{"id":17528,"date":"2011-12-28T17:51:37","date_gmt":"2011-12-28T06:51:37","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=17528"},"modified":"2011-12-28T17:51:37","modified_gmt":"2011-12-28T06:51:37","slug":"mmt-is-biased-towards-anti-crony","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=17528","title":{"rendered":"MMT is biased towards anti-crony"},"content":{"rendered":"

\t\t\t\tThere has been a couple of interesting articles written by John Carney who is a Senior Editor at CNBC.com on Modern Monetary Theory (MMT) – starting with Monetary Theory, Crony Capitalism and the Tea Party<\/a> (December 22, 2011) and followed up with Modern Monetary Theory and Austrian Economics<\/a> (December 27, 2011). I am happy that our work is penetrating in to the mainstream business and economics commentary space. It is good that John Carney has spent some time coming to terms with MMT and its departure from the failed mainstream macroeconomics. But some problems remain with his analysis. The issues he raises relate to political matters rather than the economics of MMT. In that context, MMT is neither anti- or pro-crony. But if you delve deeper and really understand the MMT macroeconomic framework then you realise that MMT is biased toward anti-crony.
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John Carney notes that the US fiscal stimulus and central bank quantitative easing “both occurred without any attendant inflation or giant soaring of interest rates” and that the “so-called ‘bond vigilantes’ turned out to be mythological creatures” and “the downgrade of the U.S.’s credit rating only lead to lower interest rates”. These events were contrary to the predictions made by several prominent mainstream economists.<\/p>\n

That should be of no surprise because the predictions were consistent with the theoretical models that students are taught in mainstream economics programs and which guide the research efforts of the majority of my profession. Clearly, the predictions were wrong – over and over again.<\/p>\n

In this context, John Carney said that:<\/p>\n

\nThe school of economics that best explains this phenomenon is called “Modern Monetary Theory” or MMT. The MMT school is made up of scholars, businessmen and online advocates who have a deep understanding of the operations of the actual operational aspects of our monetary system.<\/p>\n

They argue, quite persuasively, that our monetary system is built in such a way that our government is never revenue constrained, which is to say it can spend as much as it likes, because the government creates our money. The real constraint on government spending is price inflation, which occurs when government and private spending outpace economic output.\n<\/p><\/blockquote>\n

Which is an accurate portrayal except I would note that the real constraint on government spending is not price inflation rather than the productive capacity of the economy. Price inflation in this sense is a symptom that nominal aggregate spending is outstripping that capacity.<\/p>\n

I would note that the “MMT school of thought” is different from the various blogs that have developed since the academic material emerged in the 1990s which draw on that conceptual material. There are many “blogs” now that are sympathetic to MMT or suggest they espouse MMT which have been derived from the early academic work that a few of us (Warren, Randy, Stephanie, Scott, Matt, myself and a few others) developed. I always agree with the contributions of the early MMT writers but often disagree with some of the statements that the blog writers outside of this group make in the blogosphere.<\/p>\n

I consider the early MMT writers to be the MMT theorists.<\/p>\n

John Carney also noted that:<\/p>\n

\nThere’s a lot more to MMT than its view of monetary operations and government funding, however. They believe the government should guarantee jobs for everyone, that the financial system tends toward crisis and corruption, that capitalist economies are not self-regulating, and that fiscal policy should be measured by its effect on the economy not on whether budgets are balanced. Some of this is fine, other parts I regard as distractions (such as the jobs guarantee).\n<\/p><\/blockquote>\n

Remember that MMT is derivative in that it draws on previous theoretical traditions – dating back to Marx, Keynes, Kalecki, Lerner, Minsky to name just a few of the intellectual influences from yesteryear.<\/p>\n

However, the way these influences are drawn together into a comprehensive macroeconomic framework by MMT theorists is unique and distinctive. Further, it is a framework that has stood up to extreme empirical scrutiny.<\/p>\n

We have large budget deficits relative to the norm and the central banks have expanded their balance sheets by a significant degree. We do not have inflation nor out of control interest rates. And, as predicted, the Eurozone is melting down in the face of the flawed (unworkable) design of its monetary system. All essential insights that one can derive from MMT.<\/p>\n

The focus on price stability and the way that buffer stocks can be used is very distinctive and you will not find this in the mainstream framework. The Job Guarantee<\/a> is developed within that tradition.<\/p>\n

John Carney like most other students of MMT tend to consider the JG to be a “guarantee jobs for everyone” which he think of as one of the “distractions” to the main MMT contribution. However, that characterisation demonstrates to me that the “student” hasn’t fully embraced the buffer stock thinking that is unique in MMT.<\/p>\n

Those who haven’t come to MMT from a solid background in macroeconomics can easily just think the JG is a tacked-on “leftist” or “social democrat” policy aimed at providing jobs to those who cannot find them. So I often get the view expressed in E-mails etc that the JG is all very nice but peripheral to the deep financial and monetary insights that MMT provides and should be culled from the writings or de-emphasised so as not to alienate the hard financial market types.<\/p>\n

The progressives who support an income guarantee (for example, Basic Income proponents) also play down the importance of the JG (an employment guarantee).<\/p>\n

I take John Carney’s “distraction” categorisation as fitting him into those that haven’t fully grasped the role that the JG plays in MMT.<\/p>\n

The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and<\/strong> price stability. And in making that point I will draw on it later to address John Carney’s major objection to MMT.<\/p>\n

But to understand the role that the JG plays in MMT one has to grasp the concept of buffer stocks.<\/p>\n

In last week’s blog – Some hard truths for 2012<\/a>, I noted that in his keynote speech<\/a> at the CofFEE Conference earlier this month, my colleague Randy Wray said:<\/p>\n

\nAnd then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.<\/p>\n

I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.\n<\/p><\/blockquote>\n

I noted that this means that the government can thus choose – of all the “steady state” unemployment-stable inflation equilibria available – one that provides a job for all when the private market fails.<\/p>\n

For those well-versed in the history of macroeconomic thought rather than the day-to-day financial market trends, this MMT insight is crucial and relates to the need for an economy to maintain a nominal anchor (that is, maintain price stability).<\/p>\n

As I explained in this blog – Modern monetary theory and inflation – Part 1<\/a> – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:<\/p>\n