As I noted yesterday, last evening I accepted an invitation to speak on a panel…
When two original MMT developers get together to discuss their work
Last week, Warren Mosler and I had one of our regular catchups and we discussed at length the state of play in Modern Monetary Theory (MMT). We are quite protective of it. We mused about how we started out on this Project and where it has gone. As old stagers do when they get together. We also reflected and compared notes on what the state of MMT is now, given the increasing visibility of the ideas in the mainstream media all around the world and the proliferation of social media activists who have chosen to identify and promote our ideas. There were aspects of that development that we identified as being of concern for us and other aspects which we considered to be a cause for optimism (celebration is too strong a word). We thought it would be a good idea to take a breath and document what we considered to be the essence of MMT – as a sort of checklist for people who want a fairly precise account of the body of work. I agreed to write this document after input from Warren. So, this is what we mean by MMT. What follows is my account of our conversation expanded to add meaning where required.
Obviously, I have previously considered some of the things we discussed in these blog posts (among others):
1. Reflections on the 2nd International MMT Conference – Part 1 (October 3, 2018).
2. Reflections on the 2nd International MMT Conference – Part 2 (October 4, 2018).
And earlier:
3. The divide between mainstream macro and MMT is irreconcilable – Part 1 (September 10, 2018).
4. The divide between mainstream macro and MMT is irreconcilable – Part 2 (September 11, 2018).
5. The divide between mainstream macro and MMT is irreconcilable – Part 3 (September 12, 2018).
And even earlier:
6. Modern Monetary Theory – what is new about it? (August 22, 2016).
7. Modern Monetary Theory – what is new about it? – Part 2 (long) (August 23, 2016).
8. Modern Monetary Theory – what is new about it? – Part 3 (long) (August 253, 2016).
The concerns we discussed, initially, relate to matters I raised in the blog posts (1) and (2) above.
There is a tendency in the social media to use the term MMT as a slogan rather than relating to it as a coherent and body of academic work in economic theory and practice that has been meticulously developed over more than 25 years.
This tendency manifests in claims that the essence of MMT is that the capacity of the government to fund programs is unlimited and so there is massive scope for all sorts of progressive policies to be introduced.
Basic Principle 1: The beginning of the MMT ‘money story’
Societies that use state money are very different to barter-type system.
In a monetary society, the state is at the top of the monetary hierarchy. We cannot understand how such a system works unless we understand the functions of the state in this respect.
The MMT ‘money story’ begins with a state desiring to provision itself in order to fulfill the political charter for which it was elected by the people.
That meaning applies to democratic systems where the politicians go to the people with a stated mission and the winner forms government.
However, the ‘money story’ is not exclusive to democracies.
Any system, short of slavery, requires productive resources to be transferred, through free-will, from the non-government sector to the government sector in order to do the work of the latter.
That insight is the beginning of our journey.
Further, the state (generally through its designated agent, the central bank) is the sole supplier of that which it demands for payment of taxes.
The taxpayers do not have the capacity to meet their legal tax obligations defined by the state without the state acting first.
But the imposition of the tax liability is an important step in the ‘money story’ to understand.
What it means is that the tax liabilities (not tax payments) function to create sellers of goods and services in exchange for the required state tax credits, the latter which we refer to in common parlance as the state’s currency.
So we can think of a currency as being a tax credit with the state.
This provides a further insight that is intrinsic to MMT.
The tax liabilities function to create what we define as unemployment – where people seek work in exchange for the state’s currency.
Thus taxation is a way that the government can elicit productive resources and final goods and services from the non-government sector that it needs to advance its political agenda.
It is clear that the non-government sector has to get the currency before it can use it to pay its tax bills.
Where else could the non-government sector get the currency from to meet its legal liabilities to the government, if the latter did not purchase goods and services provided by the non-government sector or make transfers to that sector?
So the state can then provision itself by buying what is being offered for sale with it’s otherwise useless currency.
And thus we understand the basic operations involved.
The state, from inception, as the sole supplier of the funds needed to pay taxes or buy the debt issued by the state, must necessarily impose tax liabilities on the non-government sector before it can spend.
Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes, without a concomitant injection of public spending, by design, creates unemployment (people seeking paid work) in the non-government sector.
The unemployed or idle non-government resources can then be utilised through government spending, which amounts to a transfer of real goods and services from the non-government sector to the government sector.
While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.
Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.
This understanding provides a further insight.
State spending therefore, is constrained by what is offered for sale in response to tax liabilities.
But, importantly, spending by such a government is not operationally constrained by revenues.
Note here that this conclusion does not apply to the 19 Member States of the Eurozone because they surrendered their currency sovereignty and use a foreign currency instead.
Principle 2: The unemployment and Job Guarantee story
In a normal function economy, there will always be some unemployment as people move between jobs. Typically this state should be transitory and a low percentage of those willing and available for work. We call this an irreducible level of unemployment and it might be around 1 to 2 per cent, depending on the nation.
Anyway, unemployment in excess of that irreducible minimum is called mass unemployment.
And, bringing together the initial insights above we can conclude that unemployment is the evidence that state spending is insufficient to have hired all people that the state’s taxation has caused to become unemployed.
In the Post-World War 2 period where the so-called ‘Keynesian’ consensus operated mass unemployment was referred to as ‘demand-deficient’ unemployment, which described a situation where there is a shortage of jobs overall relative to the willing supply of labour resources (persons and hours) at the current wage levels.
The tag went beyond description though because it indicated that such unemployment arose because of a a deficiency in aggregate spening.
Mass unemployment thus varies over the economic cycle – rising when aggregate spending falls below the level needed to fully employ the available workforce and falling when aggregate spending moves closer to the level needed to full employ the available supply of labour.
This conception is fully consistent with the way MMT characterises mass unemployment. The difference is the emphasis MMT places on the role of government and the operations of the tax liabilities.
Thus, mass unemployment arises because, after the non-government sector has implemented its spending and saving decisions, the level of spending in insufficient to create sales and output commensurate with the provision of jobs necessary to absorb the willing and available supply of labour.
The MMT emphasis is that this shortage arises because for a given state of tax liabilities, government spending is insufficient.
We thus understand that the remedy is to either to spend more into the non-government (which may involve hiring the unemployed directly) and/or reducing the tax liabilities.
Warren would say that the government should do this until the unemployed transition back to the non-government sector.
His view is that, initially, the government should provision itself as desired to the ‘right size’ as explained. And once the government is at it’s desired ‘right size’ the remaining unemployed can be transitioned back to the private sector.
I would express this a little differently by allowing the possibility that the Job Guarantee pool could be a permanent employment location for some workers if they so choose. Having a small fairly rigid buffer doesn’t reduce its price stability features.
I also understand that one could make a case to render these jobs permanent within the non-Job Guarantee part of the public sector, which then relates directly to Warren’s reference to the ‘right size’.
But the point is that the currency-issuing government always chooses the prevailing unemployment once the spending and saving decisions of the non-government sector are implemented.
In the current era, governments use the unemployed as a buffer stock to provide a price anchor for wages in the general economy.
In the ‘Keynesian’ full employment period, governments saw mass unemployment as a policy target – to be kept as low as possible within inflation limits they believed existed.
But in the neoliberal era, governments use unemployment as a policy tool to discipline wage demands and soften sales (thus putting a discipline on firms who might concede wage demands).
The unemployed buffer stock approach (sometimes called the NAIRU approach) is the way in which inflation control is managed.
However, the longer people stay unemployed the higher is the skill loss and non-government employers tend to prefer to hire from those already working or who have been unemployed for only short periods of time.
In other words, the disciplining power of unemployment requires that the unemployed constitute a threat to those still in work so that they will moderate their wage demands.
However, over time, the threat from this unemployment pool starts to wane as the unemployed endure skill losses and firms introduce new technologies and processes.
In this case, the so-called NAIRU has to be pushed higher and higher by contractionary fiscal and monetary policy for the same degree of threat to be maintained.
There are also massive costs involved in both income loss and personal pathologies (social exclusion, psychological harm, et) that further compound the overall disadvantages of the unemployment buffer stock price anchor.
On any reasonable grounds, this approach to price stability is very costly and ultimately, unworkable in a modern economy.
High and sustained levels of unemployment, ultimately, undermine the social and political stability of a nation, which creates unintended costs that go far beyond those noted above.
These blog posts provide much deeper discusion of these points:
1. Buffer stocks and price stability – Part 1 (April 26, 2013).
2. Buffer stocks and price stability – Part 2 (May 13, 2013).
3. Buffer stocks and price stability – Part 3 (May 17, 2013).
4. Buffer stocks and price stability – Part 4 (May 24, 2013).
5. Buffer stocks and price stability – Part 5 (May 31, 2013).
The MMT alternative is that the government introduces a Job Guarantee policy to establish an employed buffer stock which provides a superior price anchor than the current policy that used unemployment as a buffer stock.
Warren sees the employed buffer stock as a means to promote the transition from unemployment to private sector employment.
I see that it can do that but may also be a permanent pool of workers who will never be able to gain private sector employment at current wages. My bias is not to privilege non-government employment over public employment.
But that doesn’t alter the fact that the Job Guarantee is an anti inflation policy that further renders the positive externalities of higher paying jobs for anyone willing and able to work.
These blog posts are also relevant:
1. Whatever – its either employment or unemployment buffer stocks (December 30, 2011).
2. MMT is biased towards anti-crony (December 28, 2011).
The Job Guarantee is a macroeconomic stability approach, which means it is much more than a simple public sector job creation policy.
As MMT has gained in popularity, there have been a number of different job guarantee proposals coming out of the woodwork, many of which claim to be derived from MMT.
Note the use of the lower case j and g in the previous paragraph.
However, there is only one Job Guarantee in MMT.
The Job Guarantee within MMT is a technical construct designed to replace the mainstream Phillips curve (the trade-off between unemployment and inflation).
The Job Guarantee is a superior buffer stock mechanism to mass unemployment for maintaining price stability.
And this means, that even if one didn’t hold the philosophical or moral commitment to the ‘right to work’ they would still advocate a Job Guarantee (MMT style) in contradistinction to the NAIRU-approach which uses unemployment as the buffer stock price anchor.
They would have to agree that in efficiency terms – which relates to resource wastage etc – the employment buffer stock approach is superior to the current dominant alternative.
The Job Guarantee disciplines inflation because the government offers anyone a job at a fixed wage that is at the bottom of the wage structure.
In times of inflation pressures, the government can use fiscal policy to redistribute workers from the inflating sector to the fixed price Job Guarantee sector.
Clearly, it is desirable to keep the Job Guarantee buffer stock at a minimum.
And so fiscal policy adjustments can be implemented to keep the Job Guarantee pool at minimum required levels to achieve desired price stability.
Principle 3: The Public Debt story
In trying to understand, the issuance of public debt, we note that funds spent by the State into the non-government sector (for goods and services) is either lost to the economy when taxes are paid, or remains in the economy as savings until used to pay taxes.
That is just a matter of accounting.
The ‘savings’ are stored as financial assets in various forms.
As a matter of accounting between the sectors, a government fiscal deficit (spending that isn’t matched by taxes) adds net financial assets (adding to non government savings) available to the non-government sector and a fiscal surplus has the opposite effect.
The last point requires further explanation as it is crucial to understanding the basis of MMT.
Given the current bias toward (unnecessarily) matching fiscal deficits (spending greater than tax withdrawals) we say that what is commonly termed the ‘public debt’ is really just the accounting record of the savings – the funds spent by the state that have not yet been used to pay taxes.
In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.
The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.
In accounting terms, the government’s deficit (surplus) is exactly equal at all times the non-government sector’s surplus (deficit).
All this ties in with our previous discussion by allowing us to see the limits on government spending.
It is clear that government spending has to be sufficient to allow taxes to be paid.
In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).
It is also clear that if the Government doesn’t spend enough to cover the taxes to be paid and the non-government sector’s desire to save overall, then the manifestation of this deficiency will be unemployment.
In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
Further, fiscal deficits manifest in the non-government sector as actual cash balances in banks and credit balances in reserve accounts and securities (debt) accounts that are maintained by the central bank in the nation.
All commercial banks hold reserves at the central bank as part of the ‘clearing system’, so that all the transactions that occur on a daily basis can be validated and resolved.
The debt accounts record the outstanding government debt in various forms (short-term and long-term) that has been issued to match the fiscal deficits.
If you think about the process through which net government spending initially create an increase in net financial assets in the non-government sector you will appreciate that spending effectively involves the government crediting bank accounts in the non-government sector and taxing involves the government marking down bank account balances.
A fiscal deficit means there is a net accretion in these accounts. Initially, after all the transactions are made between government and non-government and within the non-government sector, that net accretion shows up as increases in the banks’ reserve accounts at the central bank.
Interest may or may not be paid on those balances.
If the deficit is matched dollar-for-dollar with debt issuance then the government would debit (mark down) the balances in the reserve accounts (of the banks that were party to the debt purchases directly or through their clients) and credit (mark up) another ‘account’ which we can call ‘outstanding public debt’.
In other words, the debt issuance effectively just results in funds in reserve accounts being transferred to funds in the ‘outstanding public debt’ account.
When specific debt items (bonds) mature (that is, reaches the time that the government has to pay back the principal), a reverse operation would occur.
The ‘outstanding public debt’ account would be debited (marked down) and bank reserves would be credited (marked up).
And if the central bank was to pay market rate of interest on reserve balances (as many are currently doing) then there is functionally no difference between the impact of leaving funds in the reserve accounts as opposed to issuing debt and transferring the funds to the ‘outstanding debt account’.
This also means that traditional open market operations, where the central bank buys and sells public debt to the non-government sector in order to drain or add reserves such that there is an appropriate balance that allows it to maintain its current interest rate target is unnecessary.
Some further points.
First, the debt issuance does not fund the net public spending. It just gives the non-government sector an alternative financial asset in which to store its overall saving.
The net spending would occur without the debt being issued.
Second, the funds used by the non-government second to purchase the debt came from past fiscal deficits that had not been taxed away.
Third, if the government was concerned about the interest rate (yield) it was paying on the debt it issues, then the central bank can always control that yield through appropriate purchases of that debt itself, which influence the price of the assets in the market and thus the yields.
This changes the interest paid by government from the market yield of the debt purchased to the rate paid by the central bank on reserve balances.
Fourth, the central bank can always purchase any debt that the private sector chooses not to purchase via the primary auctions. There may be legislative or regulative rules that apply here but they are creatures of the government anyway.
The last two observations mean that there is never a reason for government bond yields to rise above a level that the government considers to be acceptable.
Which means that a currency issuing government (which is the consolidation of the Treasury and central bank) can always assume the role of its own largest lender and borrow as much as it likes from itself (subject to laws it itself makes etc).
Fifth, governments always have the option of issuing only short-term debt anyway.
There is a distinction between the interest the government pays and the yields on longer term government bonds, as the government can elect to not sell long-term bonds if it doesn’t want to pay those rates. But it might want long-term bond yields to be lower for other reasons, such as the cost to private borrowers for home mortgages.
But even in that instance, the government can use the banking system to fund those at any rate it elects.
Principle 4: The Price Level story
We define ‘inflation’ as a continuous increase in the price level. A once-off rise in prices in not considered to be an inflationary episode.
In MMT, given the currency is a state monopoly, the state becomes the ‘price setter’ because the price level is necessarily a function of the prices paid by government when it spends or the collateral demanded when it lends.
This ties in with the Job Guarantee as a macroeconomic stabilisation framework within MMT. As the government is offering jobs at a fixed price to anyone with a zero bid for their services in the ‘market’, that spending becomes a price anchor.
A continuous increase in the price level will not be the case unless the state keeps bidding for goods and services in the market at the continuously higher prices.
All spending in the economy carries an inflation risk if it tries to compete on a continuous basis for real resources that are currently fully utilised.
We need to understand that a once-off increase in government (or non-government) spending will typically not generate an inflationary episode.
The price level might rise as mark-ups are applied to the higher costs but such an impact is finite.
Typically, there are spare resources available for purchase, and, as such, the inflation risk is low.
But history tells us that this is not necessarily the case. There are well-documented examples where unemployment has been high and there is a concomitantly high inflation rate. Venezuela and Turkey are current examples. The stagflation that beset the West after the OPEC oil price rises in the 1970s is another example.
We understand those examples, within MMT, by realising that, ultimately, the inflation continues because the government paying more for the same ‘basket’ of goods and services, through various means such as indexation policies.
But it should be understood that the ultimate constraint on government spending is not financial but real – the actual resources that are available for sale.
Principle 5: The fiscal sustainability and fiscal space story
In the mainstream macroeconomics, the concept of fiscal sustainability and fiscal space is defined in financial terms.
For example, the IMF defines fiscal space in this way:
… (the0 room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
MMT rejects these notions outright.
You cannot fiscal space or sustainability by some given deficit size relative to GDP or some threshold level of public debt to GDP or any other self-referencing ‘financial’ ratio.
The concept of fiscal sustainability cannot be meaningfully defined in terms of any notion of public solvency. A sovereign government is always solvent (unless it chooses for political reasons not to be!).
The concept of fiscal sustainability will not include any notion of financing imperatives that a sovereign government faces nor invoke the fallacious analogy between a household and the government.
The concept of fiscal sustainability will not include any notion of foreign ‘financing’ limits or worries about foreign ownership of a sovereign government’s debt.
We have learned that:
- a sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
- the capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.
But, saying a government can always credit bank accounts and add to bank reserves whenever it sees fit doesn’t mean it should be spending without regard to what the spending is aimed at achieving.
The concept of fiscal sustainability is more appropriately defined in terms of societal goals such as well-being.
For example, fiscal sustainability is directly related to the extent to which labour resources are utilised in the economy.
The goal is to sustain full employment, which is the base case in an efficient economy that seeks to avoid resource wastage.
Once the government assumes its responsibility to achieve and sustain full employment there are specific requirements imposed on its spending.
In this blog post – The full employment fiscal deficit condition (April 13, 2011) – we learned that:
The lessons, in summary, are:
1. A macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the spending injections equal the sum of the spending leakages. Whenever this relationship is disturbed (for example, by a change in the level of injections, however sourced), national income adjusts and brings the income-sensitive spending leakages into line with the new level of injections. At that point the system is at rest again.
It should be understood though that the system is in constant flux and equilibrium defined in this way is being continually disturbed. The resulting income changes work to bring the injections and leakages back into balance.
2. The injections come from export spending, investment spending (capital formation) and government spending.
3. The leakages are household saving, taxation and import spending.
4. For every ‘agent’ that spends more than their income, another ‘agent’ necessarily spends less than their income.
Any government, corporation, resident or non-resident can run deficits (spending more than they earn). For example, those who spend more than their incomes include households borrowing to purchase houses, businesses borrowing to invest in new capital equipment, and governments that spend more than they extract in taxes. On the other side, households and businesses that save are running surpluses.
5. An economy at rest is not necessarily one that coincides with full employment or has all desired savings realised.
6. When an economy is ‘at rest’ and there is high unemployment – there must be a spending gap and unmet saving desires – given that mass unemployment is the result of deficient demand (in relation to the spending required to provide enough jobs overall).
7. If there is no dynamic which would lead to an increase in private (or non-government) spending then the only way the economy will increase its level of activity is if there is increased net government spending – this means that the injection via increasing government spending has to more than offset the increased drain (leakage) coming from taxation revenue.
8. To sustain full employment, the fiscal deficit has exactly offset the gap left by non-government leakages being greater than the injections.
If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost. If the government tries to expand the fiscal deficit beyond the full employment limit, then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).
In some cases, a fiscal surplus will be required to sustain full employment without inflation should the non-government injections outstrip the leakages (say if the export sector is particularly strong).
A government operating according to those rules is conducting a sustainable fiscal policy.
The fiscal balance that arises under those conditions is whatever it is.
There is nothing intrinsically good or bad about a fiscal deficit of 2 per cent of GDP, compared to a deficit of 10 per cent of GDP or a fiscal surplus of 3 per cent of GDP.
Assessing fiscal sustainability requires us to understand the context which means we have to understand the saving and spending decisions of the non-government sector.
This also ties in with the MMT concept of fiscal space, which is about unmet savings desires as evidenced by the existence of mass unemployment.
In a modern monetary economy, fiscal space has nothing to do with what the current fiscal balance is or has been and what the current public debt ratio is or has been.
A sovereign government can purchase any idle resources that are for sale in its own currency, including all idle labour.
The available resources (good and services) that are for sale in the currency of issue defines how much fiscal space the government has.
Such a government can never run out of funds in pursuing its goal to ensure all available resources are being productively deployed.
So a past deficit poses no particular constraints on what the government can do in the future, except to say that if the deficit has been properly calibrated to sustain full-employment fiscal then there will be less to do should the private sector contract.
To better understand the concept of fiscal sustainability and disabuse yourself of the false claim that it is somehow related to deficit history or public debt ratios, the following introductory suite of blog posts will help:
1. Fiscal sustainability 101 – Part 1 (June 15, 2009).
2. Fiscal sustainability 101 – Part 2 (June 16, 2009).
3. Fiscal sustainability 101 – Part 3 (June 17, 2009).
4. The full employment fiscal deficit condition (April 13, 2011).
5. Fiscal space has nothing to do with public debt ratios or the size of deficits (August 30, 2018).
Principle 6: The currency sovereignty story
To finish the discussion we can now clarify the MMT meaning of currency sovereignty.
Some people seem to think that monetary sovereignty is about being able to buy everything a nation might need to be prosperous.
I note that Warren prefers not to use the term ‘sovereignty’ because in his view it leads to confusions such as the statement in the preceding sentence.
I prefer to use the designation however.
In common parlance, the term relates to the power of the government. But what I think MMT shows is that there is a sharp difference in the capacity of a government that I has ‘monetary sovereignty’ (defined below) and one that does not.
The Eurozone governments are ‘sovereign’ in the common parlance but not in the MMT parlance because they use a foreign currency.
That is why I prefer to use the term.
However, Warren and I agree on the substance that follows.
In MMT, currency-issuing countries that do not borrow in foreign currencies or peg their currencies by any arrangement are sovereign in that currency.
Such a government, which in MMT represents the base case for conduction monetary and fiscal policy:
1. Spends and taxes in its own currency exclusively.
2. Its central bank sets policy interest rate. The preferred setting is at zero per cent.
4. The currency floats.
5. The Government does not borrow in any foreign currency.
Accordingly, that government can purchase anything that is available for sale in that currency including all idle labour.
As a result no productive resources ever need to be idle if they are looking to be used.
Of course, it does not mean that a country devoid of natural resources or dependent on imports for food and energy will generate prosperity just because its government can ensure all productive resources are working.
If no other nation desires the exports of that sort of country then it remains materially poor regardless of how ‘sustainable’ the government’s fiscal policy is.
This blog post goes into much more detail – Ultimately, real resource availability constrains prosperity (February 11, 2016).
Principle 6: The open economy story
This will have to wait until next time.
For now read:
1. Modern monetary theory in an open economy (October 13, 2009).
2. MMT and the external sector – redux (September 26, 2018).
3. Trade and external finance mysteries – Part 1 (May 8, 2018.
4. Trade and finance mysteries – Part 2 (May 9, 2018),
5. A surplus of trade discussions (May 23, 2018).
Conclusion
This post hopefully will serves as a reference guide in one place to the basic principles of MMT as seen through the eyes of Warren and myself.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
“When an economy is ‘at rest’ and there is high unemployment, there must be a spending gap …”
My understanding was that, in an “at rest” state, the spending gap should have been closed by the automatic stabilisers.
“The state, from inception, as the sole supplier of the funds needed to pay taxes or buy the debt issued by the state … ”
What is issued by the state is a liability, not a debt. All debts are liabilities but not all liabilities are debts.
‘And if the central bank was to pay market rate of interest on reserve balances (as many are currently doing) then there is functionally no difference between the impact of leaving funds in the reserve accounts as opposed to issuing debt and transferring the funds to the ‘outstanding debt account’.
This also means that traditional open market operations, where the central bank buys and sells public debt to the non-government sector in order to drain or add reserves such that there is an appropriate balance that allows it to maintain its current interest rate target is unnecessary.’
I have to confess that I always get a bit muddled by this ‘no-debt-issuance alternative.’ What I don’t seem to get is how the interest rat is maintained without adjusting the reserve levels and how this affects the intra-bank selling of reserves to balance out the payments across the system which also is part of the floor/corridor interest rate determination. Does this mean the ‘penalty rate’ is the same as the ‘bank rate’? ( hope I’ve got my terminology right!).
Any help out there to clarify this appreciated as always. As usual I’m probably missing something blindingly obvious.
John Hermann,
Governments issue currency and bonds. In most jurisdictions (although not all jurisdictions) both are considered “public debt” or “debt”.
Even if it was not the case, I believe that discussing this kind of unimportant technicalities is unproductive here…
For me the MMT job Guarantee does not go far enough. I agree that the spinoff benifits of the MMT job guarantee are true. But I think that even more can be achieved.
Why should a person want to achieve more? Aren`t all the benifits of the MMT job guarantee enough?
By asking for more perhaps I am getting greedy. Well if we want to meet the challange laid down to us by Thomas Paine (peace and blessing be upon him), it should be the goal of human societies to eliminate all forms of expoitation with in a society.
There is a problem in achieving this goal however. That is what constitutes expoitation is a SUBJECTIVE conclusion not an objective one. But just because it is subjective does not mean that it is something that can be ignored.
in a society dominated by compition of one private firm or ———– against another, the value of knowledge and intellegence is far greater than the value of human muscle power. Because the governments for the most part have done nothing to mitigate this disparity we have reached a point in which those in ownership and managerial positions have hyperwarp advantages over those who are not in those positions.
I can quickly think of two trends that result from this state of affairs. The first one is that humans are forced in to an educational arms race in which more and more time is spent investing in our education, rather than our production, so that we can avoid becoming uncompetitive. The second is that we create a society in which everyone is trying to become a chief and no one wants to be an indian. (Hey if any Native American, or Asian from the country of India is offended by that no offence is intended) These trends also create economic misallocation of resources. If a person wants to learn more about this in greater detail I reccommend studying the economic school of Participorty Economics.
Those people who fall behind in the economic competition of the market place, if they avoid unemployment, end up working not only for much lower pay but in positions that have much less comfortable working conditions. Therefore it is my subjective (but spiritually true) conclusion that the economically less successful humans get screwed twice. Once with their lower pay, twice with their less disirable jobs. Are the people who end it these positions any less deserving of happiness and love as those who were born in to a wealthy family and and IQ above 125 and great athletic ability or beauty?
It is for this reason that I think that a government run job program aimed at providing “temporary” employment MUST offer a higher wage to those who are put to work at less disirable jobs. Not to do so is to make the government guilty of direct expoitation. No as defined by, Milton Friedman and a market economy ideology, it is not expoitaion. But as defined by Thomas Paine it is.
OK such a plan could increase inflation. I doubt that it will because there is not one market for labor there are many labor markets. The number of people involved in the market for manuel labor is small their salaries are small and therefore the over effect will be small. But even if the overall effect is not small, big fragging deal. Such a plan will redistribute real wealth from the richer to the poorer.
One thing that I can imagine that will certianly result from this plan is that those who are doing work at higher pay on the jg program than those doing work for lower pay on the jg program will be on the program for a longer period of time. Big deal. Because a goal of the program is to not only to provide employment but to force a change in society of who gets paid how much. The effect that this employment policy has can be aided by a highly progressive income tax. The government will be saying to the wealthy you are going to lose it so you may as well use it. (Their money)
I suspect that the defenders of the status quo in the world, I used to be one, will be if you subsidize mediocity you will get more of it. I think that they betray their own mediocrity by saying such a thing. As things stand now the indoctrination that we recieve is that being average is to be a failure.
To promote such a view is evil. Whether being average is a failure or not depends upon what factors are used to measure it and how high or low the bar is. if humanity uses the standards of Thomas Paine to set its bar then being average should be something to be admired.
Thank you Bill and Warren for these clarifications, as I am also hearing things about MMT from supporters and detractors that I have thought were inaccurate or incomplete.
One other thing about the job guarantee, that I did not raise in my previous post, although not neccissarily related to that post about my support for a higher wage for doing undisirable work while working for the jg program. The other thing is, are higher wages for labor, as opposed to work in management or even in research and developement, a spur for technogical developement? Of course if the answer is yes that could be a good or a bad thing for the laborers depending on what kind of a system that they are laboring in.
Simon Cohen,
I think I can answer this, but other people may correct me if I say anything wrong.
The effective base interest rate is the rate that the central bank pays to financial institutions and other kinds of investors who have excess currency and want to invest it at the central bank. It is usually (although not always) considered “the risk-free rate” and a benchmark rate for evaluating risky projects or enterprises (risky projects have to yield more than the risk-free rate in order to be attractive for investors).
The central bank determines from time to time a target for the base interest rate and it has the mandate of keeping the effective base interest rate close to the target.
To fulfil its mandate, the central banks around the world usually employ one of the following strategies:
1) The central bank remunerates, with the target interest rate, the bank reserves that financial institutions let deposited overnight. With that kind of strategy, the central bank does not need to do anything actively. It passively pays the target interest rate on whatever balance is deposited overnight. The currency to pay the interest is “created out of thin air”.
2) The central banks does not remunerate bank reserves. Instead, it actively offers through auctions (or other mechanisms) repo or bond operations that are, in effect, just a more complicated version of strategy 1.
Both strategies can be employed to maintain the effective interest rate close (or exactly at) the target.
If, for some reason, the Treasury decides to issue bonds, there isn’t much difference, except that maybe financial institutions will want to deposit less money at the bank reserves (or repos), because they already deposited at the treasury bonds account. If the Treasury decides to never issues bonds, there is not problem at all. Investors will invest in remunerated bank reserves (or repos) instead.
So, non-remunerated reserves are like your current account, while remunerated reserves, repos, bonds and similar government operations are like your savings account.
“how the interest rate is maintained without adjusting the reserve levels”
Well, reserves levels are adjusted, but not by the central bank. It is the market that decides the level of reserves it want to maintain given the interest rate. If the central bank wants to fulfil its mandate of keeping the interest rate at some specified level, it has no choice but to let the level of reserves float. If it decided to control the level of reserves, then it would have to let the interest rate float.
I don’t know if that helped…
The story on taxes as a driver needs a little fine tuning. The preexisting tax liability doesn’t seem to exist in the modern world unless I’m missing something. There is no present day equivalent to the Hut Tax. Taxes are associated with having income. Without income we simply have nothing to impose a tax on. If we receive a fine, it simply can’t be paid. We certainly don’t work for the privilege of being able to pay a tax.
Nonetheless the fact is that taxes are as L. Randall Wray puts it “sufficient” to ensure people will accept the governments money more than anything else seems to hold. This holds even for people who are in a position that allows them to choose not to pay their taxes on income, and goods are universally priced in the national unit of account.
It would seem though that those who are unemployed and have no income are free to settle accounts using other means, until they are tossed into prison for what amounts to the social crime of being unemployed and poor.
I realise the above is in essence, the summary of a conversation; I sincerely thank you Sir for the orderly “lay out” for the next few mailings of my e-list. (with appropriate references of course) 🙂
Although there is mention of “commercial bank clearing” under Principle 3, I am wondering if it would be at all useful, to add a short (1a) to the “Money Story”.”Commercial bank credit and the Hierarchy of money.”
Andre,
Thanks for taking the time to respond-much appreciated. I’m still hazy on a lot of these operations so please excuse fundamental errors.
Isn’t it the case that, in corridor systems the interest rate is determined by the ‘gap’ between the base rate and the so-called penalty rate?
If bonds aren’t used to drain the reserves and Government is adding to reserves how can a particular rate be maintained unless it is zero ( I’m aware that Bill has written as 0% being the /natural rate). But in this case he writes about interest reserves that are >0.
Also, without bonds, there will be no repos as most repos, I think(?) are Government Securities so how will Banks obtain reserves when they are short if there is no market created by the interplay between the bank rate and the penalty rate? The only other place to shit reserves is into the Treasury account to get them out of the system, if other investments are made (say corporate bonds) they are still in the reserves system.
You say the Central Bank doesn’t control the reserves-but surely it does? It creates the parameters around which the market functions?
I think Bill is probably saying something straight forward here, it’s just that I don’t see the whole picture yet!
Simon Cohen,
“You say the Central Bank doesn’t control the reserves-but surely it does? It creates the parameters around which the market functions?”
I think we are saying more or less the same thing but we are having trouble with semantics. I say that the central bank doesn’t control the level of reserves because if the central bank wants to peg the interest rate it needs to float the level of reserves. The central bank would have no choice but to accept the amount of reserves banks want to deposit at the current interest rates. If the central bank tried to control the volume somehow, the interest rate would go above or below the target.
“Isn’t it the case that, in corridor systems the interest rate is determined by the ‘gap’ between the base rate and the so-called penalty rate? (…) If bonds aren’t used to drain the reserves and Government is adding to reserves how can a particular rate be maintained unless it is zero”
I’m not familiar with the US system, so maybe someone else can give a better answer. I believe that, despite the corridor system, Fed does operate in the repo market to make the fed funds closer to the target. If a bank has excess reserves, it will invest in the central bank (and receive government bonds as collateral) and if it lack reserves, it will borrow from the central bank (giving government bonds as collateral).
“Also, without bonds, there will be no repos as most repos, I think(?) are Government Securities so how will Banks obtain reserves when they are short”
Well, I believe that the usual is the banking sector having excess liquidity. If the bank doesn’t invest in bonds for any reason, it will have excess reserves and probably will invest it in the central bank repos (receiving government bonds as collateral). Or the bank may choose to invest its excess liquidity in long term government bonds, and, whenever it needs currency, it either sells the bonds or borrow from the central bank giving the bond as collateral. The latter is sometimes preferable for practical reasons.
If a single bank needs currency and doesn’t hold any bonds, it will probably not resort to the central bank. Probably the central bank would not lend money against credit portfolios or unusual collateral, although it will depend on the jurisdiction. Instead, the bank may try to sell part of its credit portfolio to another bank, or borrow from someone (maybe giving the credit portfolio as collateral) or somehow fund itself. If the bank cannot borrow or sell assets in time, it may go broke!
I see the central bank operations as a kind of limitless savings account (that pays the base interest rate as remuneration), but not an overdraft account. Banks can invest how much reserves they want, and they will be remunerated no matter the volume. However, banks cannot go negative on their accounts.
In some countries and periods, maybe central bank operations may have functioned as a kind of overdraft if the bank had enough collateral. It may be the case in US or Europe now, but I’m not the right person to answer that kind of question…
“The goal is to generate full employment.” The statement of this goal of MMT as an economic theory reveals why economics, as a discipline, offers, at best, a very partial explanation of our human predicament and only limited imagination as to how we might work our way out of it. THE GOAL IS TO SURVIVE AND THRIVE AS ONE SPECIES AMONG MANY ON A HEALTHY PLANET. I have little doubt that Bill would agree with this, and I do indeed understand his desire to focus on changing our economic lens from the distorted one of neoliberalism to the transparent one of MMT. I’m not sure, however, whether Warren would agree, given his position that private-sector work is to be privileged over public-sector. Our massive environmental problems, the looming suicide/ecocide we face, will never be fully addressed by the private sector, no matter how regulated and incentivized, because it has been and continues to be the most powerful engine for bringing the crisis about. Not to see that MMT indicates extraordinary governmental agency to put massive amounts of people to work (from manual laborers to scientists and engineers) to protect nature and begin to heal the immense harm we have done to her and thus to ourselves–and not to advocate for that crucial exercise of governmental agency–is to miss, in the terms of a most appropriate phrase, the forest for the trees.
Fantastic post as always, Bill. Very helpful for anyone who is trying to communicate MMT fundamentals to others.
@J Christensen. Yes, Wray usually says taxes are sufficient, not necessary. He notes that it is conceivable you could achieve acceptance in some other way but historically this is not what happens. This may suggest that, in reality, taxes probably are necessary for the viability of a currency pertaining to a whole society but strictly speaking it seems that sufficiency is logically what can be established. It’s a point to keep in mind because some people in social media or comments will try to trip us up on this point about logical necessity of taxes.
Regarding endogenous taxes, my understanding is that they will drive the currency in pretty much the same fashion as exogenous taxes because income and wealth will be assessed for tax purposes in the state’s currency. Since most people need income, and this income will be assessed in the state’s currency for tax purposes, they will incur a tax liability and so need to accept the currency at least to the extent required to pay their taxes. At minimum, this is what is required for the state to be able to transfer resources from the private to public sector.
I agree whole heartedly. Why couldn’t I say that as well as you did? I wonder if it is it a problem with my hardware (genetics) or my software (cultural influences).
J Christensen : The preexisting tax liability doesn’t seem to exist in the modern world unless I’m missing something. There is no present day equivalent to the Hut Tax.
No, Hut Taxes do exist, and they are essential. Property taxes, sales taxes, prices for anything the government sells, fees, fines, (income) taxes levied on barter transactions etc. Anything where you need to pay state money for something “real”.
Taxes are associated with having income.
Again, even if that is the biggest tax, it is not the only tax. But you are making a good MMT point. Income taxes alone cannot drive the demand for money. What they can do is augment a preexisting demand, by making the money needed for Hut Taxes scarcer.
You (or the private sector as a whole) can avoid income tax by not having income, and if the only thing you need to have income for is to pay income tax, that is an excellent solution.
Curt Castens,
You write: ‘Therefore it is my subjective (but spiritually true) conclusion that the economically less successful humans get screwed twice. Once with their lower pay, twice with their less disirable jobs.’
I’ve often thought about that. I sometimes think that if you have been gifted with good cognitive skills and other skill attributes (athlete/musician etc) then the reward should largely be that you have been graced with something that you didn’t create yourself (which is what being’graced’ is all about) we can work hard at improving our skills but the fundamental aptitude has to be there already, yet society rewards those skills as if the possessors of them had created them themselves.
Those without such intellectual/physical capacities miss out on the reward of having them so one could, perhaps argue that they should have another form of compensation which should be NOT to be ground down and treated as inferior.
Maybe it is a spiritual issue in so far as those possessing high levels of cognitive abilities should perhaps see their ‘gifts’ as a way of providing service to society which sort of sounds quasi Christian ( the more positive aspect of it, of course!).
In a way Bill does this by providing this blog where he offers us the fruit of many years of work and insight. I remember Bill saying, in a recent post, that he thought cleaners do a more directly important job (than himself) by protecting us from infection and illness – it is this sort of spirit we need. But a great psychological shift is required and that can’t be forced.
My comment made at 4:24 was for Newton Finn which I forgot to write.
Simon Cohen, Thank you for your response. Yes and our ability to improve on our natural given talent is in itself to a (great, large, sicnificant???) extent dependent upon our environment which to a large extent is not freely chosen. That undercuts the claim that those earning large sums of money deserve it.
Imo, Principle 3 should be principle 1, as the sectoral balances is the most important economic principle, by far. It’s the basis of every single economic transaction, monetary or barter, ever done. I gained what you lost and you gained what I lost. We may decide we’re both better off but nevertheless the zero-sum nature of it remains. This principle alone rules out much of mainstream economic thought, especially in the European continental context. Everyone can’t be in surplus simultaneously.
Principle 1 obviously ties right into principle 3 and principle 6. These provide a sort of “escape hatch” to the zero-sum nature of monetary transactions. People like earning more than they save. It’s only possible for the non-govt to netsave is the govt runs a deficit, which isn’t necessarily unsustainable. If you understand that, you’re already well ahead of every tv commentator, politician, or most economists for that matter, pretty much anywhere.
The JG is nice, but it’s not strictly necessary to an analytical economic framework. I agree that full-employment is a worthy goal, but not everyone would agree. Some people really are fine living in their walled compound with people starving in the streets. But that doesn’t change the zero-sum nature of economic transactions, or the fact that the state must create currency before it can collect taxes in that currency or that the state can’t ever run out of currency. The statement “The goal is to generate full employment.” is a political one, not an economic one. Principles of the sectoral balances, money and credit creation, taxation etc, are not subject to political views, they’re true regardless, merely a description of how things actually work.
Might I suggest an additional principle about the credit creation process, ie that it’s new spending and not a transfer of money from saver to borrow, ie no loanable funds. The initial spending of the deposit created by extending credit to a borrow, is the borrower spending more than they earn, but at some point in the future, said person must net save to pay it back, all the while running into the sectoral balances principle, as was clear in the immediate post-GFC period. The state faces no such future constraint requiring them to net save.
Dear Joe (at 2018/12/14 at 7:38)
You asserted:
And that assertion is false.
Economics by the very nature of the word is about efficiency. Wasting labour resources is not efficient.
Full employment, independent of ‘right to work’ motivations, is about getting the most out of what you have. That is pure economics.
Further, you seem to think the Job Guarantee is just a job creation program. It is not. It is a macroeconomic stabilisation framework with an inbuilt price anchor. It is essential to any sensible analytical framework.
best wishes
bill
@J Christensen,
Re: Hut tax.
I was also struck by the same thought, but we in the UK do have the mis-named Council Tax which is compulsorily payable by property residents (not necessarily owners) regardless of their income (although unemployment benefits will partially cover it, pensioners still have to pay). This obliges residents to work for currency to pay it, even though it’s not strictly a tax as it’s issued by a currency user (the local authority) rather than the currency issuer; it’s really a community service charge, and gets spent into the economy rather than withdrawn from circulation via the Exchequer.
Two points I am unclear on to do with money supply.
In a closed economy I get that the government is the only net creator of money but trading bank created deposit money circulates in the economy and is accepted as payment for taxes even though it is matched by a liability and is extinguished as a loan is repaid. Does this only create a timing mismatch ie credit money being used to pay taxes but govt money being used to pay bank debt; it all netts out in the end?
Secondly, in an open economy, I am unsure how foreign exchange works. Do export receipts or FDI create new money in the exchange process ie increase the money supply, or are they merely swapped for existing money and hence the foreign exchange rate movement up or down as demand for the local currency either increases or decreases
Regards
Stephen Keys
“bank created deposit money circulates in the economy and is accepted as payment for taxes”
Well, bank deposit is not accepted as payment for taxes.
When you order your bank to pay your taxes, behind the scenes it uses government currency (reserves, notes or coins) to settle the taxes. The government does not accept any other thing (except local governments, depending on the jurisdiction).
Andre:
“Governments issue currency and bonds. In most jurisdictions (although not all jurisdictions) both are considered “public debt” or “debt”. ”
The terminology is important. It is my contention that debt has a timeline (for repayment of principal and interest); other types of liability (i.e. contingent liabilities) do not. A Treasury bond is a debt – although not the same type of debt as a household debt (indeed I note that some MMTers would assert that such bonds are effectively not debt at all, on the grounds that the constraints applying to a sovereign government differ from the constraints applying to everyone else). It may also be argued on these grounds that currency is not a debt. Consider also that not everybody in possession of currency has a tax obligation.
“The terminology is important. It is my contention that debt has a timeline (for repayment of principal and interest”
I agree that this is an interesting definition, and it may be useful in many contexts, but the fact is that law in many countries explicitly accounts currency as “public debt” or “debt” (so they are obviously using another definition).
“Consider also that not everybody in possession of currency has a tax obligation”
Tax liabilities and currency assets (for the holder) or currency liabilities (for the government) are separate, distinct concepts. You don’t need to have one to have the other. Some companies may hold currency assets and not tax liability at all, while others hold no currency and many tax liabilities. The fact that currency is distinct from tax liabilities does not change the nature of currency or taxes.
1] International trade and therefore, inter-European trade has a problem.
The German people don’t understand that for them to sell more to the other European nations year after year than they buy, many other European nations *must* buy more than they sell.
. . And that this is not stable. Neither people (all the time) nor nations (in international trade) can buy more than their incomes allow in the long run. They can’t buy with credit forever. And nations can’t sell if no one is buying.
. . Somehow it seems Neo-liberal Economics fails to make this clear.
. . So. – – – It is a problem that Germany clearly doesn’t want to change the EU.
. . So, either all the nations of the EU, except Germany, leave it or somehow the Germans are convinced to allow the rules to be changed.
. . The euro was promised to provide prosperity for all. Instead since the GFC/2008, it has brought austerity for all, except Germany. Some economists (all the MMTers) predicted this would happen in the next recession, and clearly they were right.
. . It seems to me that the euro can only survive IF 1 of 2 things happens. 1] Some way is created to create a flow of *free* euros to the nations that import so they can use euros to buy from the nations that are exporting. [Here I’m assuming all the nations we’re talking about are in the Eurozone.] OR, 2] Some way is found to let nations regulate the amount of importing they do to match the amount of exporting they can do.
. . The US does the former by giving the Senators from each state the power to get or force the Fed. Gov. to spend more in poor states than it does in the rich states. Somehow, in the past just enough dollars went into most every state to match all the dollars that flowed out of it. If this wasn’t true then some states would have been getting poorer and poorer over time. It may not be as true now, because some states seem to be getting poorer [like Ohio, Indiana, etc., i.e. the rust belt].
. . In fact this is a problem for all international trade. [Except, for the US who benefits from the world’s desire to hold US Gov. Bonds, but this will end someday.]
. . . . *Does MMT ever deal with this aspect of economics?*
.
2] Steve Keen [an MMTer, I think] says that the US, Europe, and the world have another problem.
Banks create money when they make loans. They can do this without limit. The increase in lending is added to the total income of everyone and is spent, so the GDP is larger by that amount.
. . This creates a problem because over time the banks begin to think they can lend to poor and poorer risks. If the workers are not paid enough or the banks lend to people who can never pay it back; then at some point, the banks realize that they are not going to be paid back. So, the banks have to stop lending.
. . Until that time the increase in lending was adding to the income of everyone, so the GDP was larger by that amount. When the banks stop lending; not only is there now zero increase in lending, but loan payments are reducing the total income.
. . Therefore, the GDP drops. If it drops enough the GDP will stop increasing; and this defines the start of a Recession. Steve keen says this is the cause of many of the Bank Panics and recessions of the past.
MMT says that some past Bank Panics and recessions were caused by the Gov. have a surplus and so sucking too much cash out of the economy. This will always cause a recession according to MMT, right?
. . Since, we want to eliminate all causes of recessions, shouldn’t we find a way to keep banks from getting carried away in a boom and *lending too much?*
. . *Therefore, how does MMT propose to solve this problem?*
Great resource.
I’ve forced my partner to learn about MMT recently. Summaries like this are invaluable in the process of de-neoliberalisation!
The phillips curve does not exist so cannot be replaced
Thanks for this great post setting out MMT so clearly in one place. The bit I struggle with most is the Job Guarantee. I can see the logic of the employed buffer stock. I’m just struggling with the details of how it would be implemented in a decent way. Basically key jobs, doing essential stuff in our society ought to be fully staffed at all times regardless of the state of the economy. Staff doing such essential jobs won’t be on a Job Guarantee. They will have bargaining power and will strike if they aren’t getting the pay they want and/or will be committed to their jobs and so will not be an anti-inflationary buffer stock. So that leaves the Job Guarantee with tasks that society does not value and the people doing it don’t value. IMO we would be much better off if that stock of people instead were training but being paid a decent bursary whilst training. Such training would need to include courses for people with all sorts of aptitudes and aspirations – so construction skills, accounting, coding, caring, literacy, numeracy etc etc and courses would need to have rolling start times. The thing is the UK Labour Party has proposed a Nation Education Service that would be very much like that. It seems to me that very little push would be required to get the UK Labour Party to fully embrace the Job Guarantee potential of that National Education Service. I’m baffled as to why the MMT community has not embraced this.
Stephen Keys
“Do export receipts or FDI create new money in the exchange process ie increase the money supply…?”
That’s exactly what Steve Keen was saying in the recent Keen/Mosler debate and was roundly contradicted by the latter. As Warren said it depends what you mean by money.
It was all very succinctly explained in two follow-up blogs by Bill as follows –
https://billmitchell.org/blog/?p=39282
and
https://billmitchell.org/blog/?p=39303
There may be more (what we think of as) money when a firm exports goods, but it depends on the desires of the exporting company. For example, I used to have dealings as an accountant with an international tobacco manufacturer who had their own FX department. They made more profits out of FX than they did out of selling cigarettes. On the other hand I acted for a small UK firm that exported marine air conditioning systems, mainly to the US, and they operated a US dollar account with an International bank from which they periodically had (again what we think of as) money from that account to their Stirling account. In the first case, the financial asset (not money, please note) generated by sales would remain within the company on FX accounts at banks around the world and on their balance sheet. Those financial assets would only be turned into money when the firm paid its employees and dividends to its shareholders. In the latter case the net financial asset the firm held in its dollar account was turned into money when it instructed its bank to transfer the dollar holding from its dollar account in the US to its sterling account at the same bank in the UK, and then paid its employees and directors (who were the sole shareholders).
In order to understand what is going on you need to stop thinking about money and think about net financial assets and liabilities. What we think of as money is only assets that have ended up as deposits in bank accounts.
Please note that although I have been studying MMT for nearly three years now I very far from consider myself to be an expert. I’m currently doing a lot of research on FX, and I think I am starting to get a handle on it, but it is really hard to see the wood for the trees, especially when there are lots of different species of tree.
Stone:I’m just struggling with the details of how it would be implemented in a decent way.
The details aren’t the problem. The details are easy, because it would be extremely difficult to run an MMT Job Guarantee program that wouldn’t be far better than unemployment. Job guarantee programs in the past that had problems- the French Ateliers Nationaux of the 1840s say – had macroeconomic problems that the MMT JG is designed to avoid or that do not apply to modern developed, capitalist countries. The New Dealers implemented basically “it” in a decent and highly productive way in a matter of months. So “Details” are a joke of a problem. Political will is the whole problem.
Basically key jobs, doing essential stuff in our society ought to be fully staffed at all times regardless of the state of the economy. Staff doing such essential jobs won’t be on a Job Guarantee. They will have bargaining power and will strike if they aren’t getting the pay they want and/or will be committed to their jobs and so will not be an anti-inflationary buffer stock.
In the modern world, there are very few such key, essential jobs. Often enough, they are the worst paid. (E.g. cleaners) The JG would boost the pay and therefore the performance of this portion of key essential jobs.
So that leaves the Job Guarantee with tasks that society does not value and the people doing it don’t value.
Non sequitur. Or by that argument, this description would apply to most jobs – any but rare key essential ones. No, the tasks of the Job Guarantee are stuff that society values greatly – especially in our modern rich countries of private splendor and public squalor. The only ones who do not value JG output only are the do-nothing, lazy, parasitic welfare-recipients called “the rich”, the bourgeoisie, the — industrial complex etc that systematically sabotage modern economies, making the populations of rich countries live far below their means. Basically, what they want is a million-dollar a year minimum wage JG (for them) for doing the destructive, disgusting and insane things they do. The “people doing it don’t value” part is quite wrong too.
IMO we would be much better off if that stock of people instead were training but being paid a decent bursary whilst training. Such training would need to include courses for people with all sorts of aptitudes and aspirations – so construction skills, accounting, coding, caring, literacy, numeracy etc etc and courses would need to have rolling start times.
No, this sort of thing “instead” of a Job Guarantee for “that stock of people” is much worse. Been there, done that, doesn’t work. It is a neoliberal trick. It is blaming unemployment on the unemployed, who include plenty of people trained with all those skills already. And blaming unemployment on the unemployed is worse than immoral and inhuman though it is both – it is a very gross insult to one’s intelligence.
Bill has annoying blogs on this issue, like The skill shortage ruse is re-appearing. Annoying, because back then I was just about to suggest a book he reviewed there Gordon Lafer’s The Job Training Charade (2002) but he beat me to it. 🙂
Bill:
and Lafer:
That being said, paid training and (higher) education should be part of a JG program in a rich country if citizens want it & they probably would. But forcing it on people instead of a genuine, desired, productive job is nothing but a destructive, insulting trick used to maintain a high level of unemployment to discipline everybody else into obeying the insane, disgusting and destructive whims of the rich.
Yes working out the details of a job guarantee in a decent way is a challenge. Is the promise of a jg best met by a MMT JG operating in a capitalist framework, or by a Parecon economy, or by Cuban style socialism?
Training programs can certianly be part of the solution. But imagine a class of people in the UK who have been retrained as electricians. At the end of the class 30 people passed the test and proved that the deserved the certification as an electrician. But we can of course not guarantee that everyone will get a job offer say with in 3 months after graduation. Some people due to age, or perhaps some social disability will be difficult cases to employ. The problem for placing some people could lie with the society at large or it could lie with the individual. A jg in a capitalist economy is for the problem cases. If the government does not guarantee anyone who wants to work a job then the old answers about what to do with the problem cases will be the policy. A lifetime on government welfare, or a lifetime of being supported by family members who may themselves just be treading water. Or they are allowed to starve to death. A few percent of people will committ suicide before things get that far. But most will commit a crime before then. Which means those who have trouble getting a job usually end up in prison in those countries with underdeveloped welfare systems. We can also not forget the many ways that Bill pointed out in which long term dependence on welfare damages people.
From my perspective as someone who works with dirt. The job guarantee is a double edged sword.
I do not like bullies or racists, and I find the values of conservative christians, conservative muslims, conservative jews, and secular economic conservatives, to be a threat to the sustainability of a just society.
Yet by supporting a jg I am promising such people that as long as they obey the law* not only will they be allowed to live they will be allowed to llve with dignity. That is a bit troublng because they can continue to devote their lives to spreading their ideological viruses. But I accept this because if there is anything worse than a racist for example it is an angry racist.
* I mean the REAL law not the fake law of the spineless Supreme Court or the bought and paid for Congress.
Steve American – look up Warren Mosley’s suggested changes to the private banking system. He proposes a switch to a “positive” regulatory stance (private banks can ONLY do this…) from a “negative” regulatory stance (private banks must not do this, this, this….. ad infinitum.
This would necessarily limit the number of speculative activities publicly backed “private banks” could get involved in. If I private entity wants to create speculative financial instruments then it would have to do so outside the publicly backed system and would have no recourse to public subsidy if it’s bets failed.
Warren Mosler’s other observation is, of course, that so called private banks are private in name only: they exist at the pleasure of the state.
The whole of our public perception of our money system is false and created by a long running confidence trick. Bizarrely even when a banker (Mosler’s) breaks ranks and tells us how it really is the bovine public prefer to go with the herd and believe the fairy tales they learn from the mainstream media.
Bill,
Thank for this recap – much appreciated.
However, I suggest that for the lay-publuc (such as myself) it is essential to spell out the use of legal force implied by taxation. In “5,000 years if Debt” David Graeber makes a very compelling case for the history of money following this course: private credit between people known to each other and trusted by each other followed by and accompanied by barter between people unknown to each other or not trusted by each other and finally state issued credits backed by the threat (and use) of force.
For me at least it was only by understanding the way in which tax first came to be (conquest and force) that I could intuitively grasp the modern democratic system.
I’m yet to see mainstream MMTers fully communicate this historical narrative and I think it would greatly help your cause if you did so. The reason people like me don’t get it till we know the history is that it is impossible to intuitively untangle the modern system. It’s so complex and we’re so embedded in it it is impossible for most lay-publuc to understand the differences and transitions between private credit money, barter and public credit money backed by taxes(and force!!!).
“tasks that society does not value and the people doing it don’t value”
I would write that differently: “tasks that the market does not value …”. People have come up with lots of things that society could use, except that the business and financial system doesn’t want to pay for them. I see the job guarantee as addressing a market failure. It’s a failure when the market takes a set fraction of the people (2% or 6% or 25% or whatever) and simply leaves them out of society.
It will be a policy problem to assign a market value to jobs and products that the market has refused to evaluate, but then, problems are the things we have to solve. We’ve known that ever since Adam and Eve were kicked out of the Garden.
@Mel, I don’t think this is just about a market failure. What I said was that if the job was valued by society or by the people doing the work, then by definition, it would not work as an anti-inflationary buffer stock. If the people doing the job know that society values that work, then they will have bargaining power and will strike if they think they aren’t being paid enough -so it will not be possible to keep the JG wage at a level of the government’s choosing for anti-inflationary purposes. If society doesn’t care whether or not some group of workers go on strike with that work left undone, then by definition, society doesn’t value that work. Similarly if the people doing the JG work value it highly, then they won’t switch to alternative jobs, as and when those arise, and so also won’t be acting as an anti-inflationary buffer stock.
Stone, your worry about society valuing the contribution of Job Guarantee labor too much, well, I think that would be a really great problem to have don’t you think? If society ended up valuing the product of labor of a particular job guarantee job more than the costs in real resources required to employ someone in that job, then that is a total win for society in my view. Even if that employee’s job is not functioning as part of a buffer stock at that point. It argues instead, that that particular job become more permanent and that employees in that job receive a fair compensation for their efforts.
@Jerry Brown, I think you’re misunderstanding me. I started by stating that “jobs doing essential stuff in our society ought to be fully staffed at all times regardless of the state of the economy” -so we agree that such roles should not be part of a buffer stock and should be standard public sector jobs if they aren’t private sector jobs. My argument was that the buffer stock would best be composed of people who had chosen to take bursaries paying them to receive training suitable for their aptitudes and aspirations, giving them skills needed by society. I haven’t heard an argument as to why that is worse than a buffer stock of people doing un-valued tasks.
Stone, I am fairly sure that Bill Mitchell has mentioned favorably that kind of education as being considered as one part of the job guarantee. But I don’t think the JG should entirely be limited to ‘training’. That is one of the failures of current government programs here in the US- they train people for jobs that aren’t there at the end of the training. It is that 100 dogs and 95 bones analogy that Bill has often made- at least 5 of the dogs are not going to get a bone unless there are at least 100 bones.
In any event Stone- it is not like the ‘tasks’ JG workers would be performing would be ‘un-valued’ in any competently run job program. They might be valued at less than the cost of production, but they would still produce something of benefit to someone else. It is not like Bill advocates paying one JG member to dig useless holes and paying another to fill them back up. And there is a decent argument that even if that was the extent of a JG, the JG program as a whole would produce benefits to the economy over costs as far as supply-side considerations of the labor force and by reducing the detrimental costs of unemployment to society.
Dear stone (at various times, with Jerry Brown)
We answered all those questions and more in this Report from 2008 – http://e1.newcastle.edu.au/coffee/pubs/reports/2008/CofFEE_JA/CofFEE_JA_final_report_November_2008.pdf
It is long but considers all the operational matters pertaining to the design and implementation of a Job Guarantee. While structured for the Australian institutional setting, the general principles apply, well, generally.
best wishes
bill
Exactly, Jerry. Because it has a link to a relevant blog by Bill (that quotes from a book “The Job Training Charade”) which addresses Stone’s question, my longer reply hasn’t shown up yet. Or it has been eaten. “Training only” always has been and necessarily is a fraud. A fraud that leads to such a program’s destruction and its subsequent use as a (planned) failure to discourage any public employment program. That’s the game plan of those who push such intrinsically deceitful programs.
The JG does tasks highly valued by the great majority, but they are just not valued by the powerful. The biggest problem is identifying “what is valued by the rich” as “the desires of society” or as “natural”. Far from being identical, as systematic research shows, these are usually opposed and are always highly unnatural, created by the corruption of state power used to serve a tiny minority.
Adam Sawyer,
I’ll try to find Mosler’s essay or post.
But, for now, from your post it seems like he is mostly referring to loans to corps.
I see the problem being more about loans to people, i.e. mortgages and credit cards.
During the boom phase, banks get carried away with the need to find another person to make a loan to, so the loan officers can seem to be making a profit for the bank.
. . It is just a mathematical fact that there is only one* case of a system that can grow exponentially for ever. It is just not possible for the banking system to increase total loans outstanding every year without it creating a crash. The one exception is [of course] the Gov. fiat debt.
. . It is strange that Neo-liberal economics reverses this and concludes [using false premises and strange logic] the opposite — that Gov. fiat debt must be limited and total bank loans can increase without limit and not cause a problem. [Maybe not so strange if we assume that Neo-liberal economics works backwards, i.e. deciding on what to prove and then finding a way to prove it that people will accept.]
.
.
* . OK, I’m not counting the size of the expanding universe (if it is still growing).
@ Adam Sawyer
You may find Michael Hudson’s work useful in tracing the archaeological record of the emergence of debt, credit, and the origins, purpose and operations of currency.
“And Forgive Them Their Debts” is the first in his multivolume work on this topic
“Dear stone (at various times, with Jerry Brown)”
Bill you are right that I don’t deserve the ‘Dear’ appellation at all times. Happy to earn it at various times though…
More seriously, thanks for the link. I have not read it all (‘long’ does not do it justice) but I do have a question. In the 28 page executive summary, point 13.3 says
“The JG provides a platform for developing the national skills base, by comparing the observed skills and competencies of the JG workforce with the emerging skills requirements of each regional labour market. This would inform the provision of accredited training (both in-house and via external providers such as TAFE), the indenturing of apprentices, and the design of JG activities so that they include experiential development of skills expected to be in local demand, thereby restoring the role of the public sector as a net trainer of skilled workers and minimising the likelihood of inflationary bottle-necks in labour supply.”
Which seems to say JG jobs could consist of skill development. And chapter 12.5.1 also seems to support an educational element of the JG.
But reading chapter 13 itself, the entirety of which is very relevant to my discussion with stone, I come away with the impression that JG jobs should not be based on ‘training’ or skill development, maybe because that should be the responsibility of the private sector businesses that hire people. So I’m not sure what you think would be better. So do you envision a JG where part of it could be educational or skills learning in nature?
stone@5:22, check out chapter 13.5.1 “Real Jobs?” (pg 231) for a discussion of your concerns about un-valued work.
Thanks Bill for the link and to Jerry Brown for the page recommendation. I’m still reading through the link.
I’m still sure that in general usage of the term, a job is only a job if by going on strike it pressurizes the employer to increase the wages. If that isn’t the case, then it isn’t a job; it is just the dole paying authority mandating that the recipients look busy.
Redefining such “looking busy” as being a “job” reminds me of Lewis Carroll :-
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean-neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master-that’s all.”
I guess this is mostly about power of various groups within the economy. People want jobs partly because they want power and influence. If people simply wanted to do stuff, then they could just do it irrespective of whether or not someone employed them to do it. What people want is having a real job that is missed if they go on strike; a job where they have real bargaining power -and so by definition absolutely not an anti-inflationary buffer stock.
What exasperates me somewhat is that the detailed stuff about the JG seems to be dancing around it being training course in all but name. But there is a flat denial that that is the case, and that mind set of denial prevents full realization of the potential of simply having something along the lines of the UK Labour Party’s “National Education Service” proposals (perhaps in a souped-up version regarding bursaries etc). The overall muddle that arises from miscalling non-jobs as jobs etc gives the whole concept a whiff that prevents the important parts of the message having any political traction or take up by policy makers. I think that is very unfortunate and so avoidable.
I also worry that the JG plan engenders complacency in the MMT community regarding the real and still unresolved political economy issues at the heart of this.
Full employment and a “high pressure economy” is needed not just for social justice but also to ensure technological progress etc. Inflation probably is typically largely a consequence of employees’ bargaining power.
The MMT JG narrative is that there is no more need to think about how to resolve this and have genuine full employment with price stability (ie inflation within non-disruptive bounds). The JG sorts it all out supposedly. However the reality is that the JG is not genuinely creating a full employment situation, it is simply miscalling people as being employed when they aren’t.
Perhaps there are ways that we genuinely could have full employment with price stability. IMO getting answers will mean grappling with the power relationships at the heart of this since inflation is typically largely about conflict between employers and employees. Perhaps reforms such as extensive employee ownership or profit sharing and representation in management etc are required.
There is also the issue that people should have adequate free time and not need to be working all hours as well as not being threatened with unemployment. Again, this is an issue of power relationships between employers and employees.
This is all vital and needs to be grasped more by the MMT community IMO and isn’t being because of the complacency from the JG “solution”.
Stone: I’m still sure that in general usage of the term, a job is only a job if by going on strike it pressurizes the employer to increase the wages. If that isn’t the case, then it isn’t a job; it is just the dole paying authority mandating that the recipients look busy.
No dictionary agrees with you. Respectfully, this is not general usage, but an astonishing Humpty-Dumpty definition that nobody has ever used – or thought of before, as far as I know.
(By the way, my earlier comment with link got posted above)
Job = work for money. Period. Or even more generally any work participating in some division of labor. There is speculation that the word “job” itself comes from ancient oars and oarsmen – who obviously must work together – row in the same direction. A good paradigm.
Irrational JG-phobia amounts to saying that it is impossible for people to get together and row in an agreed on direction and that even if they did, it won’t get them anywhere – the right solution is to sit in the boat and wait for some laissez-faire general equilibrium to perform magic. Utter BS.
JG-type programs like the US New Deal have been very successful for their particular aims and even more successful in their macroeconomic effect. JG-phobia theory is refuted by practice the world over.
People want jobs partly because they want power and influence. .. What people want is having a real job that is missed if they go on strike
NO, people work mainly because they want the money and what is much the same thing, a decent and secure place in society. And who goes to a get a job thinking about their how they would love to strike???!!!
If people simply wanted to do stuff, then they could just do it irrespective of whether or not someone employed them to do it.
No, they can’t “do stuff”. They need money and what it can pay for, like food and a place to live, to “do stuff”. Many or most people’s skills are not solitary ones, but involve organized and combined effort. This sort of talk is utterly unreal, like Marie Antoinette’s “let them eat cake”.
However the reality is that the JG is not genuinely creating a full employment situation, it is simply miscalling people as being employed when they aren’t.
This is not reality, not using a definition anyone else uses. This is an ancient, false, crazily false slur that malefactors of great wealth fanatically and desperately bellow when they see the threat of their power diminishing, as during the New Deal. The underlying idea that the only real work, real job is working for the rich is irrational beyond words. Of course the rich don’t believe this logically impossible nonsense. For where do they get their money? By crony capitalism, grabbing it from the state by hook or by crook. But it is amazing how successful their brainwashing is.
Your division into “key essential work” (with supreme strike power) and “JG make work” is an absurdly binary division of a spectrum with infinite gradations. Almost everybody’s job is not key essential work by this standard. Some workers have real strike power. Some don’t. These days a lot fewer have real power, say only 10%, so by your definition, 90% of people are unemployed!!
JG jobs by definition are valued by both the society and the worker. The idea that such jobs “would not work as an anti-inflationary buffer stock” depends on this absurd sharp division and equally farfetched assumptions, like the overwhelming power of strikers and so is equally absurd. In a real JG, both sides would have some negotiating power – usually the state would have much more IMHO – and this would make the buffer-stock work just fine.
JG workers might strike. They might succeed or they might not. It depends on the particular circumstances. Are the wages too low? Are the working conditions too bad? If so, the strike could be huge and succeed. There would be a great many voters on both sides. But as long as it is a living wage under decent conditions, this isn’t really all that important. The power to strike is not infinite.
But strikers could realize that there are limits to their power set by the economy and logic itself. A JG essentially creates a labor standard for the currency. Say $20 = 1 hour of basic labor. so $1= 3 minutes. A successful strike that increased the wage to $1 million /hour wouldn’t do anything longterm – it would just overpay them for a very short time but mainly inflate the currency by a factor of 50,000 and then the anti-inflationary properties of the JG would kick in again. But there is no way that a JG workers can be consistently paid at a rate that equates to more than one hour of labor in return for their one hour of labor.
The JG sorts it all out supposedly.
All that is definitely needed for pro-JG arguments to work without modification is that a JG is less inflationary than unemployment, that it is a better buffer stock. Basically that a JG produces and does anything good in sum at all. To disagree is to believe something so farfetched that nobody would even think to say it if they hadn’t been brainwashed for their whole life.
Oarsmen can cooperate to row, row, row their boat. Really. And even merrily. That ain’t a dream.
Andres says:
” .. the fact is that law in many countries explicitly accounts currency as “public debt” or “debt” (so they are obviously using another definition). …”
The law is sometimes an ass, and magistrates can make fools of themselves when they make rulings in fields they do not understand. This applies in particular to the definitions of words. If a magistrate happens to rule that a deposit is a borrowing by the depository (implying that it is an asset of the depository) – and such rulings have been made on more than one occasion – then this indicates to me that the magistrate does not understand the first principles of accounting.
@SomeGuy, you refute my assertion that a job is only a job if going on strike would pressurise the employer into raising the wages. You say that, “Job = work for money. Period. Or even more generally any work participating in some division of labor.”
-but how then do you define “work”? In the UK, an unemployed person can’t get the dole unless they take part in various assessments and applications etc etc. Those tasks can be very onerous, so by your definition those people have a “job”. More so, someone receiving a bursary whilst studying under the “National Education Service” proposals from the UK Labour Party would be studying hard, often on a vocational course (eg construction skills or elder care skills etc). Why do you dismiss such a bursaried, lifelong education system as being inferior to JG “jobs” that don’t have training as a primary aim?
I need to be clear that I fully support having lots of public sector jobs providing for everything that the private sector fails to provide equitably or efficiently. I’m just saying that such provision should be by standard, unionised, public sector sector employees. I also advocate genuine full employment policies. I’m just making a plea that the MMT community tries for that rather than accepting a JG second best.
Stone, I really enjoyed your comments at 19:29 and at 20:01
I think that you raise some really good points. My first comment, the lesser important of the two, is that the value of work in a free market system boils down to one dollar one vote. That is at least as bad as one man one vote and probably worse. Because of that I agree with the point that Jerry Brown often makes that just because the market will not pay sometone to do the work does not mean that it has no value. None the less. you have a point, the work that is being done could be the equivelant of digging holes and filling them back up again. Yet with the MMT plan a check against this possibility is at least formally addressed.
Under my current understanding the MMT JG states that the actual decision about what kind of work gets done by a person in the program shall be under LOCAL controi. That implies that those making these decisions are local residents and knowledgable about what the local needs are that are not currently being met by either the state or the local business community.
The key question for me can I really believe that the control of these local decsion making positions will come to be held by competent and legitimate authority. For the MMT community at large the answer is an obvious yes. You have a local election. Well I personally have no more belief in elections, in which anyone over the age of 18 can vote, being likely to deliver positive results than in I do in cats that can talk.* There are many reasons why democracy fails to deliver on its promise in general and even more why it fails to deliver on its promise in the USA.
The MMT program that is implemented is most likely to be based on local politicians running the program, at least indirectly. Therefore at the moment I expect very divergent results. Incompetence and corruption will probably be widespread. If this program comes under a democratic political process in the USA in the environment that the USA has now I would not be surprised if the control of the program in an African American area comes under the control of the nearest white business communtiy and gets turned in to a welfare program for white women or men who previously were not working because their spouse made enough money that the opportunity costs of working took them out of the labor market. Although it is forseen that the pay for this program will not be extravagent it will be very appealing for spouses of some decent earners to make 15 dollars an hour for four or five hours a day if the work is not unpleasent.
That brings me to my next point. If we can trust the decisions of who does what to local control why not also trust them to who gets paid how much. The idea that there is such a thing as basic labor is a Unicorn. There are certianly similar types of labor. But each job is different. There are really no good reasons that these differences should not be reflected in different rates of pay. Well if those running the program offer a rate of pay for a kind or work that is higher than that which is being offered by the local busniness community for that same type of work the workers in those jobs will be in those jobs for a longer period of time. Not only that but unless the local business community raises it wages for that type of work employees will actually leave their private sector employment and try to come to work for JG program. But once they get there they are likely to find out that the JG program is no longer offering work in those exact jobs. If they want work in the JG program they may have to take a pay cut and do another type of work. That will cause those workers to go back to were they came from. Hopefully before they gave their two weeks notice. Because the control of the program is local there is a limit that any one local agency can do in terms of giving people jobs to improve local conditions or meet local needs. After that if there are still unemployed people in the local area it would seem apparant that we then have to apply the mmt reccomendation that it is the job of the state to bring jobs to where people live not expect people to move to where they can get a job. Once that happens it would be apparant that the local agency giving the unemployeed jobs is going to have to coordinate with regional or national authorities to invest in the local area so that the area in question can do something that meets regional or national needs.
Stone, your comments about employee ownership and profit sharing are certianly valid. I have come to accept a jg even an imperfect one as being at worst a medicine for an economy that will alieviate symptoms of economic illness without killing the pateint. It might not cure the desease. I think at the moment there is no consensus on what the desease is let alone its cure.
What a useful compilation. Great to have this post.
I’ve had this question rattling around for a while so I thought I’d air it out here.
You write that “Mass unemployment arises because, after the non-government sector has implemented its spending and saving decisions, the level of spending is insufficient to… absorb the willing and available supply of labour.”
I think “saving” here refers to individual, household, and corporate “saving,” such as retirement account contributions or retained earnings. It’s about individual actors choosing not to spend all their after-tax income. They choose instead to hold some income for future consumption or investment.
Later there’s this: “The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.”
And a few lines after: “…net government spending is required to meet the private desire to save (accumulate net financial assets).”
I think I understand that only the government can add or subtract net financial assets to/from the non-government sector as a whole. But I don’t get how to square these two concepts of “saving,” i.e., individual saving versus aggregate non-government net saving. As an individual, do I care about the level of the sector’s net financial assets? Who or what has a “desire to accumulate net financial assets” in the aggregate?
It seems to me that government spending decisions could consider only the need to maintain full employment, without regard to an assumed sectoral desire to accumulate net financial assets. Is the amount of net financial assets a residual, like the government’s fiscal balance? I gather it’s more important than that.
Any insights appreciated.
@John Hermann
“All debts are liabilities but not all liabilities are debts.”
Any authority (besides yourself) to back up this claim?
“It is my contention that debt has a timeline (for repayment of principal and interest); other types of liability (i.e. contingent liabilities) do not.”
Same would apply for contingent debts.
“If a magistrate happens to rule that a deposit is a borrowing by the depository (implying that it is an asset of the depository) – and such rulings have been made on more than one occasion”
I am highly sceptical. Can you provide an example of such ruling?
“then this indicates to me that the magistrate does not understand the first principles of accounting.”
No, it would indicate that they don’t understand the first thing about law.
@André
“but the fact is that law in many countries explicitly accounts currency as “public debt” or “debt””
Interesting, but what ‘many countries’ are those? Can you provide examples?
For me, what makes a lot of these principles easier to explain is what I’ll call a Fundamental Theorem of Money. I got this idea from Eric Tymoigne’s excellent series of posts on money and banking: money is a promise. Or more formally, money is a promissory note denominated in units of currency.
If you have a trading partner that you don’t trust, you’re forced into a barter situation. If you have a trading partner that you do trust, you might be willing to accept a promissory note from them, but there’s not much you can do with that note in a larger economic sense. However, if there’s a third party that is widely trusted, say a government or a bank, you can use their promissory notes as money. And that is exactly what every modern economy does.
This works well because people who don’t yet understand money well are familiar with promises; how they are created, how they work, how they can fail. And that knowledge can be extended to many aspects of how money really works.
Some examples:
Money, like all promises, is created out of thin air. The value of money, like the value of a promise, depends on what is promised and the willingness and ability of the promiser to fulfil the promise. The US Gov used to promise that it would exchange its money for gold, or accept it as payment of taxes. Now it only promises to accept its money as a tax payment. Bank money (deposits) are promissory notes payable in US dollars. This explains the differences between what MMT refers to as inside and outside money.
When someone makes a promise, they impose an obligation on themselves to fulfill the promise. If the promise is expressed in terms of money, it is entirely appropriate to refer to it as a debt. There can be no credit without a corresponding debt or liability. There is no such thing as debt free money.
Eric Tymoigne characterises bank operations as a swap of promissory notes. When you look at the promises exchanged in typical bank loans and mortgages, and how they are financed, it becomes clear that the banking system is a huge interlocking web of promises. If too many of those links become broken promises, we get a financial crisis.
@Curt Kastens, I was coming from this from the perspective of wishing that the MMT community would be less antagonist towards some of the policy proposals of the UK Labour Party. The UK Labour Party plans are not about leaving the economy down to the private sector. They are centred around having the public sector step in and provide any services that people (including the poorest people) need if that isn’t already provided efficiently and equitably by the private sector. So in this context the JG choice isn’t between those roles being left undone versus being provided for by a JG program; rather the JG choice is between those roles being provided by standard, unionised, public sector workers versus being provided for by a JG program.
To my mind if a job needs doing then it should be done by a unionised worker with proper bargaining power.
Another major aspect of UK Labour Party policy proposals is for a “National Education Service” with bursaries. So anyone would be able to take up a training course and be financially supported whilst they were training. We all could benefit from further training and education, both of ourselves and of our fellow citizens. A buffer stock of people enhancing their training would seem to me far more constructive than any other sort of buffer stock.
In this context, the JG argument is about claiming that is better to have jobs being done by someone on a JG program rather than by a standard, unionised, public sector worker or saying that people choosing to take up a training course should instead be doing JG tasks.
As an old cynic i will believe the MMT job guarantee is an effective inflation
control mechanism when it is.
The problem of mainstream economics is the disconnect between theory
and reality[NAIRU and phillips’ curve et all] which seem to fundamentally
boil down to a belief in non existent invisible hands and their non existent
price mechanism and macro equilibrium super powers.
Wishful thinking is the norm.
Stone,
your points seem reasonable to me. i should point out though that I have a bias. I am not an inflation hawk. I seem to recall making a comment about six or nine months ago that the MMT JG program seems designed to defeat criticisms that will be thrown at it from the conservative side of the political spectrum not the correct side of the political spectrum. The conservative side has created a narrative in which the growth of public sector jobs is seen as creating economic inefficency with only private sector jobs delivering effecient economic and in addition to that that there is direct compition between the wll being of government workers and workers in private enterprise. This MMT JG proposal seems to promise that the workers in it will only temporaily be in the public sector, unless the private sector has no use for them anyways, in which case they may be stuck in jg jobs forever.
To get a full employment program implemented a full employment program has to be implemented by the people holding power. That has been by people of the wrong side of the political spectrum for decades. So I am not surprised that the plan put forward pays more attention to answering the criticisms of those on the wrong side of the political spectrum.
Here is one other note about inflation. I do not know how percent of inflation at any given time is attributable to labor. But I do know that once there are major crop failures in two or more of the major food production areas of the planet in the same year and there is actual food insecurity for billions of people there will be a volcanic eruption of inflation.
Stone, I am thinking that when we consider what options we want the JG to include, we have to always consider whether those options allow the people who are on the JG to also serve as a publicly supported ‘buffer stock’ of labor while they are in the program. If the particular option allows for that then why not add it. But if it does not, then it really doesn’t belong as part of the Job Guarantee.
That does not mean that we should not fully support an idea like bursaries for students who had lost their previous employment and want to learn the skills necessary for a different trade. I think that is a great idea personally. I just don’t know if it belongs in the JG. If you can make a good argument that the students will also be acting as the ‘buffer stock’ of potential labor, then I personally would support adding that to the job guarantee program. Otherwise, I would support a separate program that would do just that as its primary focus- it just wouldn’t be part of the JG.
And your statement- “To my mind if a job needs doing then it should be done by a unionised worker with proper bargaining power”- I completely agree with that.
@Jerry Brown, I think the proposed “National Education Service” participants could act as a buffer stock so long as the courses included short modules, had rolling start times and were extremely flexible regarding enrolment numbers. I’m not sure they would need to be just about retraining for a new line of work. They could also be training skills that augmented their skills for their current line of work. Many people have jobs where say doing an accountancy course or gaining proficiency in a language, or management techniques or another construction skill or coding or whatever would make them a more valuable and able worker in their current profession.
@Curt Kastens, I agree with you on this. In the UK however we do seem to have a real hope of getting a government that has “for the many not the few” as its slogan and policy proposals that back that up. Bill has spoken with John McDonnell (the UK shadow Chancellor) and that is great. However many rank-and-file MMTers here attack the UK Labour Party for not having the MMT proscribed style of JG as a manifesto policy. I think widespread, thoughtful, two way, dialogue between MMTers and UK Labour Party politicians could benefit policy development a lot.
I think there are different “species” of inflation. As you say, food shortages can induce catastrophic hyperinflations. The tragic 1943 Bengal famine is a classic example of that. At that time, both the UK and British-ruled-India were each subject to blockades, by the Germans and the Japanese respectively. The British government put in place food rationing in the UK but couldn’t be bothered to do so in colonial India. The underlying food shortage was no more severe in India than in the UK, but the rationing program in the UK meant that there was no hyperinflation and no one went hungry. In India three million people starved to death whilst there were food hoards. Basically if there is a food shortage, then rationing is the only way to deal with it.
I think the inflation arising from “industrial relation” conflicts is quite a different thing to that. It is the sort of inflation that always looms in our economy and is typically held at bay by extremely damaging and wasteful measures such as fiscal austerity and high interest rates that induce mass unemployment as well as curbs to workers rights. I guess higher but steady-state inflation isn’t really the worry. The worry is explosive accelerating inflation. I’m not sure to what extent that is just a bogeyman rather than being a real danger.
@Curt Kastens, I agree with you on this. In the UK however we do seem to have a real hope of getting a government that has “for the many not the few” as its slogan and policy proposals that back that up. Bill has spoken with John McDonnell (the UK shadow Chancellor) and that is great. However many rank-and-file MMTers here attack the UK Labour Party for not having the standard MMT proscribed style of JG as a manifesto policy. I think widespread, thoughtful, two way, dialogue between MMTers and UK Labour Party politicians could benefit policy development a lot.
I think there are different “species” of inflation. As you say, food shortages can induce catastrophic hyperinflations. The tragic 1943 Bengal famine is a classic example of that. At that time, both the UK and British-ruled-India were each subject to blockades, by the Germans and the Japanese respectively. The British government put in place food rationing in the UK but couldn’t be bothered to do so in colonial India. The underlying food shortage was no more severe in India than in the UK, but the rationing program in the UK meant that there was no hyperinflation and no one went hungry. In India three million people starved to death whilst there were food hoards. Basically if there is a food shortage, then rationing is the only way to deal with it.
I think the inflation arising from “industrial relation” conflicts is quite a different thing to that. It is the sort of inflation that always looms in our economy and is typically held at bay by extremely damaging and wasteful measures such as fiscal austerity and high interest rates that induce mass unemployment as well as curbs to workers rights. I guess higher but steady-state inflation isn’t really the worry. The worry is explosive accelerating inflation. I’m not sure to what extent that is just a bogeyman rather than being a real danger.
stone: -but how then do you define “work”?
Do I have to define everything!? 🙂
It’s hard work. It’s a job that I won’t do unless you pay me.
But why ask me? What is important is not how I define things, but how general usage and the dictionary define things. MMT & I just use standard dictionary definitions. There is nothing unclear about what “work” and “job” mean for practical purposes, as in my sentence above. Proponents of MMT & the JG are not imitating Humpty Dumpty. Critics are.
Being forced to humiliate yourself for a welfare check, for charity, for fake training is not a job, is not work in “general usage”. It’s just extortion. That’s why jobs are better than welfare, than charity, than training – they’re not about humiliating yourself or others. They’re about doing stuff in the real world for a real goal.
Why do you dismiss such a bursaried, lifelong education system as being inferior to JG “jobs” that don’t have training as a primary aim?
My first response to you treated this at length and eventually appeared. I refered to a billyblog and a relevant book. It is your turn to respond, not mine.
Experience has shown that these job training programs without jobs are always frauds that blame the victims and crush their spirit. That’s the intention of those who push them. This question inverts things, promoting a fraud and using scare quotes “jobs” for the real thing. Sure, have all the training and education programs you want. But as add-ons to a real job program. Without it, they’re a sadistic joke.
I’m just saying that such provision should be by standard, unionised, public sector sector employees. I also advocate genuine full employment policies. I’m just making a plea that the MMT community tries for that rather than accepting a JG second best.
The JG is NOT a second best. It is the first best and the essential. Throwing in unions is a red herring. The JG doesn’t really even mention unions. So superficially, it is neutral. But “Jobs”/ “Free labor” rather than “slavery” demonstrates and constitutes bargaining power in itself. Recognition of the right to work and the JG get rid of the slavery implicit in unemployment in a monetary economy. So the JG is implicitly a proposal, a demand of the union called “Everybody” upon the same, to not engage in the criminally insane policy of running a monetary economy without a JG. It constitutes an epoch-making, tremendous triumph for labor.
There could be unions in a Job Guarantee, why not? New Deal work programs were unionized under the Workers Alliance of America. The only argument you make is that unionization would give so much power to the unionized JG workers that the JG couldn’t function as a buffer stock. That genuine full employment and a unionized public sector are incompatible with inflation-control.
I think a great deal of history, current events and logic shows this is quite farfetched. Your anti-JG arguments are really just a new guise for hoary assertions/arguments of business economists and monopoly capitalists that the New Deal & the postwar era proved false.
@Creigh Gordon: Well said.
See 12 Reasons Labor Should Demand a Green New Deal and Workers Alliance of America for New Deal / WPA unions and their modern relevance.
Stone, I do agree with you that some MMTers and even Bill have been too critical of Corbyn et al. Corbyn has a difficult political path to walk. So far seems to be doing well.
Re-posting a short version of my question above, posted a few days ago. Ideas, anyone?
I don’t get how to square the two concepts of “saving,” i.e., individual saving versus aggregate non-government net saving. As an individual, do I care about the level of the sector’s net financial assets? Who or what has a “desire to accumulate net financial assets” in the aggregate?
It seems to me that government spending decisions could consider only the need to maintain full employment, without regard to an assumed sectoral desire to accumulate net financial assets. Is the amount of net financial assets a residual, like the government’s fiscal balance? I gather it’s more important than that.
Any insights appreciated.
Dear Richard Genz,
I do not know why an economist did not answer your question sooner. My background is in archeology.
Here is my shot. So, you want to buy a car or make a down payment on a house and you start saving.
Say it would take three years for you to save for the car and six years for the house. Well some older people would have started saving long before you did. They should be reaching their savings goals and spending their money at the time that you start saving.
But not always. Some of those savers may reach the point that they were about to make a large purchase and cancel it because they have new information that their job is not secure. Or they lack medical insurance and a child has developed a serious illness. So their savings gets spent slower than planned.
This is where I like my glacier discription. The money going in to savings is like the snow falling on top of the glacier. The ice breaking off the front of the glacier and melting is the money being spent in to the economy. When an economy is cold an MMT government will be trying to heat it up by adding money. It is possible that the money in the savings accounts could come flooding back in to circulation. That could cause higher levels of inflation.
If we are talking about inflation levels going from 2% to 10% (OK 12%) I would say, so what. But if that makes people uncomfortable the people in charge could say, look if you buy a government bond today for 95 drachmas today we will give you back 120 drachmas in two years, to soak up some of the excess water comming off of the glacier and store it in a resivour near by thereby cooling the inflationary tendincies in an economy. If I am not mistaken inflationary tendicies can also be dampened by importing goods and services with fiat currency.
What really really disturbs me is the implications that flow from this policy at an international level.
Each soverign government will be trying to maximize THEIR OWN countries potential for (sustainable) economic well being. Their is no incentive for the leaders of any country to comprimise with the leaders of any other country. Yes of course a Green New Deal will mean that that nation will build solar panels and shut down coal power plants. Or maybe a nation will want to double down on nuclear power. But under mmt only each nation will be trying to be the first to reach 500 billion mega watts of solar and wind power. First the world had a race for naval supremacy. Then it had a race for nuclear weapons supremecy. Then it had a race for supremacy in space. Now it has a race for cyber supremecy. The race for more solar panels seems to be next in line. The finish line of all of these races is for a soverign government to tell its people. We ARE THE BEST!! We have the worlds highest standard of living. and not only that it is the first one that is SUSTAINABLE. WE are not producing a gram of CO2!!! (Forget about methane) The reason that other countries are destroying the planet is because, THEY ARE IRRESPONSIBLE. OK perhaps they are not irredimably irresponsible. But they are more irresponsible than we are. Therefore they should do what we tell them to do. BECAUSE WE ARE THE CHAMPIONS MY FRIENDS!!! AND WE WILL KEEP ON FIGHTING TO THE END!! To prove it.
Richard Genz,
And I almost forget. Every archeologist that I know would agree, the primary government economic focus should be on maintaining full employment. But even that is only an ends to a means. Because the ends is to make sure that no one goes hungry. But we all say that even before that a government should have to work with in a level of global economic restraints.
Of course weak governments would quicly agree to that but they have limited ability to enforce it. Powerful governments have no incintive to enforce it. The leaders of these governments will of course hid behind the will of the people mantra.
@Richard Genz, I’m answering more than anything just to try and help myself get my head around this (and to get corrected myself).
My impression is that the MMT position is that the government should deficit spend with the primary goal simply of ensuring full employment. The need for the deficit is a consequence of the net saving action of the non-government sector (ie of them accumulating net-financial assets).
I guess (please correct me if I’m wrong), it would also be possible to reduce the need for such a deficit by reducing the net saving action of the non-government sector. Shifting towards more progressive taxation might reduce the propensity to save. If there were more custom for what firms were wanting to sell, and that provoked them into investing more, then rather than net saving, capitalists might save in the form of building the physical capital stock.
Richard, I’ll give it a try but ‘savings’ in economics is a tricky concept. So don’t bet on this answer being correct 🙂
So the amount of net financial assets created in a time period is indeed a residual very similar to the outcome of the government fiscal balance for that period. As far as I can tell, the government fiscal balance is the main source of net financial assets, although the central bank can also create net financial assets, as when paying interest on reserves. So if the government spends more than it taxes, net financial assets will increase by the amount of that difference, and they will decrease when the government taxes more than it spends.
Now why is it important to consider the private sector’s desire to accumulate (Save) these net financial assets? First thing to remember is that total expenditure always equals total income (and equals nominal GDP) for the economy as a whole. So when the private sector (as a whole) wishes to save more than it wants to spend, well total expenditure can drop which means total income will drop and NGDP will drop. It could happen that total income drops so much that individuals find that they are not able to increase their savings even if they wish to (called the Paradox of Thrift). Production can decrease and unemployment increases. None of which is very pleasant and most people would want the government to increase the supply of net financial assets (to accommodate the private sector’s desire to increase saving) in order to avoid that.
But if and when the private sector reduces its desire to save in the currency we can have the opposite problem where expenditure starts rising faster than our ability to increase production which can cause rising inflation. Which people usually don’t like either. So in this case, we would want the government to decrease the supply of net financial assets by either spending less or taxing more.
So part of the beauty of the JG idea is that it would automatically make some of these government spending adjustments quickly so that it would counteract the changing saving desires of the private sector to some extent. This is a feature of policies that are called ‘automatic stabilizers’. Plus, it would eliminate involuntary unemployment as we know it.
Thanks for the responses. @Curt, appreciate the archeological perspective and the glacier metaphor.
@stone, As I understand it, a government deficit is the mirror-image of non-government sector net savings, not a consequence of it. However I think simple *savings* inside the non-government sector can indeed result in inadequate demand, unemployment, and the need for government deficit spending.
@Jerry Brown Thanks, your confirmation that “net non-government savings is indeed a residual very similar to the outcome of the government fiscal balance for that period” has helped me work through the question a bit more.
I think the key may be in Bill’s statement in the post:
“Mass unemployment arises because, *after the non-government sector has implemented its spending and saving decisions,* the level of spending is insufficient to absorb the willing and available supply of labor.”
Imagine that in a given year within the non-government sector, all spending and saving decisions are already implemented. The “inside wealth” of the sector is what it is, meaning creditors have already accommodated as many debtors as they are willing to. Non-government sector assets and liabilities have all been issued. By definition they sum to zero. There are no net financial assets, because a *net* financial asset must be a claim on an entity outside the non-government sector.
If the particular mix of non-government saving and spending decisions results in a level of spending that’s “insufficient to absorb the willing and available supply of labor,” then across the whole sector, as Bill says in his post, there’s a “net desire to save (accumulate financial assets).” The “net desire to save” doesn’t belong to actual households or firms; the “desire” is a metaphorical expression of the fact that the particular mix of non-government saving and spending decisions leaves the non-government sector wanting: i.e., wanting more jobs.
Enter the government sector, which injects deficit spending to end mass unemployment and (residually) creates net financial assets in the non-government sector.
That’s my best shot for now.
Hi Richard, I am glad you found my attempt at an answer helpful. But like I said, the ‘savings’ thing is tricky in economics (for me at least). You quoted me as saying “net non-government savings is indeed a residual very similar to the outcome of the government fiscal balance for that period” which is not actually what I said. I am only pointing that out because I really am not sure that is true. Although it sounds about right to me. And in all honesty, I am not 100% sure that what I actually wrote would be true according to an expert in national accounting. But you can be sure that what I wrote is my very best attempt to explain it in line with my understanding of the matter.
I was really hoping Bill would answer your question the first time you asked because I had given up on my first attempt at that one.
Jerry,
My apologies for misquoting you! You actually wrote “the amount of net financial assets created in a time period is indeed a residual very similar to the outcome of the government fiscal balance for that period.”
However what you actually did write is what I was addressing: net financial assets. And it helped me get to grips with the confusion I had about the “desire” to accumulate net financial assets.
I’m an amateur, not an economist, but I do believe your statement holds. Randy Wray puts it this way: “In terms of stock variables, in order for one sector to accumulate net financial wealth, at least one other sector must increase its indebtedness by the same amount.” p. 15, Modern Money Theory
To me that says net wealth accumulation is automatic: when government runs a deficit, non-government runs a surplus, i.e., accumulates net financial assets (leaving aside the foreign sector).
RG
I thought that I was going to take a Christmas vacation but then I remembered something important.
It is funny how context narrows our perception. We have been writing here about nuts and bolts kind of. But there is a whole different level for this savings spending unemployment inflation connection. My own comments about having a job to make sure that we have a full belly reminded me of that.
OK do not forget I am an archeologist so if anyone contradicts this historical narrative I will cut your head off and cover it with honey before dropping it into an ant hill.
In the beginning, if a person did not hunt or gather they did not eat. Then if they did not plow, plant and harvest they did not eat. But then metals were discovered and things changed. Specialization of labor picked up speed. There was an imbalance of technological power. Imperialism was born.
The end. Well kind of.
Those without land had only their labor to sell to gain access to the food supply produced by the farmers. Prior to industrialization labor was important. In principle if a person was doing something that someone wanted them to do they were doing something to make society better in at least one persons opinion, their bosses.
Then comes mass production and a society can meet the actual needs for durable goods of everyone in society quite easily. But what happens then. For hundreds of years humans have operated on the principle that if you are not making any money you are not doing anything productive therefore you must be a lazy leech. So companies that produced radios told us once there was a radio in every hause we needed one in every room. Once we had one in every room these radio production componies perhaps went on to produce tvs again one for every household then one for every room.
That continued with computers. Then they convinced people that they needed to buy more beautiful radios tvs and computers to replace the ugly slow or black and white ones that they already had.
So in addition to the ultimate problems of our modern world that often get mentioned here, the collapse of the environment and critical resource depletion, there is the problem that some people talk about frequently. I just have not seen it talked about here. That is that with suffecient energy inputs it is possible for an industrialized society to reach an point in that not only will there not be jobs for every one there will not even be a reason to retrain anyone because everything that should be produced has been produced, EXCEPT for FOOD.
We have been talking about this job guarantee and whether or not the jobs would produce value.
My accusation is that we already have many many jobs in private business that do not produce value. These jobs are essentially fraudulent. The thing is because of our specialiyation of labor the people who carry out these fraudulent jobs can fool enough people enough of the time that they can earn a living. Is it really neccessary for me to give examples.
In the short run mmt is good. It seems that in the long run capitalism and free markets have to be tossed in to the dust bin of history if we want more than a few people to survive. The Marxists warn us that we must choose between socialism or barbarism. I think that they are right. But I myself do not choose democratic socialism. I chose confucian socialism. I am sure that everyone knows what that is. The success or failure of confucian socialism of course rests with those who initially establish the system. If the training of confucian socialist leaders is bad to start with such a system will collapse just as fast as any other system full of problems. One of my mottos is all isms fail. Only good leadership will keep humanity alive. There is no way to ensure good leadership in positions of power. But a confucian training system gives humanity the best chance.