, payment for imports are a cost.” (financial)
It is a case by case thing to see which ends up “better” for who. In real life, both sides of each trade transaction usually benefit by foreign trade transaction. Otherwise people wouldn’t do it!
To be sure, this only involves “goods”. If you talk about “bads” – say radioactive waste, then
“exports of bads are a benefit, imports of bads are a cost” etc.
Once you get all this straight – it is time to keep following Bill’s arguments, and see how people and countries who don’t understand, who make the mistakes from going too fast – really, really do BIG GIANT STUPID things in the real world,
It’s started already Bill.
It only took 3 days after Nicola announced over the weekend that Scotland was going to implement a new currency if it became independent.
The media always go to this idiot whenever Scotland talks about introducing their own currency.
Professor Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, said tens of billions of pounds in foreign exchange reserves would have to be raised to protect the currency from economic shocks and speculators.
The media have put the figure at £300 billion.
means of production = technology = power
manufacturing requires scale, scale requires exports.
“Why would any company be willing to do that kind of transaction?”
Because business is about making profit in financial terms. Capitalists hoard money to keep score. It’s like cricketers with runs. Who has the biggest number.
The idea that money is just about stuff is the neutrality myth. It’s nonsense. Money is held for its own sake – to show how rich and powerful you are.
Quite frankly, it could not possibly be any clearer than is stated in, “Reclaiming The State”
There No need to complicate the obvious.
“The idea that every transfer of resources from an exporting country to an importing country has ipso facto an impoverishing and only an impoverishing effect on the former strikes me as unconvincing.”
It’s entirely convincing. That’s what you are doing – and stockpiling instead something that is an utterly useless bauble you don’t need: money.
The point of exports is to *exchange* what you have in excess for *real stuff* you have a shortage of. There is no point at all producing things to excess if you don’t do that. You’d be better off *working fewer hours* and not bothering.
So it is impoverishing because people are working harder than they need for no additional benefit. They should work fewer hours for the same pay instead, or use less labour and re-deploy that labour on producing real stuff the locals can use or enjoy.
Remember we are talking about a net export surplus – where you produce stuff, sell it for financial assets and then sit on the assets. And those assets are generally owned by the capitalist class, not the workers forced to labour to excess.
I’d say, the pro’s and con’s of the current account can be extracted from the historical economics and mercantilism.
The effort and willingness to sacrifice homeland nominal surplus and able bodies, to sink these funds in gunboats and market dominance on far away shores, to the benefit of the redistribution of homeland real wealth through the preferential consumption and spending of consumer goods, i.e. pepper, sugar, tea versus manufactured cloth, medical, military, administration and tax harvesting know how and competencies etcetera is to be noted.
The present post-’71 Bretton Woods laissez-faire reality of nominal leverage, the off the books credit facilities, has generated a completely new and different world and market place, we’ve entered a new historical phase where a global hunt for yield on far away shores, where both nominal investments and the safety valve of flash unwinding of these in liquidities, have become prime drivers of nominal gains instruments, and have become the focus of all the primary players in a present globalized and regulated ‘neo-liberal’ framework.
The problem, in my view, now becomes the aggregate of character, tastes and determinations of the main players that drive consumerist consumption, which is ‘culture’.
Plastics, by the way, need not so much be abandoned, but be treated akin chemical waste to be recycled or destroyed through efforts of administration and policy.
In an ideal world which existence become more prescient by the day, a meaningful and massive cleaning of the oceans of plastics for instance, can be organized, and is most probable the only way feasible, through invitations to tender (with performance clauses), and the expense simply financialized on the respective central banks books or of the World Bank or IMF pool, for there is no yield in the aggregate of this subject other than the one to be gotten from the general and ‘nominal’ common wealth of the nations (rationally a category per the utility of a communal benefit beyond national jurisdictions and tax interests).
First time I’ve come across post minimalist piano music. Thanks Bill.
“said tens of billions of pounds in foreign exchange reserves would have to be raised to protect the currency from economic shocks and speculators.”
Yes, and he has no idea what he is talking about.
So instead you need a policy proposal to neuter that. Any new Scottish Reserve Bank will be *statutorily barred* from operating in the foreign exchange markets. Instead they will have an accelerated resolution procedure in place which will run any bank going bust through an administration process within a day – ensuring a total loss for all equity and foreign exchange holders in that bank and protecting the depositors in the local currency 100%.
It is for those exporting to Scotland to use their own central bank’s powers to keep down the exchange rate to the Scottish currency.
Indeed it was the comment from the ’eminent’ Ronald Macdonald which motivated my post above.
Hes obviously taking time out from the fast food chain 😉
This is a fantastic series on trade and, I think, there has been a serious need for popular MMT discourse to more properly emphasize the *floating* component of a sovereign fiat currency as opposed to the *non-convertible* aspect and implications (sector balances, loans create deposits, automatic stabilizers, JG, inflation etc.) – which you and others have done to death very successfully and anyone who is interested should be able to find out and understand.
One point you keep on making that really, really bothers me and is, I think, at the heart of these discussions over the floating currencies (versus fixed/managed/gold thinking that still permeates too much of the debate in general).
This is exemplified by you saying here “If that is the government’s strategy (and one could suggest Germany fits that bill) then they are deliberately depriving their citizens of a higher material standard of living. They are either working too hard, being paid too little and underconsuming.” Statements of this type are a common refrain you have repeatedly used in such discussions over the years. (e.g. over Germany’s long term mercantilist strategy, DM management, Hartz reforms etc.)
Still, given your correct penchant for providing well supported evidence to support your arguments, I do not recall you ever providing suitable data to support this verbal claim. What exactly are the macroeconomic indicators that can demonstrate this?
[Bill deleted a section that linked to a site that has advertising that I do not wish to promote]
Please, please address this.
Brian Ramanchuck addresses some of the more obvious errors in SK’s above linked post here http://www.bondeconomics.com/2018/05/on-everyone-cannot-run-trades-deficits.html but does not address the question I am asking you.
Neil and Scott,
It is a complete and utter disgrace. How much does he get paid for saying this crap.
He’s the attack dog they always let off the leash. Unfortunately, he holds at lot of sway in Scotland because the media put him on that pedestal.
He’s the attack dog they always let off the leash. Unfortunately, he holds at lot of sway in Scotland because the media put him on that pedestal.
He holds a lot of sway because this clown says what the print and broadcast media want to hear.
I feel the dependents (unionists) are far more alert to the cost of independence than they are to those of departing the european union in such a ramshackle manner.
It is going to be a rocky ride but I am glad they have declared their desire to be a currency issuer.
“It’s entirely convincing. That’s what you are doing – and stockpiling instead something that is an utterly useless bauble you don’t need: money.”
Utterly useless? But wouldn’t I want to hold currency in order to be able to pay taxes and avoid the legal sanctions of not meeting my fiscal obligations? Isn’t it what currency is about? Or maybe I would like to exchange such a currency with someone who wants to pay his/her taxes, giving away money and receiving real goods.
I don’t know, I’m clearing not understanding something here. I do not feel that I have the big picture. Maybe some piece is missing.
It seems to me that problems are elsewhere, and not in the currency hoarding or export/import things.
I mean, hoarding currency or not, exporting goods or not, if a company produces illegal drugs, enslaves people, throws radioactive waste in the city’s river, does fraudulent activity, murders people, bribes politicians to enact laws that are only good for its business etc, then it is bad. Such company should be closed and their shareholders should face the legal consequences. However, the export/import thing (or the hoarding money thing) doesn’t seem to be a problem in itself.
What am I missing?
The reports not out yet but if it mentions currency unions or sterlingisation I’ll pack my bags.
At small scale, it’s like telling to a couple who owns a restaurant and employs the entire family that cooking for the neighborhood is a cost for them and they would be better off shutting down the business and go to eat to the restaurant on the other side of the street. For me it makes no sense in a capitalist economy.
a lot of people seem confused as to the implications of this. it does not simply imply that countries try to reduce their exports. exports are an investment. if increasing your exports leads to increased imports, then sure go for it.
if on the other hand you are net exporting, then either increase your imports to balance your trade, or if your need for the goods that foreigners produce is satiated, then put the capacity that was otherwise creating that net surplus to more productive use instead.
“if on the other hand you are net exporting, then either increase your imports to balance your trade, or if your need for the goods that foreigners produce is satiated, then put the capacity that was otherwise creating that net surplus to more productive use instead”
Don’t know if I am understanding it right, but it seems that you are treating the country as a single entity that decides its balance of trade.
However, in reality, the balance of trade is the sum of many individual decisions by companies and people. Each one is somehow deciding how many real goods to export and financial claims to receive (or vice versa).
The government may influence the individual decisions through policy, of course.
But my point is that if each individual is transacting willingy and not doing anything wrong (illegal), I can’t see how such a positive balance of trade is bad for the economy or society… Of course, I may be understanding something wrong…
” can’t see how such a positive balance of trade is bad for the economy or society”
How is the positive balance of trade in Germany working out for Greece?
What would happen in Greece if Germany spent its hoarded Euros and when on holiday more?
“It is going to be a rocky ride but I am glad they have declared their desire to be a currency issuer”
None of which will be much use if they stick with joining the European Union – since that involves giving up most of the power of a currency issuer.
Similarly emulating Denmark means being a net exporter, which means most of the Scottish excess output will end up feathering the nest of the English – without a transfer union sending it back.
“How is the positive balance of trade in Germany working out for Greece?”
The only way Germany can achieve a positive balance of trade with Greece is by the willingness of germans to export and greeks to import. That by itself is not a problem, as I precieve it…
Why would germans be willing to export more than import? I don’t know… I’m not an expert in international trade. But, for some reason, germans are willing to give up real goods (like cars and vehicle parts, I imagine) and hold more currency in return. Why is that bad? I can’t understand.
Greeks are getting real goods and giving up currency to the germans. Is it bad?
“What would happen in Greece if Germany spent its hoarded Euros and when on holiday more?”
I guess that greeks would stop getting real goods from germans. Maybe the situation would reverse: greeks would supply real goods and services (tourism) to the germans, and receive currency in return, if both parties are willing to. Is it bad? Can’t see why. I must be missing something.
Neil Wilson and Some Guy, Thank you for your replies. I am enormously indebted to Bill Mitchell and other protagonists (including Neil Wilson) of MMT for enabling me to understand economics much better than before I got acquainted with your thinking. When I beg to differ concerning the present issue (which I do not consider to be a crucial element of MMT), I do this in the most friendly spirit, always ready to discover that I may have overlooked something. Perhaps, we are talking along different tracks. For the time being, I feel closer to Joan Robinson, who has written this:
“From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labour trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.”
“However, in reality, the balance of trade is the sum of many individual decisions by companies and people. Each one is somehow deciding how many real goods to export and financial claims to receive (or vice versa).
The government may influence the individual decisions through policy, of course.”
governments are the biggest players in the market
“can’t see how such a positive balance of trade is bad for the economy or society”
“How is the positive balance of trade in Germany working out for Greece?”
better question: how is it working out for Germany’s working class? why do you think populism is also on the rise there?
Dear Lector (at 2018/05/25 at 5:31 am)
Thanks for the kind comments.
Joan Robinson was talking about a world economy under the Bretton Woods agreement (fixed exchange rates). The constraints that system imposed on governments and nations no longer apply – where nations adopted fiat currencies with floating exchange rates.
A world of difference.
Dear Bill, thank you for (again!) returning to this discussion which I have sincere problems understanding apparently. And for re-explaining your and the MMT position on the trade things. It was helpful and I am very happy that MMT recognizes that trade deficits that lead to (even if they didn’t HAVE to lead to) a hollowing out of a country’s industry might be a bad thing and something a Job Guarantee on its own would not necessarily solve. Re-reading the three posts you did on this recently, I also realize you never said any such thing in any of them to begin with. Probably I got confused in the difference between real costs and something else, maybe nominal costs, although I don’t think so- although as you say, MMT sometimes considers the nominal to be as important also.
I just would like to point out that often times it seems to turn out that ‘real costs’ are not really all that bad. Yes they are costs- but something very real may be gained by incurring these costs. I imagine that every spring when the farmer fertilizes and plows and plants seeds that these are all very real costs to the farmer. And perhaps none of that is necessary- perhaps if he let the fields alone, enough food would grow that he could eat enough for himself anyways. But I imagine that most of the time that the real cost turns into a ‘real’ benefit for the farmer, even if it ends up that he has to turn the excess into a merely nominal benefit by selling whatever surplus over what he uses himself. It doesn’t seem right to me to point out the real cost to the farmer of producing more than he can eat that year without giving equal consideration to the benefits, even if only nominal, received by producing and then selling that excess.
“The only way Germany can achieve a positive balance of trade with Greece is by the willingness of germans to export and greeks to import. That by itself is not a problem, as I precieve it…”
And once the Germans have drained the money from Greece, by refusing to go on holiday there, what happens to Greece?
Expand your view past a single hop and run a circulation. Remember, my spending is your income.
What you get is a suppressed equilibrium in the net import area and a brain drain. Those that can leave, leave and those left behind struggle to maintain a structure. This is what happens in a fixed currency system. It is what has happened in Greece. It is what is happening in the UK and USA, because the transfer area mechanisms are too weak to offset the black-hole like pull of the financial centres.
It also happens in a floating rate system between currency areas if the ‘export-led’ half uses mercantile mechanisms to hold the exchange rate down – aka holding financial assets ‘hostage’ and refusing to spend, but the ‘import-led’ half fails to use the mechanisms described by MMT to defeat that hostage situation.
The effect of the ‘Washington consensus’ mechanisms for operating floating rate currency areas is to turn them into quasi-fixed currency areas. Which defeats the object of having them. If export areas Ying, import areas have to Yang.
Import-led areas have to learn to ‘turn into the skid’, ‘run into the ambush’, and (no doubt bill’s favourite) ‘dive into the base of the oncoming wave’. All of these are deeply counter-intutive actions – as is the MMT description of international trade.
When you get the time can you please change the format of your comments system so that it is obvious who is replying to which comment? Rather than a simple linear system you could have tree system like on reddit or naked capitalism. It will be much easier that way to make sense of all the comment.
“But I imagine that most of the time that the real cost turns into a ‘real’ benefit for the farmer, even if it ends up that he has to turn the excess into a merely nominal benefit by selling whatever surplus over what he uses himself.”
how and why are we back to using household analogies?
Hoarded money is only a measurement of wealth and power if it can be exchanged
for real goods and services and crucially be passed on to others so they can control goods
As i have put it many times Chartalism will always be the enemy of the wealthy because
it posits the state has the money to buy,control and use real resources which the
wealthy belief they are entitled to.
The poor consumer is never on top.
hoarded money is only a measurement of wealth and power IF it can be
exchanged for goods and services.
This is why chartalism will always be the enemy of the wealthy because
it says the state can have first use of goods and services and they believe
they and their offspring are entitled to whatever they want.
I suspect we are back to using household analogies because we are not discussing
the spending capacity of currency issuing governments.
“hoarded money is only a measurement of wealth and power IF it can be
exchanged for goods and services.”
That’s just simply not the case. It is the myth on which everything founders. Money is collected for its own sake – like gold and diamonds and bitcoin. And cricket runs (particularly in England, where they are scarce at the moment).
Thank you for your reply.
I fail to see how a regime of floating exchange rates invalidates what these gentlemen have to say about the benefits of engaging in exporting:
“Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries the surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return something else for which there is a demand. It gives value to their superfluities, by exchanging them for something else, which may satisfy part of their wants and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers and to augment its annual produce to the utmost, and thereby to increase the real revenue of wealth and society.”
Adam Smith, The Wealth of Nations, Chap I, Commercial System, p. 181
While Adam Smith emphasises trade and thus exporting as as “a vent for surplus production and as a means of widening the market thereby improving the division of labour and the level of productivity” (Thirlwall), the latter author continues to write in his “Growth and Development” (1990, p. 430),
“… export growth plays a major part in the overall growth process by stimulating demand and encouraging saving and investment, including foreign direct investment from abroad, and by increasing the supply potential of the economy by raising the capacity to import.”
And he adds on p. 431 with respect to the most successful among the developing and (not only recently) industrialised countries
“… there is no way in which these countries could have grown as rapidly as they did without the rapid growth of exports. Apart from all the externalities associated with trade and encouragement of domestic and foreign investment, they simply would not have had the foreign exchange to pay for all the imports.”
If this is true, and I have no doubt it is, how can one claim that exporting is an impoverishing activity and nothing but an impoverishing activity (Neil Wilson above), a cost and nothing but a cost, not eligible to be ascribed any benefit(s) ?
Are you saying all of these benefits do not exist? Alternatively, are you saying that if these benefits exist their effects are fully annihilated, made to disappear, leaving no traces of their positive side by the fact that an exporter is “giving up some real things” of domestic origin? Are you arguing in favour of total autarky? No, you are not, because you posit that imports are a benefit (and nothing but a benefit). But as you acknowledge yourself, exports have the benefit of making imports possible. How does that benefit disappear, when it is claimed that exports are nothing but disadvantageous, void of benefits, a cost and nothing but a cost?
“But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal [sic] with trade.”
You are avoiding the term “benefit”, but still a benefit it is. Then you write:
“Which means that the cost [that export is] is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.”
The ability to afford the cost of importing “some real things” is a benefit derived from export. If export would not bring forth this benefit, I would not be able to benefit from import. Restricting export to its cost side is as inadmissible as claiming that a salary is a cost for its receiver, say, for all of it is spent. Well I could not spend anything unless my salalry had the benefit of being worth enough to afford the cost that sellers erect like a wall between my desires and the things I would like to acquire. This cost (of purchasing imports) is not generated by export, but by the importers legitimate inclination not to give away things for free, and that cost is met by the exporter’s ability (i. e. the great benefit of export) to offer something sufficiently valuable to entice the importer to make a purchase. So export can be looked at from the point of view of benefits (e. g. it gives me purchasing power) as well as costs (I have to give up certain things to enjoy the benefits of export).
To claim that within the conceptual framework of costs and benefits, only the concept of cost applies to export is not true. It (export as cost) applies in the form of special cases.
It is not clear to me what one hopes to gain by claiming that a proposition is more general than it actually is.
Also, the advantages and disadvantages (costs and benefits) of exporting and importing can not be exhaustively accounted for by concentrating exclusively on the question whether the domestic availability and the domestic use of domestic resources are increased (supposedly categorically good) or reduced (supposedly categorically bad). Why should one use domestic resources domestically, when they are more productively and profitably applied by producing and selling export goods?
To the extent that trade involves international imbalances as well as winners and losers, this still does not justify the conceptual truncation whereby exports are said to be a cost and only a cost, and not amenable to being (perceived as) anything else, and imports are said to be a benefit and only a benefit, and not amenable to being (perceived as) anything else.
I think, this is the core reason why many people do not go along with “export = cost, import = benefit.”
A claim is made that the proposition is virtually self-evident, easy to state and understand, when it is not, for it purports to express a generally applicable statement, when in fact it can be challenged by valid counter examples.
The claim is confidently introduced as simple and clear and of the most general nature, but further discussion quickly reveals that sophisticated complementary arguments are required to support it.
It seems to me that a rephrasing is required that avoids the above shortcomings.
I write this as someone who is willing to try very hard to understand MMT, because I have amply experienced how exceptionally valuable this way of looking at the economy is.
Lector – This is misinterpreting what Bill & MMT & FF are saying. The only reason that anybody ever disagrees with or could disagree with “export = cost, import = benefit” is because they don’t understand what is being said. That is proved by the above discussion. Nobody who understands what is being said disagrees. Everyone who disagrees misunderstands and misinterprets that statement. What is written above shows you agree with the intended and correct English meaning of that statement, you just don’t agree with the unintended and incorrect meaning of that statement. Neither does anybody else!
It is not clear to me what one hopes to gain by claiming that a proposition is more general than it actually is. Right, but people aren’t claiming that. People expounding the MMT position are working hard to NOT claim that. (At worst, some, not Bill as far as I can see, might in exasperation make slight overstatements.)
when in fact it can be challenged by valid counter examples. Nobody has given one; all the examples given by you or anyone else are based on misunderstanding.
Misunderstanders constantly, wrongly identify the export and the payment for the export. They are different things. One is “real”, one is “financial”. Exporters can go broke. It can be hard work to see the first dollar from exporting after millions of dollars or yen or what have you have been sunk into the venture. If you don’t get that first dollar, the export transaction is pure cost – because it was 100% export! No “import” of nothing, real or financial!
Getting clear about real vs financial – by saying really obvious things that people are usually too embarrassed to admit to themselves that they don’t know utterly perfectly, or that they don’t yet understand why it is so crucial to say, is the heart of MMT. There is nothing non-obvious or counterintuitive about MMT if you just go through it slowly enough. Festina lente. σπευδε βραδεως. Maybe Bill should write in (pig?) Latin or classical Greek so people might slow down and try to digest each sentence before jumping forward.
With amazing serendipity, after posting that, while looking for a book by another Gulick, I found this one:
Robert Lee Gulick- Imports: The Gain From Trade- Carnegie Endowment (1946). The title speaks for itself in explaining the “MMT” = irrefutable perspective in 1946, when the USA was struggling with problems of being a super-exporter.
Although I would not endorse absolutely everything there, it is another explanation that shows MMT & FF are not the only sources of common sense, in pointing out that sometimes the obvious and simple needs to be emphasized, and that pro-export attitudes can become ridiculous and self-contradictory. Gulick’s comparison of 1946 American attitudes to those of the Ch’ien Lung emperor is still remarkably apt!
What is the difference between purchasing a product made domestically from one made in a different country? In either case, the manufacturer is experiencing a real cost when it hands over the real product for some nominal income in whatever currency they sell the product in. I mean the producer had the real good and could have enjoyed it themselves if that’s what they wanted to do, but nobody thinks that’s the reason they made the darn thing in the first place. They made it to sell it- not to enjoy it themselves. Pointing out that they are experiencing a ‘real cost’ because they sold the thing and cannot enjoy it themselves anymore is kind of besides the point- they are usually really happy to sell things and give their sales people bonuses and such when they sell extra.
Unless what the buyer is giving them is truly funny money, and the manufacturer is too stupid to realize what they are getting is worthless. Either of which is just not the case.
This issue is too complex to just say exports are a real cost and imports a real benefit so don’t worry about it. It depends what’s going on- maybe a currency issuing government and the people can adjust easily enough and will be happy to do that, maybe the foreign trade becomes too disruptive to the domestic situation and causes too much pain. Obviously too complex for me at least and I’m not buying the simple story. This post seems to recognize it might not always be so simple. Its kind of nuanced or whatever 🙂
“What is the difference between purchasing a product made domestically from one made in a different country? ”
Nothing. That’s the point – and the issue.
The problem is taking a narrow view. You are abstracting away the process of production and sales *and what happens afterwards* within the dynamic circulation.
At a micro level the producer has no need of the goods and services, that is why they are producing them for exchange. The problem is that they are not producing them for exchange. They are producing them to hoard baubles. Which then creates a paradox of thrift in that circulation.
What MMT and endogenous money show is that when you have a financialised economy you end up with excess savings, and those excess savings are not eliminated by any market process. Excess savings mean that somebody somewhere is not getting an income.
When London sells financialised products to somebody from Rochdale, but then fails to buy cotton product from Rochdale, instead hoarding the savings as ‘wealth’, Rochdale residents lose out, businesses close and the area becomes depressed, which leads to a brain drain to London. The excess savings of Londoners – all perfectly reasonable personal decisions at the micro level cause a public vice in Rochdale and eventually a public vice in London as you get overcrowding and poverty.
The uncontrolled cycle recreates 1840s Manchester time and time again. Export-led growth is the mantra of the Victorian mill town. A great idea if you are a rich mill owner. Not so great if you are anybody else.
You can fix that by having different currencies in the two areas. One currency that can only be spent in Rochdale, and one that can only be spent in London. But to make that fix work you have to deal with the saving in London of the Rochdale currency – particularly once you understand that the financial system is sophisticated enough to take the Rochdale currency, hold it as an asset, and create more London currency – which then has the effect of making London goods cheaper and Rochdale goods more expensive. We’re then back, largely, to the same situation as if London and Rochdale shared a currency.
Left to its own devices the balancing mechanism of a floating rate system can be defeated by the financial systems of the export-led side of the process.
MMT analysis recognises that and proposes a set of *unilateral* mechanisms by which the Rochdale’s of the world can restore the power of the floating rate currency and their own fortunes *regardless of what policy approach London adopts*.
I am afraid Neil it is you who are living in a fantasy if you think the wealthy
would collect worthless things.Why don’t they?Why do they only hoard things
which have an exchange value for future consumption?
Like cricket runs? that’s how you win a game of cricket and in a world where
money can be exchanged for stuff that’s how wealthy people win the game of
getting what you want .
It is not as if the super rich don not gobble up resources
eg Musk and Branson in space.
Neil Wilson: “Import-led areas have to learn to ‘turn into the skid’, ‘run into the ambush’, and (no doubt bill’s favourite) ‘dive into the base of the oncoming wave’. All of these are deeply counter-intutive actions – as is the MMT description of international trade”.
Hog: “how and why are we back to using household analogies?”
This is my attempt at reaching some understanding of the basis for Mitchell’s teaching. But I dimly perceive that the key to the puzzle may lie in an analogy with the chemist Peter Atkins’s depiction of progress in scientific understanding as consisting in progressively attaining ever-higher levels of abstraction. Abstraction is the antithesis of unaided intuition.
By applying to the simple observation of the surface of things conveyed to us via our senses we perceive (or think we perceive) chains of cause and effect. Our senses (and/or what our brains make of what our senses convey) can and do deceive us, and so our intuition can be partly or wholely wrong; but this is only critical when it is a matter of life and death. For instance, our ancestors’ intuition was that the earth was flat and that the sun travelled across the sky, a misperception of course but one which was of no consequence so long as they remained land-bound, only becoming more critical when they began to venture out onto the oceans.
Macroeconomics is one such (set of) abstractions, and consequently is in many respects counter-intuitive by its very nature. It is this, I think, which gives rise to much of the confusion and misunderstanding because the habit of “non-experts” (ie about 99% of humanity, including the entire academic economics mainstream) is to approach the analysis and solution of problems in economics via their own intuition. (Deductive reasoning adduced from a priori axioms is just intuition in fancy-dress). That causes “ordinary people” automatically to use their immediate domestic situation as the framework within which to think, and only with the greatest difficulty can they be persuaded (even if only for the sake of argument) to exchange that perspective for another – abstracted – one which they find wholly alien. For those not habituated to it, to breathe rarified air requires a conscious and continuous effort! Most people are simply unwilling and unmotivated to make that effort because they don’t see any obvious reason why they should.
For those few who are habituated to it it’s easy, but too many of them make the mistake of assuming that because it comes naturally to them (like Sherpas) so should it for everyone else – a mistake BTW that Bill does not make, but then he’s a dedicated teacher.
All questions of international trade boil-down to power-politics. Mercantilism in its pristine form was completely explicit about that:- trade was a zero-sum game which a nation won by cornering and holding onto more gold than its rivals (ie by running a perpetual current-account surplus). By that means it could exercise dominance over them and if that dominance was threatened immediate resort to war was the automatic response (exactly the response to the emergence of China as a threat to the USA’s current dominance of world trade desired by neo-cons evidently still living in the seventeenth century, like Steve Bannon and John Bolton). All the members of the EU continue to act as nation-states notwithstanding that they are nominally signed-up to being parts of a supra-national entity: that applies not one iota less to the unfortunate Greeks (nor to the Brits – nor, putatively, the ScotNats) than to the cases of France and Germany. Until that day dawns when a World Government takes office while all nation-states melt away, trade is going to continue to be power-politics practised amongst nation-states.
As I understand it, MMT’s thesis takes that as a given but, far from in consequence espousing mercantilism, in fact propounds its polar opposite. In an ideal MMT world nation-states will not have withered away (far from it) but not just their governments but their electorates too will have become MMT-literate and will therefore be completely unafflicted by the “beggar-my-neighbour” myopia in regard to their external trade-balances which bedevills today’s world. Instead, real resources surplus to requirements in one country will find their way to countries where they can be put to use, to the benefit of both parties, without anyone getting exercised about nominal trade deficits or surpluses.
“When London sells financialised products to somebody from Rochdale”
What do you mean by financialised products?
What I thought is that if government spending is high enough to accommodate the savings desires of everyone (in London, Rochdale and etc) then there is no issue at stake.
The balances of trade of London or Rochdale would then just reflect the savings desires or real goods consumption desires of each city. It wouldn’t matter if the balance of trade is negative or positive, it wouldn’t be an issue at all. Who am I to judge whether someone should accumulate currency or potatoes?
But then you talk about some kind of paradox of thrift I couldn’t grasp…
Neil Wilson @5/26 16:10, this is a restatement of something you wrote at Brian’s is it not? I agree with it if I am interpreting it as you meant it to be. Private individuals often desire to save in the currency and MMT points out that this is actually a good thing for the issuing government- and therefore for the people who the government serves. Because that savings allows for the government that understands this to do more for the people it serves without causing inflation or increasing taxes. But somehow I think there is a difference when this savings desire comes from another currency issuing government that uses its central bank or financial system to, in effect, subsidize its exporting industries. This kind of policy is not necessarily good for the people of the import receiving country- it is designed by a different entity for the benefit of that entity- not for the benefit of the people in the importing country. Even if it means they get a lot of real stuff for less at the same time. Since it is not market driven, it can go on and on for as long as the other currency issuer is willing to support it and that can do harm.
Bill seems to say that the importing nation’s government can always adjust to this external policy. It can enjoy the real goods provided while altering its own systems in reaction. I am saying that adjustment can be a cost in and of itself- and that it doesn’t actually happen anyways in the country I live in.
Jerry Brown:But somehow I think there is a difference when this savings desire comes from another currency issuing government that uses its central bank or financial system to, in effect, subsidize its exporting industries.
No, there is no difference whatsoever. Saving is saving. Losing your job because some customer saved a dollar and didn’t buy that extra widget from your employer is exactly the same, whether that (non)customer is in Antarctica, Australia or Annapolis. Doesn’t really matter to the employer either – he’s in the business for money, not Antarctican, Australian or American money in particular.
I am saying that adjustment can be a cost in and of itself
Ordinarily, the adjustment is small in comparison to the genuine benefits of lower prices etc & functional finance etc. If the foreign competition is trying to destroy your national food self-sufficiency – then you have a real problem. But the smartest thing would be to let him cut his own throat. Stock up on all the cheap wine & cheese he is selling you and support your farm sector at the same time.
and that it doesn’t actually happen anyways in the country I live in.
I think we live in the same country. It does happen, just not enough. The US government mostly does adjust to or accommodate even foreign savings, trade and current account deficits, so it runs biggish budget deficits, though probably not big enough. So people who work at Wal-Mart can get by, with food stamps and buying stuff at Wal-Mart. Is that great? No. But having those same people not working, not getting food stamps and having to buy stuff at higher prices would be much worse for them and everybody else.
What such fears boil down to is that higher prices to a consumer or anybody else can be somehow better for them. Assuming that the consumer is actually buying goods, like food, not bads, this is absurd.
The problem is inadequate adjustment, not full or no adjustment. A Job Guarantee, would automatically provide adequate adjustment. Of course if the dirty rotten exporter just didn’t subsidize and export etc, export unemployment, necessitate more adjustment, a bigger JG etc – things might be better for everyone, under some measure. But not much better and not necessarily better at all for the importer, who often is better off in all respects by the exporter’s “hostile gift”.
Sure, and there might be some tweaks protecting domestic industrial capacity etc that would make things even more better. But to think the USA, the reserve currency issuer, has any serious economic worry – in a full employment, low price, low inflation Job Guarantee environment – is a joke.
Some very rewarding reading:
Hathitrust has put up Lerner’s Economics of Employment (1951) – (link to the foreign sector chapters) In these chapters, Lerner answers any objection I have ever seen here or elsewhere and more.
Far too many, far too many even here, in this thread, argue as if a “favorable balance of trade” is a magical benefit to a country, a magical harm to the recipient. Not so. When the chips are really down, you want an unfavorable balance, an import surplus:
And here is Abba Lerner’s “An Integrated Full Employment Policy” in Frank Graham & Abba Lerner’s Planning and Paying for Full Employment (1946) He has a short section “8. International Complications” in this paper, worth a look.
But even more, from the end of the paper & the book (my bolding of “shift blame” – that is all that this “surplus of trade discussions” is about):
The objections are not to the medicine but to the cure.
Some Guy: “But to think the USA, the reserve currency issuer, has any serious economic worry – in a full employment, low price, low inflation Job Guarantee environment – is a joke”.
A candid admission that the USA consciously sets out to use the arbitrary monetary hegemony it ruthlessly appropriated to itself to feather its own nest.
The candour is disarming, as is the implied riposte:- “so, what would *you* do” (or if you’re Britain, “what *did* you do”) in the same position?” Which is unanswerable – or rather the only candid answer is the admission: “the same”. That’s what nation-states have always done whenever they got the upper hand, until prevented by other states combining against them.
Time for us others to combine, methinks.
Yes Some Guy, I live in Connecticut and yes, it is difficult to portray the US as suffering from some kind of exploitation, especially from people selling us useful things.
I would love to continue to argue, and believe me, I could, but it isn’t fair to the blog administrators who have to read all my arguments 🙂 In any event, these three posts by Bill and the more than 200 comments on them have been a learning experience for me. And while I still have some reservations (although much fewer than before) about the MMT position on this, I have to stop arguing at some point and it might as well be now. Especially because I don’t anticipate coming up with anything else. I guess I will have to rest on the plethora of statements already produced.
In case you were wondering- the discussion with you has been helpful to me and it has had an effect on how I view this issue. It has been a pleasure arguing with you and you have been patient, and intelligent, and kind throughout. And actually, so has everyone else, including Bill. The quality of this blog and the commenters often amazes me. Thanks.
It was mentioned above that the desire to save robs some people of an income. I do not see how that is true, unless the savings are stuck in a matress, which is a tiny percent of savings. Savings take the form of increasing the amount of money in a bank account, or purchasing stocks, or bonds, or Manhattan real estate or Brazilian rainforest real estate, or diamonds, or art work, or baseball cards all of which provide someone else with an income. Therefore the whole idea that savings leads to unemployement seem to be to be unsupportable.
The claim that the best strategy for a country to follow is to steer in to the ambush when faced when some other country is following a pro export strategy does not seem to be well supported either. But it does seem to be an interesting line to follow. I would be interested in hearing more of that line of reasoning. Although it still seems to me to be of secondary importance. Why secondary?
It was stated above the microeconmic decsions that are perfectly reasonable for millions of firms and billions of people can cause grotesque ineffeciencies at the national as well as the international level. Would the same process not all be true with the hundreds of national governments and thousands of regional governments making decisions which are apparently best for their region resulting in a collective result is going to be to cause chaos somewhere else on the planet? Therefore even if the statement that exports are a costs and imports are a benifit is true I have yet to be convinced that this is useful information.
Germany and the USA are completely different on the important export continuim yet they share many of the same problems of uneven geographical economic performance. They also share the same problems of wealth dispartiy to the point of working class families being displaced by a lack of afforable housing near the places where they can find work. Germans workers have stronger Unions but their purchasing power wages are no higher than American workers. Then in my experience when it comes to retirement American pensions seem to me to be much higher than German pensions.
This dispartiy causes me to wonder is there something stopping the German government from running larger fiscal deficits to fund larger pensions? When I compare Germany and the USA I see Americans have larger homes and larger cars. Germans have more vacation time. Germans get a freer education. But the wages of Americans with a college degree seem to be higher than their German counterparts. Huge numbers of people in both countries depend on working overtime or even working an extra part time or even a full time job to make ends meet while many others have no job at all.
Then there is the issue of medical care which in the USA is better for high earners but worse than Germany for low wage earners. So what this scenic little compairison is bringing me to the potential point, if Germans had higher pensions life in Germany would be for most people better than life in the USA.
Obviously German politicians at the highest levels know that they could make things better not only for Germany but for Europe by spending more. For all of the economic disfunctionalities in Germany these problems are even worse in almost every other European country. If the Spanish and Portugese were wealthier they might not come to Germany for a summer vacation. They might go to France though. The increase in income created by more Iberian tourists in France might not create more French tourists in Germany either. But it would likely create more French tourism in Poland and That will be a huge benifit for Germany.
is it possible that German leaders have not thougth of this? OR are these leaders motivated my some other Agenda other than doing what is best for Europe or Germany? OR are these leaders constrained in some way that can not be made public?
Some years ago the German leadership was not willing to bail out Greece. But only a short time latter it was willing to bail out the Ukraine. Can anything important be infered from this Greek-Ukrianian example? If there were evidence that the world’s economy was being sycronized but for agenda’s different than sustainable fair economic performance what would such evidence look like?
Having answers to those questions would be useful if I new someone who could take advantage of the answers.
Bill has addressed these questions (many times, in regards to Germany and Greece!) on this blog. I recommend you start with the Debreifing 101 category in the sidebar.
Some Guy: But to think the USA, the reserve currency issuer, has any serious economic worry – in a full employment, low price, low inflation Job Guarantee environment – is a joke
Robert:A candid admission that the USA consciously sets out to use the arbitrary monetary hegemony it ruthlessly appropriated to itself to feather its own nest.
The candour is disarming, as is the implied riposte:- “so, what would *you* do” (or if you’re Britain, “what *did* you do”) in the same position?” Which is unanswerable – or rather the only candid answer is the admission: “the same”. That’s what nation-states have always done whenever they got the upper hand, until prevented by other states combining against them.
Time for us others to combine, methinks.
There is no necessity to combine (not that there’s anything wrong with that!) because there is no ruthless appropriating by the upper hand of monetary hegemony. The MMT & FF advice is just – stop pointing your own guns at your own head and pulling the trigger. This advice applies to the US, to the UK, to France, Canada, Australia, Argentina etc etc etc.
My first point is that the USA is semi-adjusting, semi-accommodating, semi-not-pointing, semi-feathering (the rich of course). If it didn’t the world would look a lot different, the US would be in a Great Depression & considering the prevalence of economic anti-knowledge, much of the rest of the world would be too. If it fully adjusted, fully accommodated, had a Job Guarantee then my second point is that it is damn rich and would be even richer then, so obsessing about an industrial policy is pointless, the best industrial policy is just not going to do all that much – it would have nothing to worry about.
So in the terms above I am saying the US should ruthlessly exercise its hegemony. Why? Well, this ruthless exercise would benefit first (a) the poorest USAns, many worse off than the poorest in other rich nations. (b) the US as a whole and (c) the rest of the world, including the poor in the rest of the world.
What reason would other nations have to combine against this? As Lerner said in the first book I linked to, this sort of ruthless functional finance – domestic depression avoidance, unemployment eradication is an international responsibility, a moral duty – the opposite of what is implied by considering it as some kind of oppression for others to combine against.
the problem i see with the idea that trade deficit is a benefit while trade surplus is a loss.
is the fact that in a world in which there is more than 2 currencies, a real buffer of employment as well as unemployment is determined by 2 factors.
1.the attractiveness to save in your currency for foreigners.
2.the attractiveness of your exports relative to imports.
i would explain it, in a world where there is 2 currencies there is indeed a situation where a trade surplus country is gaining net financial assets against the trade deficit country.
in this case the trade surplus country will have 2 choices concerning this foreign denominated assets.
A.to keep this financial assets and basically to save in foregin denominated currency of the trade deficit country.
(this is deflationary and allows the trade deficit country to achieve full employment via fiscal policy).
B.to buy with this financial assets goods from the trade deficit country.
(in this case a trade surplus country will inject demand into the trade deficit country and thus the trade balance will become balanced).
however in a world where there is more than 2 currencies there is option C
C.the trade surplus country is willing to save not in trade deficit country currency but in third country currency.
in this case the desire of trade deficit country to import is not equal to the desire of trade surplus country to save in a currency of the trade deficit country, and in this case officially (by requesting to pay for imports with the currency of said third country) or unofficially (by converting immediately the currency of trade deficit country into the said third country currency), the trade deficit country is required to pay for imports in foreign currency.
and in this case the trade deficit country have 3 choices.
A.to allow the currency devalue in non inducing employment manner (in case of unemployment buffer stock) or to reduce the real JG wage (in order to decrease imports).
B.to borrow in foreign currency (slow suicide option).
C.to reduce imports or to increase exports via capital controls tariffs export subsidies industrial policy and such.
thus international trade can be more complicated than simply imports=gains exports=losses
I have read all of those articles. I certianly have not read everything that Bill has written on the subject of international trade. I certianly can not remember everything that I have read that Bill has written about international trade. I am attacking two points that have been put forward by adherents to the mmt school of thought which were put forth here on this thread.
Nr. 1. Savings causes unemployment. That proposition seems flat out obsurd.
Nr. 2. That because exports are a cost and imports are a benifit national governments should not take any action to balance the countries imports and exports. This claim has some initial appeal. But, other critics have clearly pointed out so many exceptions that there really does not seem to be any point what so ever in basing any policy at all on the idea that exports are a cost.
This whole discussion is a diversion from much more basic problems. AT THE MOST BASIC, consumers who have access to money decide what products to buy based on price, percieved quality, and perhaps status could be added or that could maybe be seen as a charachteristic of an items quality. Lets work backwards from this list of three things, Status is a highly subjective quality in which advertising plays a huge factor. How well something was made is usually just quess work. I claim that most consumers do not have the expertise to judge the quality of the vast majority of items that they purchase. Finally although the price of something is very concrete it tells the consumer nothing about how an item was manufactured or grown, or how the money that they are paying for that item will be used to cover the different steps that were required in its production.
The result is that we have a planet of 7 billion loose cannons operating as consumers.
At higher levels of society things are no better. Let say that a country (or provence, state, or city) wants to persue an export related development strategy. They have to chose between a huge number of potential altenative products or industries to subsidize to increase the chances of success for this strategy. Yet what products are actually chosen is not determined by the quality of the alternatives. It seems to me it is determined by who gets access to the microphone. Those who get access to the microphone are more often than not the wealthiest people in the room.
Under these current conditions of chaos I am not sure that there is any general advice about trade that an economist can give to a national government that will be surely work to help that country defend itself from the predatory practices of more powerful actors. The advice that has been given by the scholars of mmt here on this tread has had so many wholes poked in to it one can not say that it carries water. It does not work when a country is exporting agriculture products in to an importing country that is not developed. It does not work when an exporting country is absuing environmetal standards. Exporting on the other hand works because it results in foriegners helping to pay for development costs.
Since the need for international sycronization is obvious it must be that some people thought of this a long time ago. Sure enough Marxists did think of this a long long time ago. But the opposing team denyed that they understood the benifits of this strategy. They described a world which would lead to permanent widespread prospertiy based on following short term self interest. With this story as a foundational story there is no need for you or me to worry about international sycronization. That allows THEM to do it for us.
As a result of this discussion I think that I might have had an insight in to an aspect of this international sycronization that THEY carry out. It is a good cop bad cop routine between Germany and the USA. It seems to me that if your nation is on a hit list it does not matter what policies are persued your country will be screwed. That would imply that the international disagreements between the USA and Europe are completely fake. That are just a smoke screen for an underlying joint strategy. But even more importantly I have to ask myself how far this manipulation of world tensions goes. World problems never get resolved decade after decade. Is it because the leadership of the USA and Europe are an evil force in which the rest of the world does not have the power to overcome. Or is it because the leadership of China, and Russia, and Iran have secretely been bought in to the arraingement ensuring that there will never be an attempt to overcome those who set the globalization agenda.
Curt, it’s simple. Savings is money NOT spent. It’s idle and going nowhere in the economy. Now, this is different to an investment. In the most simple terms, spending causes demand causes supply causes employment.
Exports cost REAL resources, which are not available to the country any more. Imports gain REAL resources, which were previously unavailable to the country. There’s no getting around that, and that is all that MMT is saying in this regard.
You are, quite evidently, overthinking this.
“Curt, it’s simple. Savings is money NOT spent. It’s idle and going nowhere in the economy.”
Maybe it is idle today, but not tomorrow.
I mean, I (and a lot of other people) have worked hard (and labour is a real resource) to accumlate currency or government bonds or other kinds of financial instruments. I gave up my time and labour in order to receive financial claims.
If the government spends enough money to accommodate my investment desires and those of other people, there will be no unemployment. Otherwise, there will be unemployment.
Hence, in my understanding, it seems that saving money is not a problem in itself. The same can be said about exporting. The problem is not exports, but government spending, if I got things right.
What’s the net flow of productive capacity between deficit and surplus countries?
Was China a superpower 20 years ago? If not what changed?
It is really simple. Money is never not spent. Therefore the desire to save does not cause economic disruption. While I was out walking and thinking about this I did remember that there is away for money to be saved in a way that does contribute to economic disrutption. But this manner of savings is NOT a wished for method of savings. Therefore it can not be fall in to the catagory of a desire to save. It is the build up of inventories beyond what is needed to satisfy potential demand.
Once there are surplus inventories companies will need to sell it at a lower profit or even an outright loss. That will lead to a reduction in a firms financial wealth. That could have an effect on the firms investment decision making.
But let us say that there is a macro economic build up of excess inventories which causes a macro economic desire by firms to borrow money which leads to banks having more money sitting in their vaults than usual and even by dropping the intrest rate on this money to zero the money still does not get taken. Could it then be said that lack of money in circulation is the cause of an economic downturn? Hell it would seem to me that under such circumstance there is an abundance on money and a lack of understanding of how to make use of that money.
With ths understanding I would think that a person would recognize that Marx’s criticism of the capitalist business cycle was accurate. The foundational problem causing unemployment is lack of maccro economic sycronization. Sadly the past performance of socalist planning is not one to inspire much confidence. But there is a key difference today. The world has much better forms of communication.
The leaders of the world global system can not be ignorant of Marx’s critiques. They would have had to familiarize themselves with his work to be able to try to discredit it. So with that knowledge in mind I have to ask myself is this lack of sycronization caused by to much decentralized decision making leading to gross ineffeciency. OR, are economic disruptions actually planned forms of economic sabotage designed for purposes that are never publically revealed in the same sense that the reasons for the USA and the UK not occupying Sweden have never been publically revealed.
It seems to me that if leaders really wanted to fix the problems causing the business cycle that were pointed out by Marx it really would not be all that hard to do so.
Dear Curt Kastens (at 2018/05/29 9:02 pm)
It is ridiculous to say that: “Money is never not spent. Therefore the desire to save does not cause economic disruption”. The flow of income in the form of saving is highly disruptive if it not matched by an equal flow on spending into the system.
That is basic Macro 101. Sorry.
What is an example then of money not being spent that is not put in to a matress? Furthermore even if money is put in to a matress having that money might make a person feel economically secure enough to borrow money to make an purchase or investment.
Dear Curt Kastens (2018/05/30 at 1:17 am)
I suggest you go back to the basics of Macroeconomics and learn about leakages and injections. That is what your question is about. It is basic 101 stuff.
It is also the topic of the debate ‘Keynes and the Classics’. I have covered that in depth previously. Search my blog and you find a whole series about it.
OK based on my reading of marro economics 101 last night I am going to put things in to my own non economist words to see if I am still on the mmt reservation. But the comment no longer has anythng to do with international trade so it would certianly be reasaonable to move it to another post that is more relevent. Anyways here goes. If I am making a fool of myself, I am in the good company of human beings with lots of formal education.
Savings are like a currency snow. It is a currency that is moving so slowly that it is frozen. Some of this snow is like the snow in Germany in falls on the ground and stays there a short time then when someone buys a scooter for example the snow melts and and rejoins the currency stream flowing downstream. But some of this snow falls lands on glaciers. Glaciers with names like Saving for Car or Saving for House.
On these glaciers the snow just piles up and moves slowly downhill until if reaches its head where it breaks off when someone has reached thier savings goal and then spends what they saved on a new house or car and when that happens the savings snow turns to spending fluid and it joins the stream of currency flowing downstream. But how fast these chunks break off the savings glaciers is infuenced by the economic temperatures of the times. When the tempratures are warm the glaciers flow quickly downhill and contributes more to the stream of spending. When tempratures are cool the glaciers move slowly and contribute little to the spending stream.
So that is the end of my analogy for now. There is no point in going further with it if it is already deemed to faulty.
Dear Curt Kastens (at 2018/05/31 at 3:28 am)
Why not just focus on the much easier concept that saving is a flow of unspent income that accumulates into a stock of financial assets, in the first instance, typically, a saving deposit increase somewhere.
All this talk of snow and glaciers etc introduces too much unnecessary complexity and description.
I will try that and see how it works
“Why not just focus on the much easier concept that saving is a flow of unspent income that accumulates into a stock of financial assets”
I know I am banned but presumably this will get thru to you.
The above is not strictly correct. Saving is not unspent income. It is income not spent on consumption. An entirely different notion.
Dear Henry Rech (at 2018/05/31 at 11:55 am)
You are not banned. I just asked you to move on from the previous going-around-in-circles discussion.
And you are correct, almost.
But I would specify it even more accurately. In the national accounts, saving is household disposable income not spent on consumption.
I avoided the technicalities to ensure we didn’t get lost in glaciers and snow storms.
Can we use a water reservoir as an analogy for a savings deposit?
Wealthier individuals and firms have larger reservoirs.
Does water accumulate in the reservoirs or does it get drawn out (borrowed) as soon as it is stored?
Obviously water that is ‘borrowed’ must be returned. Hence the filling of the reservoir would include not only savings, but returns on previous borrowings.
When the water is ‘spent’, the owner of the reservoir decides what it is spent on.
Damned that is interesting I was thinking just a few hours ago about using exactly such anolgy specifically the water resoivor of the famous waterfall at the palace in Kassel Germany. The time stamp on your comment is exactly when I was thinking about it too. Who or what is responsible for such SYCRONIZATION of our thoughts. Dirk Gently I suppose.
Would I be wrong in extending the concept of private “saving” as opposed to “savings” as household disposable income plus corporate retained earnings, not spent as final consumption?
In one of my comments above the word “not” is missing but if figured that in the context of the sentence a human mind would place it there anyways. More importantly I had read Bill’s post written a long time ago about banking myths. I learned them. But hundreds of millions of people like me do not work with economic ideas everyday. Normal people who have been exposed to mmt have held wrong ideas for decades. The correct ideas are new to most of us. Then the ideas of mmt get battered everyday by the by the nonsense that is spread by the ovewhelming forces of society. When I reread Bills comments on banking I learned that old ideas that I had held were seeping back in to my mind because I had forgotten the correct information that I had read ONE time and was starting to rerember the wrong information that I had read MANY more times. The truth can set you free but only if you can remember all of its details.
I was inspired by your glacier analogy. So were you!
I hope that you are right. I was preparing a part 2 to my glacier analogy. But during the process I vaguely recalled a comment. I think that it was Robin Wright-Underwood who made the comments in a speech before the United Nations.
As I recall she said, It does not matter. The federal government should just keep spending until full employment is reached. As I recalled that I realized that anything that I was going to say about the effects of savings would just be trivial and irreverent in compairison to that.
Curt. I sympathize with your confusion. The term “savings” has different meanings, depending on who is talking and what they are talking about. In my mind I consider savings as real objects in the world requiring human effort in their production: bridges, buildings, roads, manufacturing plants, potable water production facilities, inventories of commodities, goods. You get the picture, capital goods and goods not amenable to immediate consumption, and to a lesser degree accumulations of knowledge, expertise. Read savings are REAL. Money, accumulated money. People might call them savings but they are not savings. They are accumulations of vouchers. Vouchers on the current or future goods or services within an economy. There is no strict relationship between the amount of vouchers extant and the amount of real savings in the economy. Vouchers can be created or destroyed at the will of the government, or even privately. Accumulations of money are not “savings” to this economists thinking. They are accumulations of financial assets.
Curt. So how can the accumulation of vouchers (savings) cause unemployment?
gpd = total sales of goods and services in a country for a year
gdi = total amount of vouchers issued (income) within the country for a year
It might seem right that the total value of the goods and services produced equals the total value of vouchers issued in a given year. Logic.
It turns out empirically to be true. Each year gdp approx = gdi. I proved it to myself. Go to BEA.
What do the vouchers do? They place the economic resources of the country at your disposal.
Now some people create a problem. They don’t want to use their vouchers. They want to accumulate them instead (save). That’s all well and good but there’s a problem – there is no draw on the economic resources of the country to the extent of the savings of vouchers. The accumulation of vouchers will cause economic resources to be unemployed. Well this can be remedied by the federal government stepping up, issuing some new vouchers to fund the building of sewage treatment plants (investing). And so the national debt will rise. But so will the savings, the real savings, a sewage treatment plant. If the government had’t stepped up? Well aggregate demand in the economy would have fallen over the year. And private business would likely respond by not investing or even closing facilities if the accumulation of vouchers continued over time.
The key is the utilization of economic resources. So. Yes. The accumulation of vouchers (money savings) can lead to unemployment. You can see that accumulation of vouchers(savings) in part of an economy will either cause savings (investment) to go up or cause savings (unemployment, closed facilities) to go down. The accumulation of vouchers frees up resources. The decision of how to use those freed resources is now compelled upon the economy.
I’ve given you the benefit of my understanding.
Thank you for your comments
Could I recommend you stick with the conventional jargon, otherwise you will end up in a confused mess. In what follows below, I hope I am not teaching you how to suck eggs. Apologies if I am.
“Saving” is a flow concept. It is an expression of what is not consumed out of income. “Saving” itself is not real. You cannot see a flow of “saving”. What you can see is the flow of consumer goods, investment goods, government goods, export goods and import goods.
Whereas, “savings” is a stock concept. It’s what ends up in a bank account or under your bed (the latter is called hoarding).
“Thrift” is the preference of an individual to not consume a portion of his income.
Then there’s the “paradox of thrift” (note , it is not called the “paradox of saving”, which most people in this blog tend to get tangled up with).
The paradox of thrift occurs when, at every level of income, less is consumed out of income.
One of the reason MMTers get confused about this is the penchant to losely use the sectoral balance equation as a means of exposition. More often than not you will find exposition of economic behaviour using the sectoral balance equation. This is a very dangerous thing to do. The sectoral balance equation is an ex post accounting identity, that is, it is a record. It is not an explanation of economic behaviour.
If you want to read some stuff try:
Joan Robinson’s “Introduction to the Theory of Employment” or even better:
Abba Lerner’s “Economics of Employment”, chapter 17, “Is Saving Good or Bad?”.
I read this two days ago and it is one of the better explanations. You will find the book online.
Dear Henry Rech (at 2018/06/08 at 4:26 am)
In relation to saving (as a flow), financial assets (as a stock), the paradox of thrift (as an example of a fallacy of composition) please show one instance where the MMT proponents (by which I mean the original authors) get confused.
Your allegation that “One of the reason MMTers get confused about this” is without foundation.
We are also aware that the use of sectoral balances is in the vein of an ex post accounting identity. That is why MMT has the T bit attached – we theorise about how national income is generated and the components which are functionally related to it and how these combine to bring that accounting identity into balance each period.
Please stick to reality when making these off-hand remarks.
“Your allegation that “One of the reason MMTers get confused about this” is without foundation.”
I wasn’t referring to you, I was referring to commentators on your blog.
“That is why MMT has the T bit attached – we theorise about how national income is generated and the components which are functionally related to it and how these combine to bring that accounting identity into balance each period.”
That part I haven’t entirely got my head around because, prima facie, it appears to me that you give the sectoral balance equation more attention than is justified – beginning with the sectoral balance equation as a behavioural analysis tool rather than the other way around. I am working to understand the theory behind this – not quite there yet.
I think Henry was merely referring to us blog commenters. “MMTer” can be ambiguous, so at times I and other people have had to use other words to make the distinction. MMT Royalty, MMT rock star, MMT developer, MMT economist, MMT academic, MMT Peanut Gallery, MMT fan are some I have seen or used.
Dear Henry Rech,
I believe that the sectoral balance equation plays here exactly the same role as in Stock-Flow Consistent modelling. It is one of the equations required to build a determined system where the number of variables is equal to the number of equations (to be solved at a point of time for the short-run equilibrium). It is true that it is an “ex-post” identity but it was precisely looking at the evolution of sectoral balances what allowed Wynne Godley to identify the “seven unsustainable processes”. Obviously the behavioural equations are the “ex-ante” component linking the past (and the “immediate-past”) with the “now” but when we see that aggregate net saving of the private sector is close to zero or even negative and we know (from the behavioural equations) that some agents must be saving, another group of agents must be financing their spending by borrowing. If this debt-financed spending is not productive-capacity-generating and there is no expansion of aggregate demand forecast for the future [if not (x and y)], the process is clearly unsustainable – unless the government fills up the void created by lack of borrowing at some point of time or a miracle happens and the country manages to run trade surpluses.
Do you have any references for Godley’s “seven unsustainable processes”?
“….we know (from the behavioural equations)…”
Which equations are they?
A lot of “ifs” and “buts”. Too many to be able to make reliable assertions, I would say.
You can draw any conclusion you want by “iffing” and “butting”.
Thank you for your comments.
Dear Henry Rech,
Here is the reference:
Godley, W. (1999). Seven Unsustainable Processes. Medium-Term Prospects and Policies for the United States and the World. The Jerome Levy Economics Institute. Retrieved from http://www.levyinstitute.org/pubs/sevenproc.pdf
I am sorry for the number of “if” statements in my previous comment. I was in the middle of modifying an algorithm for heuristic selection of some data produced by a stochastic process.
Henry @4:26 ” More often than not you will find exposition of economic behaviour using the sectoral balance equation. This is a very dangerous thing to do. The sectoral balance equation is an ex post accounting identity, that is, it is a record. It is not an explanation of economic behaviour.”
I thought that JKH had a very good response to you on that recently-
April 28, 2018 at 4:05 pm
You are absolutely right that there are many examples of how people can push accounting identities in the wrong direction and claim misleading conclusions about causality. This is usually due to a basic error in underestimating the complexity of colliding variables. And I think you’re right that there may well be a lot of abuse around in invoking sector balance constraints in order to come up with somewhat biased conclusions. But there are examples are where it’s more wisely used as well.
But I think your comment also embeds what I consider to be a pretty big category error that misses the more fundamental role and value of accounting in finance and economics.
The error is in this:
“We have to remind ourselves that it is ex post”
It is not just ex post.
It is ex post, current, and ex ante.
And this goes to the heart of the usefulness of so-called “modelling” in economics.
Accounting is ex ante in the sense that any projection, simulation, scenario analysis, etc. that attempts to consider the future must be exhibited within a framework of accounting coherence that links past, present, and future. In other words, there must be a consistent projection of what we typically see as ex post into the framework for a possible future. This is what so-called stock-flow consistency is all about, in effect. And it’s how Keynes was able to come up with things like the paradox of thrift and similar stuff. He was considering conceivable outcomes, which means he was considering what is possible for the future. He developed macro accounting logic as a foundation for thinking about the future.
Krugman occasionally uses this way of thinking in calling out what he considers to be the false logic of freshwater economics. Understanding that income changes when government spending changes in a way that results in new output is pretty fundamental (Treasury view stuff). Ironically and unfortunately, Krugman is one of the worst when it comes to understanding bank accounting, which is essential to an understanding of how banks works. So-called endogenous money is simply a fact of life.
Any so-called model that attempts to project the future must project future accounting results that connect seamlessly with the current configuration and with ex post prior results.
As a type of mathematics – which is what it is – accounting is no more ex post than calculus or algebra. It can be applied to analysis of the past and the present, and to considerations of what is possible in the future.
Finally, this type of consideration of the future is part and parcel of risk analysis and risk management – which again is essential to finance and economics. This all has to be done on a coherent accounting platform and on a smooth continuum from past to future.
Anyway, that’s the way I see it. I just think it’s quite dangerous to think in terms of accounting being ex post. That can degenerate into an excuse for thinking sloppily about the future.
Thanks to PhillipO and Adam K.
You would also have read my return comments to JKH.
I’m afraid I mostly disagree with him (her?).
Ex ante accounting, as JKH was using the term is not behavioural economics – it is merely the recording of the results of behavioural modelling.
The paradox of thrift is not the result of playing with accounting but the result of using a behavioural model.
An accounting model itself is a representation of the future but is not the source of the future results.
I can agree with his last sentence as far as it goes – but that’s about all. But I would add it is equally sloppy and dangerous to rely solely on an accounting identity when considering the future.
Yes Henry, of course I read your response. I just didn’t think it was as good as JKH’s answer (which is far better than anything I would ever write). What I don’t understand about your argument is how anyone can argue anything about economics at all if they cannot make some kind of assumptions about how people will react to things. Behavior in other words. And the accounting, at the very least, informs us what is possible given whatever assumptions about how people will behave once those assumptions are made. Now if you want to argue there are no assumptions about behavior that can ever reasonably be made, I guess that would be an argument that could be logical, but other than that what is your point?
” What I don’t understand about your argument is how anyone can argue anything about economics at all if they cannot make some kind of assumptions about how people will react to things.’
No problem with that. So, of course, neoclassical economics (NCE) makes a load of assumptions about various things, we can therefore happily bring NCE into the fold, is that right? So which assumptions do we apply? Who says which assumptions we should apply.
Anyway, the assumptions issue is a red herring as far as I am concerned. I don’t believe you can take an accounting identity, assume away all the degrees of freedom bar two, vary one and hey presto, have a meaningful result ex ante.
The sectoral balance equation is usually presented, as you know, suchly:
(S – I) = (G – T) + (X – M) (let’s forget about FNI as a simplification)
And remember that S is actually not real so let’s replace it with what is real:
S = Y – C – T
So we have:
(Y – C – T – I) = (G – T) + (X – M)
Let’s put in some pretend values for the sectors (say in billions of dollars):
50 = 30 + 20
Now where did they come from? Who knows? Was it from:
Case 1: (200 – 100 – 30 – 20) = (50 – 20) + (70 – 50)
Case 2: (200 – 80 – 50 – 20) = (50 – 20) + (40 – 20)
Case 3: (300 – 150 – 50 – 50) = (80 – 50) + (100 – 80)
Case whatever up to infinity.
So which one of the infinity of possible economies does your pretend sectoral balance represent. The three economies shown are all significantly different. When you play with a sectoral balance which of the infinity of possible economies are you dealing with? You could assume holding values for certain variables and then arithmetically deriving the one loose variable by changing another loose variable, but which ones and by how much? You can assume anything you want and get any result you want – so what’s the value in doing that? All you are doing is fooling yourself. Don’t you think, for instance, the result of modifying investment behaviour will depend on the structure of the economy you are studying (e.g. how progressive the taxation system is or what the relationship between imports and income is or a multitude of other factors) ?
“And the accounting, at the very least, informs us what is possible given whatever assumptions about how people will behave once those assumptions are made.”
Yes but where’s reality in all of this (at least to the extent a model can represent reality). Only if you simultaneously specify the behavioural model can you derive a useful result. Accounting models are not behavioural models, in essence they are merely reportage, whether ex ante or ex post.
Henry, if the numbers just jumped around like your examples then the identity would be useless like you say. But it would be a very strange set of circumstances where imports for an entire economy went from 20 to 80 in one year, or taxes went from 20 to 50, or Consumption went from 80 to 150.
“Only if you simultaneously specify the behavioural model can you derive a useful result.” I’m fine with that statement.
“…if the numbers just jumped around like your examples then the identity would be useless like you say.”
I think you have missed my point.
I am not saying necessarily that the numbers jump around year to year as shown.
I am saying, that behind a given set of sectoral balance numbers, is a universe of possible economies. When you assume a set sectoral balances , you have no idea of the economy that you are playing with (ex ante).
And I ask you, do you think that if investment moves in some direction, the (ex ante) income response in Case 1 will necessarily be the same as in the Case 3 economy, given the size differences and the structural differences?
Do you seriously believe this?
How do you know (ex ante) what response a $1B change in one variable will induce in any other variable without a behavioural model?
“”Only if you simultaneously specify the behavioural model can you derive a useful result.” I’m fine with that statement.”
If you are fine with that statement, how can you ever contemplate doing ex ante analysis solely with an accounting identity?
Henry, I really do like to argue with you. But where did you come up with the idea that I espouse using sectoral balances or other identities without any sort of behavioral assumptions? I don’t think I said that. I certainly never meant to say that and if I did say that somewhere then I admit that would be wrong. I guess I might as well copy JKH’s other response to you since you seem to have forgot it even though it applies so well to this discussion.
April 28, 2018 at 9:27 pm
“What generates the results is a behavioural model. Otherwise, with a pure accounting model you can argue anything you want without having to demonstrate or justify how you got there. You could say revenue equals X – you have generated your record of anticipated results – i.e. your accounting model. But where does “X” come from?”
Who said anything about the absence of behavior or the absence of behavioral assumptions or the absence of behavioral “models” in generating simulated future results? Not me. Check it. If that were the case, I’d have to believe that behavior was not a factor in producing actual accounting results ex post – in order to be consistent in my ignorance of this aspect across time. I’d like to think that at least in this limited application I’m not quite that thick.”
As far as your specific example about investment changing and then trying to figure what else would change- I don’t know. But whatever guess I came up with would probably be more likely if it fit into the range of possibilities allowed by the identity than if it didn’t. Better to ask Bill about this than me though. I just don’t know enough on this.
Seeing you started this with JKH’s comments you might want to remember his first comment began with the following:
“I’m always amused and revolted when the economist says something like:
– Never reason from an accounting identity –
It is inevitable that those who say it don’t know accounting, don’t know its proper place in economics, and don’t know what they are saying.”
He was very dogmatic in his beginning comment and then wound back from this position in subsequent comments. It was this first comment that got me going.
His comments that you have referenced in earlier posts above were subsequent to my initial post in response to his. And the way you have reported them neither does justice to what he said or to what I said. He also says a few things about MMT.
Anyway, this is all a diversion from what we are discussing.
Yeah Henry, I guess it is a bit of a diversion. We were at some point arguing Bill was wrong to discount some benefits of running a trade surplus I think. I’m not going to win that argument even though I’m convinced I made some good points and that you did too. I don’t enjoy arguing with Bill- he’s usually right to begin with so that makes it tough to argue. I still argue he has been wrong occasionally but it is difficult. Once in a while I catch him with some typo-type error which he corrects, but other than that nothing I have ever written has had any impact. That’s ok with me though. And I like arguing with you 🙂
Henry Rech:We have to remind ourselves that it is ex post
JKH:It is not just ex post.
It is ex post, current, and ex ante.
Henry Rech: I more or less disagree with this statement.
For me, accounting is about recording what has happened….
I agree with Jerry & JKH. Here are some relevant papers and explication.
I=S (the simplified “original” sectoral balance identity) in the Keynesian, institutional, heterodox framework is an accounting identity and more, as it has a direction of causation. I causes S. Saving is the “pecuniary accountancy”, the “financial counterpart” of Investment. (A point that Henry Rech is making when he considers saving as not real, as a residual) And the identity is necessary, instantaneous, individual and aggregate. It is “not just ex post” in JKH’s words.
Wray’s “The Reality of the Present and the Challenge of the Future: Fagg Foster for the 21st Century” at economonitor refers to two papers of John Fagg Foster reprinted along with several others by Foster in an issue of the Journal of Economic Issues. Note Foster’s paragraph (relevant to this discussion on identities) that Wray comments “An entire course in macroeconomics is contained in that paragraph.” Imho some papers by Gladys Parker Foster (JFF’s wife) also in JEI (Financing Investment; Keynes & Kalecki on Saving & Profit: Some Implications etc) have additional explanation and are just as good.
Claude Gnos’s A Methodological Issue: Ex Ante and Ex Post Analysis Irrelevant to Keynes’s Theory of Employment
explains how an accounting identity+ like I(nvestment) = S(aving) “is not just ex post” with much historical detail.
Gnos notes how later authors thought that Keynes should have used Gunnar Myrdal’s ex ante / ex post distinction & probably the majority interpret or redefine accounting identities that way. But Keynes tried out but consciously rejected ex ante / ex post and reasoned along the Foster/JKH lines.
I could ramble on, but need to go to sleep! Thanks, Henry & Jerry – rereading and discovering those Gladys Foster papers and JKH’s comment and others helped me get these things clearer in my mind.
“It is ex post, current, and ex ante.”
JKH was talking about accounting in general. Ex ante accounting is just recording the future results of behavioural models, it is not the model itself.
“And the identity is necessary, instantaneous, individual and aggregate.”
It may be all those things but it is still ex post.
..”saving as not real, as a residual…”
It’s not even a residual.
“I=S (the simplified “original” sectoral balance identity) in the Keynesian, institutional, heterodox framework is an accounting identity and more, as it has a direction of causation.”
It is just an identity. The causation is in the behavioural relationships that entangles the income variables.
“Claude Gnos’s …”
Link not working but I found paper anyway. Thanks.
The Fosters – a new one on me – I will check them out.
“But Keynes tried out but consciously rejected ex ante / ex post …”
You have taken the quote from Keynes’ letter to Ohlin out of context. A few lines above your quote he said:
“As regards the ex post and ex ante method, I shall give further thought to its advantages.”
Not that that changes anything in this discussion.
“I agree with Jerry & JKH.”
BTW, JKH ended up essentially agreeing with me, at least that’s the way I see it.
Some Guy says I=S is an accounting identity and more- it has a direction of causation. I causes S. This is true, or at the least it seems to be the best way to look at it. At least to me. And in this case it is not dependent on behavioural assumptions at all or entangled in them as Henry says. At every point in time, intentional investment expenditure causes ‘S’ to occur immediately. That statement does not work backwards. And whether it has to be considered as ‘ex post’ or can be described as ‘ex ante’ doesn’t even matter. Now I don’t want to be accused of quoting people like JKH out of context or unjustly anymore so I will just mention that this is explained very well by JKH in comments at David Glasner’s Uneasy Money blog in a series of posts dating from March and April of 2015.
Henry Rech:It is just an identity. The causation is in the behavioural relationships that entangles the income variables. No, agree or not, that it “is more than an identity” (Wray) is a major MMT/Keynesian thesis. Alain Parguez, cited in those papers, says that the heart of the (unfinished) Keynesian revolution was that I=S with the direction of causation, from I to S, not from S to I (the neoclassical assertion). [I think that that isn’t even the only way that the identities are more than just identities] It’s not a behavioral relationship that could be otherwise, it’s deeper than that. It couldn’t be any other way. So those papers help explain why MMT gives the “sectoral balance equation more attention than is justified”.
As Gladys Foster says:
Sorry about not giving links. The software rejected them as spam last night. I can send links or pdfs to anybody interested.
Henry @1:35, I’m all for being optimistic and such, but saying someone essentially agreed with you when they tell you something like “But I think your comment also embeds what I consider to be a pretty big category error that misses the more fundamental role and value of accounting in finance and economics” is pushing the limits.
None of that went away or disappeared or was taken back that I can see. There was some mention that identities can be misused (probably by people like me no doubt), but “pretty big category error that misses the more fundamental role” is kind of apparent as to what it means. And it isn’t essential agreement as far as I can tell.
Just so you know, JKH has corrected me in the past also. Its never fun to get corrected but JKH is almost always right as far as I can tell. It is almost an honor to have JKH tell you you are wrong- it means you wrote something close to the truth or worthy of discussion to begin with 🙂 That’s how I look at it at least.
“Now I don’t want to be accused of quoting people like JKH out of context or unjustly anymore ..”
You quote JKH:
” “But I think your comment also embeds what I consider to be a pretty big category error that misses the more fundamental role and value of accounting in finance and economics” ”
You have quoted him out of context, in defence of a point you are making.
What JKH calls the “category error” is calling accounting just an ex post activity. He wants to stress it can be ex post, current and ex ante.
He goes on to say:
“Accounting is ex ante in the sense that any projection, simulation, scenario analysis, etc. that attempts to consider the future must be exhibited within a framework of accounting coherence that links past, present, and future.”
Which I agree with but only to the extent that it can only represent the ex ante results of modelling. I would not say that it can be ex ante in the behavioural/causality sense. Accounting is just arithmetic governed by a set a pre-agreed rules, but rules which do not specify any behavioural/causal relationships. That is the job of economic theory. The only place accounting and economics intersect is at the income identity.
Then of course he (still don’t know if it’s she) goes on to say:
“Who said anything about the absence of behavior or the absence of behavioral assumptions or the absence of behavioral “models” in generating simulated future results? Not me.”
Which I agree with and which is in agreement with what I said above.
So JKH and I are essentially in agreement.
That certainly is some creative algebra……
I`m curious, how did you get there from…. Y=C+I+G+(X-M)=C+S+T
Are you disputing the definitions?
S = Y – C – T is just the definition of “saving”.
Anyway, let’s start from your equation:
Y = C + I + G + (X – M)
Y – C – I = G + (X – M)
Deduct T from both sides:
(Y – C – T – I) = (G – T) + (X – M)
Or you can come at it another way.
Starting with your equation (all of it this time):
Y = C + I + G + (X – M) = C + S + T
Rearrange for the T:
Y – T = C + I + (G – T) + (X – M) = C + S
We don’ t need = C + S and rearrange for the C and I
(Y – C – T – I) = (G – T) + (X – M)
With regard to the following statements in your narrative:
The next argument presented is that by saying exports are a cost it means the same thing as saying they are a loss.
Well, in the obvious way, again thinking in real terms, they are a loss because the real resources embodied in the exports are not available for use by the nation.
Which suggests the motive to export. The only reason a nation would want to export and incur the costs involved is to generate a higher rate of return.
One reason is to keep your people employed. China runs a huge budget surplus as it exports goods and services around the world because it needs to keep its people working. If it didn’t export those goods and services, they wouldn’t get produced because the Chinese people are not wealthy enough to afford them. When Milton Friedman visited China a number of years ago, he observed the people building a highway. He said to his tour guide, why don’t you use Caterpillar road building equipment. The response was that they needed to keep people employed. His response was, why don’t you give them spoons.