A Primer on Macroeconomics for Sovereign Monetary Systems
- My Introduction
- Preface to the 2nd Edition
- Definitions
- Introduction: The Basis of Modern Money Theory
- Chapter 1: The Basics of Macroeconomic Accounting
- Chapter 2: Spending by Issuer of Domestic Currency
- Chapter 3: The Domestic Monetary System: Banking and Central Banking
- Chapter 4: Fiscal Operations in a Nation That Issues Its Own Currency
- Chapter 5: Tax Policy for Sovereign Nations
- Chapter 6: Modern Money Theory and Alternative Exchange Rate Regimes
- 7th Inning Stretch
- Chapter 7: Monetary and Fiscal Policy for Sovereign Currencies: What Should Government Do?
- Chapter 8: Policy for Full Employment and Price Stability
- Chapter 9: Inflation and Sovereign Currencies
- Chapter 10: Conclusions: Modern Money Theory for Sovereign Currencies
- My Conclusion
- Updates: last updated 2020-05-19
My 1st Economics book in a year: "Modern Money Theory", 2nd Edition, by L. Randall Wray, 2012, 2015, 447 pages, 129k words. Subtitled "A Primer on Macroeconomics for Sovereign Monetary Systems", it has a Preface to the 2nd Edition, Definitions, an Introduction, and 10 chapters of 6-9 sections. It is generally a pretty easy read. Wray cracks some jokes and in general keeps the book approachable. The sections in the chapters often end with a "box" - additional or more in depth information that can be skipped if you want a quicker read. I don't think they add that much time, plus there's some good information in them, so I'd recommend reading them.
Note, I thought that MMT stood for "Modern Monetary Theory", not "Modern Money Theory". I am completely ignorant as to whether the differing verbiage means anything.
Wray is "Senior Scholar, Levy Economics Institute of Bard College, University of Missouri-Kansas City".
Finally, some economics that makes sense. I posted about MMT a little over a year ago here and here - and before that in November, 2018. Wanting to learn more, Wray's book seemed to be the definitive work. Even so, there were maybe some things that it didn't particularly cover. But other things that I didn't particularly get about MMT, particularly the JG/ELR (Job Guarantee / Employer of Last Resort), make a lot more sense now.
Note, the book and this review/summary get pretty detailed. If this is going to be your introduction to MMT, I'd recommend 1st watching this very instructional video. It was included in the 1st post mentioned above. But, the video is 56 minutes, this post is ~24k words, so you can probably read it in <~= 1/2 hour. The video is really good & more focused on introducing you to MMT. This post is focused on reviewing/summarizing Wray's book.
In the Preface, Wray says that since the 1st edition, recognition of MMT has proceeded apace. Looking at it from now, 5 years later, it doesn't appear to me that MMT has moved from ridicule to opposition to acceptance as Wray states. My 1st post linked to above points to recent (2019) criticism of MMT by Paul Krugman and Lawrence Summers. After finishing the book I went back to reread those articles. Looking them up (DuckDuckGo "Paul Krugman on MMT"), I found this article, which also points to criticism of MMT titled "Modern Monetary Nonsense" by Kenneth Rogoff, another well-known economist - and then demolishes all 3 criticisms. Rereading these 3 critical articles, I myself immediately saw where the eminent economists went wrong: Krugman picks a nit and sidesteps really talking about MMT at all; the other 2 make false statements about MMT and then use those to show how bad MMT is. I guess this is another of those cases where where old theories only go away to make way for new theories when their proponents get old and die.
I like this quote from Hyman Minsky, whom Wray describes as "my professor".
“anyone can create money; the problem lies in getting it accepted”
The brief Definitions section would read better if it were formatted like a glossary or dictionary rather than being freeform text. I've attempted to harvest some definitions:
- money - a general representative unit of account
- money "things" - a coin, a bank note, a demand deposit
- "money tokens" - "money denominated IOUs" aka "money records"
- money of account - the US Dollar, Japanese Yen - capitalized. In Chapter 2, Wray clarifies: "This is a unit of account, a measuring unit like the “inch”, “foot”, and “yard”."
- currency - coins, notes, and reserves issued by government (both by the treasury and the central bank). Again from Chapter 2, "the money “token” or currency issued by government generally functions as a "medium of exchange"[my quotes].
- bank reserves - private bank deposits at the central bank, denominated in the money of account
- IOU - (I owe you) a financial debt, liability, or obligation to pay, denominated in a money of account
The Introduction is titled "The Basis of Modern Money Theory". So where did MMT come from?
MMT is a relatively new approach that builds on the insights of John Maynard Keynes, Karl Marx, A. Mitchell Innes, Georg F. Knapp, Abba Lerner, Hyman Minsky, Wynne Godley, and many others. It “stands on the shoulders of giants”, so to speak.Here's the 0th assumption of MMT:
For the past 4,000 years (“at least”, as Keynes put it), our monetary system has been a “state money system”. To simplify, that is one in which the state chooses the money of account, imposes obligations (taxes, tribute, tithes, fines, and fees), denominated in that money unit, and issues a currency accepted in payment of those obligations.The key thing here is, the state "issues a currency". The state spends by creating currency and depositing it into bank accounts.
government spends currency into existence and taxpayers use that currency to pay their obligations to the state.[EMU is the European Monetary Union aka the Eurozone.]...
it [MMT] challenges the orthodox views about government finance (and the dangers of budget deficits), monetary policy, the so-called Phillips Curve (inflation-unemployment) trade-off, the wisdom of fixed exchange rates (and of joining the EMU!), and the folly of striving for current account surpluses.
But the real secret sauce is contained in this statement.
The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.A government that can issue its own currency is absolutely nothing like a household that must balance its budget. In fact, a government deficit represents a private sector surplus, and with no government deficit, there can be no private sector surplus. So the analogy you constantly hear of the government compared to a household is totally invalid.
Interesting verbiage, we do "tax returns" - why "returns"? Because we are returning the government's money to it. Similarly, the word "revenue" comes from French, "revenu" (infinitive revenir) meaning "to come back". The government's currency is coming back to it.
Wray throughout the book provides great insight into the (largely unnecessarily) complicated relationship between the Treasury and the Federal Reserve System aka the Fed. The system was made complicated so the Fed couldn't just create money and give it straight to the Treasury - I guess it was felt that moral peril would attach if that was too easy. So instead the new money goes to private banks and then to the Treasury. Bond sales are like taxes - the Fed creates the money in the private banks who then use it to buy bonds.
One thing that Wray does not dwell on is that the Fed is "a creature of Congress". I note in passing that a popular theme among conspiracy theory types is that the Fed is not part of the Federal government.
Wray mentions how crazy the Federal debt limit is.
Congress and the President could and should remove that debt limit, but we surely do want a budgeting process and we want to ensure that Uncle Sam is constrained by the approved budget.Later in the book (Chapter 9) Wray talks about the descriptive side of MMT - how our money system really works - vs a prescriptive side - what kind of things can we leverage with our new knowledge? This paragraph at the end of the introduction convinces me he is a fellow traveler.
Imagine how the policy discourse will be changed when our President could no longer claim that “Uncle Sam has run out of money”; when our government can no longer refuse to create jobs, or to build better infrastructure, or to put astronauts on Mars because of lack of funds; or when pundits would no longer be allowed to raise the scary specter of striking “bond vigilantes” who might refuse to “lend” more to government! There may be reasons we want to leave millions of workers unemployed, or to live with unsafe bridges and highways, or to remain earth-bound, but lack of funding cannot be one of them.
Chapter 1 is titled "The Basics of Macroeconomic Accounting".
It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.This is the essence of double entry accounting. For every debit of one account, there must be a credit of another. At one point I wrote a pharmacy prescription claim reconciliation system working closely with accountants and I definitely had this drilled into me. Wray uses a catchphrase (5 references) to describe this: “it takes two to tango”.
Wray introduces the concepts of "inside wealth" - wealth in the private sector - and "outside wealth" - which "takes the form of government IOUs". He also introduces "stocks" - accumulations of capital or whatever - and "flows" - the deltas causing the stocks to go up or down. The budget deficit is a flow, the national debt is a stock, etc.
This section talks about many "identities". For example, here's the "National Income and Product Accounts accounting identity", private sector Saving ≡ Government spending - Taxes received:
S ≡ (G – T)[I think this where my feeling that MMT is "economics that makes sense" comes from. So much of orthodox economics is about equilibrium models - but when is the economy ever stable enough to reach equilibrium? And the models generally include incredibly bogus simplifications to keep things workable. MMT instead deals with identities, hence the ≡ sign. This is not even math, it is arithmetic, it is fundamental accounting principles.]
Thinking in identities makes it clear why things like the "paradox of thrift" exist - not every country can be a net exporter, there's got to be minuses to equal the pluses.
Interesting, 1st time I have ever heard this, that the government budget surpluses during the Clinton administration meant that, identity-wise, private debt went way way up, leading to a crash in the late 90s, which, after a mild recovery, became the Great Recession of 2008. Wray refers to this event as the Global Financial Crisis (GFC). Wray states that MMT-influenced economists looked at the identities and warned of problems throughout this period.
What was hard to foresee in the late 1990s was just how far the financial sector would go in building up private sector debt. It kept the debt bubble going through all sorts of lender fraud until it finally collapsed in 2008 – a decade after we had first warned of the problem.
Chapter 2 is titled "Spending by Issuer of Domestic Currency". This chapter addresses the question "What is a sovereign currency?" Normally, each country has its own currency, but not always - some 3rd world countries use the U.S. Dollar as their currency. The European countries in the Eurozone also no longer have their own currency (oops).
It might be surprising to learn that in the United States foreign currencies circulated alongside the US dollar well into the nineteenth century; indeed, the US Treasury even accepted payment of taxes in foreign currency until the middle of the nineteenth century.Wray discusses the change from commodity backed (the gold standard) to "fiat" currencies. He discusses "legal tender laws". Ha ha, I like this:
paper currency issued in the United States proclaims “This note is legal tender for all debts, public and private”; Canadian notes say “This note is legal tender”; and Australian paper currency reads “This Australian note is legal tender throughout Australia and its territories”.So you give your fiver to the Queen, and she gives you back ... another fiver?!?!?By contrast, the paper currency of the United Kingdom simply features a picture of the Queen who says “I promise to pay the bearer on demand the sum of five pounds” (in the case of the five-Pound note).
Wray revisits Minsky's dilemma:
If “modern money” is mostly not backed by gold or foreign currency, and if it is accepted even without legal tender laws mandating its use, why is it accepted?Wray also finds this theory inadequate (although it may apply to counterfeit money):
the “greater fool” or “hot potato” theory of money: I accept a Dollar bill because I think I can pass it along to dupe some dope.The right answer is one of the book's main mantras; this statement is made 21 times: "Taxes drive money", or TDM. The longer version:
Because the government’s currency is the main (and usually the only) thing accepted by government in payment of taxes and other monetary debts due to government.Another term that Wray uses repeatedly (67 times) is "keystroke", as in this example:
all bank deposits came from bank keystrokes created when banks accepted IOUs of borrowers.Since even before I retired and started reading economics books, one of my main mantras has been: "Money Is Software". Validation, FTW!
Wray discusses scenarios in which the populace does not want to use its government's currency. This is mostly a 3rd world problem.
Throughout the book, one thing that is driven into your head is that everything monetary is basically an IOU. Everything is a debt. In the end, the government is the one who owes everybody - they are the one who creates the money. Take for example reserves.
Reserves are just a special form of government currency used by banks to make payments to one another and to the government. Like all currency, reserves are the government’s IOU.Wray analogizes money to points in an athletic contest - a way to keep score, and nothing more.
So while the game of life is a bit more complicated than the football game, the idea that record keeping in terms of money is a lot like record keeping in terms of points can help us to remember that money is not a “thing” but rather is a unit of account in which we keep track of all the debits and credits, or “points”. And these “scores” are almost always kept in the sovereign’s money of account.At one point I wondered, what about real assets? Real estate, other property? These become "monetized" when they are sold.
real assets can get monetized when someone goes into debt.Monetization is the process by which the unit of account, the Dollar, is used to measure everything - everything has a price. It replaces barter, it replaces mutual back-scratching. On my 1st read of this book, I was disappointed that Wray did not address the household and commons realms of provisioning, as defined in, say, "Doughnut Economics". Reviewing, he does in this chapter mention the contributions of the household in passing - but seems to be saying "they shouldn't be monetized"??? And that doing so would threaten the survival of our species??? He's clearly not your standard economist.
this distinction between real and financial should now be clear. Still, a lot of the most interesting activity in any society takes place outside (or mostly outside) the monetary sphere. And it is important activity; the monetary sphere would not last long without these nonmonetary activities. My own view is that this continual “monetization” of ever more activities is highly problematic and probably threatens survival of our species as well as that of many of the other species on earth. I also resist assigning monetary values to things like caring for your own children – something economists are wont to do.Wray is totally not a fan of gold, and seems to regard goldbugs with mildly contemptuous bemusement. I thought this was kind of funny:
A gold purchase by government is exactly the same as a Social Security payment, except that the government now has to go to all the bother of locking up the gold and keeping the bandits away so that the gold does not get freed and put to superior use as dental crowns in mouths. (That makes a lot of sense, doesn’t it? We need to start a campaign: free the gold!)The last section of this chapter talks about "sustainability conditions" for government deficits. I think Wray thinks that most of the fear-mongering about unsustainable deficits is based on bad-faith arguments by "deficit hysterians". Note that it was in 2013, between the 1st and 2nd editions of this book, that "the world's most famous Excel spreadsheet error invalidated the scholarly paper by Reinhart and Rogoff which (wrongly) concluded that growth suffered if a country's debt/GDP ratio exceeded 90%." Some further points:
- It is silly to ask if deficits can last forever, because nothing lasts forever; governments are no exception.
- "Anything carried to a logical absurdity is unsustainable."
- If interest rates are higher than growth rates, then the miracle of compound interest will indeed cause problems. And, in fact, the 2008 GFC was a result of interest overwhelming the private mortgage sector.
- And finally, "all the government needs to do is to lower the interest rate it pays below the economic growth rate. End of story; sustainability achieved."
the United States imports more than it exports because the rest of the world wants to accumulate savings in Dollar-denominated assets....
She [the United States] pays extremely low interest rates and profit rates to foreigners, and earns much higher interest rates and profits on her holdings of foreign investments and debt. Why is that? Because the United States is the safest investment on earth. Anytime there is a financial crisis anywhere in the world, where do international investors run? To the US Dollar.
Ironically, that happens even when the crisis begins in the United States!
Chapter 3 is titled "The Domestic Monetary System: Banking and Central Banking". From government IOUs (currency), we go to private IOUs, particularly those represented by private bank holdings.
You can present a check to your bank for payment in currency – what is normally called “cashing a check” – or you can simply withdraw cash at the Automatic Teller Machine (ATM) from one of your bank accounts. In either case, the bank IOU is converted to a government IOU.Do banks keep enough currency on hand to cover the deposits of all their customers? No, instead they "leverage their currency reserves, holding a very tiny fraction of their assets in the form of reserves against their deposit liabilities."
When too many customers try to withdraw their funds, you get a "bank run".
This can even lead to a lender of last resort action by the central bank that lends reserves to a bank facing a run.The box on "The central bank balance sheet" is very informative. Ha ha, here's former Fed Chairman Bernanke discussing the role of the Fed, the US's central bank, in bailing out banks in 2009:
Pelley: Is it tax money that the Fed is spending?Easy, peasy! Keystrokes FTW!
Bernanke: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
We learn about the "pyramid of liabilities": government IOUs on the top, bank IOUs below them, and the IOUs of "nonbank financial institutions" (also called “shadow banks”) below them. The higher up the pyramid you go, the more your IOUs are worth. As you move towards the bottom of the pyramid, IOUs have increased risk associated with them, and when banks sell them back and forth amongst themselves, these IOUs are often discounted. And of course there is leverage.
the liabilities at each level typically leverage the liabilities at the higher levels. In this sense the whole pyramid is based on leveraging of (a relatively smaller number of) government IOUs.Wow, Wray is definitely not a fan of Bitcoin. In answer to his own question, "Are Bitcoins money?", he quotes a March,2015 WSJ article by Eric Tymoigne which lists many bad things about Bitcoins, leading Wray to conclude that "the Bitcoin is an instrument used to dupe dopes." [I suspect there are a lot of people who bought Bitcoins early and got rich, but the same is probably true of Beanie Babies.] I wonder what Wray's attitude toward Bitcoin, and cryptocurrencies in general, is now?
More detail on how the Fed works:
the most common role of Fed lending on a typical day is through intraday overdrafts, which banks are required to clear by the end of the day. Really this is just like “overdraft” protection you might have on your checking account.Wray then moves on to private banks. Hah, this would be funny if it weren't true....
The central bank lends against qualifying assets. It’s the boss and can decide. Usually, central banks lend against treasuries (IOUs of the treasury); they can lend against “real bills” (short-term commercial loans made by banks to good customers); and they can lend against toxic waste MBSs (those subprime mortgage-backed securities that triggered the Global Financial Crisis – maybe a bad idea?).
If you really want to rob banks, my colleague Bill Black says the best way to rob a bank is to own one. (See: The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S & L Industry, University of Texas at Austin Press, April 2005.) Then you simply credit your own bank account with bonuses. Where will you get the millions of dollars to credit your account once you own a bank? Keystrokes!More on the power of keystrokes, and Wray again gives us some prescriptive MMT ideas.
The Fed has no limit to keystrokes, and the reserves do not exist until the Fed keystrokes them into existence. The Fed spent (buying assets) and lent a total of $29 trillion to rescue the financial system after the Global Financial Collapse ... Wouldn’t it be better to spend a fraction of that to rescue Main Street and the unemployed? I think so. Probably most Americans would agree.Section 3.5, "The technical details of central bank and treasury coordination: the case of the Fed" - well, I'm glad there won't be a test. I do think this is worth noting, re the Fed "borrowing" money - it doesn't. It just tweaks amounts of varying financial instruments to meet its goals.
bonds are sold as part of monetary policy, to allow the government to hit its overnight interest rate targetI won't attempt to summarize the next part of the book - you must read it yourself. The relationship between the Fed, the Treasury, and private banks is ... baroque, bizarre, byzantine? The main purpose seems to be to hide how things really work - that the Fed creates whatever $$$ Congress tells it to. So that the hoi polloi don't realize how badly they're being gamed.
I found this next discussion very instructive. Without the national debt, things would be very bad!!!
In the United States during the Clinton boom there was a projection that all outstanding US Treasury debt would be retired. This led to a mad rush at the Fed to figure out how the federal government could continue to run surpluses if there were no government IOUs out there to “destroy”. If we ever did get to that point, the only way the private sector could continue to run deficits against the government would be to surrender assets (rather than government IOUs) in payment. You’d have to turn over your car, house, bank account, and children to the government to pay taxes!There is discussion of the relative roles of the Fed and the Treasury. Could they be merged? Hah, once again, you do the damn accounting, and you find, it would all pretty much work the same way. Accounting doesn't lie.
What MMT has shown – from the very beginning of the creation of the approach – is that you can consolidate or deconsolidate and the balance sheets end up in exactly the same place.
Chapter 4 is titled "Fiscal Operations in a Nation That Issues Its Own Currency".
the following statements do not apply to a sovereign currency-issuing government.[This is another place where, if I were refactoring this book, I would use numbered lists rather than bulleted lists. Then, throughout the rest of the book, he could refer to "Conventional Misconception #1" or "MMT Principle #7.]...
- Governments have a budget constraint (like households and firms) and have to raise funds through taxing or borrowing.
- Budget deficits are evil, a burden on the economy except under some special circumstances (such as a deep recession).
- Government deficits drive interest rates up, crowd out the private sector, and lead to inflation.
- Government deficits take away savings that could be used for investment.
- Government deficits leave debt for future generations; government needs to cut spending or tax more today to diminish this burden.
- Higher government deficits today imply higher taxes tomorrow, to pay interest and principle on the debt that results from deficits.
propositions that are true of any currency-issuing government, even one that operates with a fixed exchange rate regime.
- The government names a unit of account, imposes a tax in that unit, and issues a currency denominated in that unit that can be used to pay the tax.
- Government spends by crediting bank reserves and taxes by debiting bank reserves.
- In this manner, banks act as intermediaries between government and the nongovernment sector, crediting depositors’ accounts as government spends and debiting them when taxes are paid.
- Government deficits mean net credits to banking system reserves and also to deposits at banks.
- The overnight interest rate target is “exogenous”, set by the central bank, but the quantity of reserves is “endogenous”, determined by the needs and desires of private banks (with the caveat noted earlier that in the age of QE, central banks can fill banks with excess reserves and still hit an interest rate target by paying a support rate on reserves).
- The “deposit multiplier” is simply an ex post ratio of reserves to deposits – it is best to think of deposits as expanding endogenously as they “leverage” reserves, but with no predetermined leverage ratio.
- The Treasury coordinates operations with the central bank to ensure its checks don’t bounce and that fiscal operations do not move the overnight interest rate away from the target.
- For this reason, bond sales are not a borrowing operation (in the usual sense of the term) used by the sovereign government; instead they are a tool that helps the central bank to hit interest rate targets,
- and the Treasury can always “afford” anything for sale in its own currency, although government always imposes constraints on its spending.
The 6 bullets of untrue statements represent so much conventional economic "wisdom" - the 1st in particular is a red flag anytime a politician trots it out.
Wray presents more arcana of the banking system - there is so much of it!
Deficit spending that creates bank reserves will (eventually) lead to excess reserves: banks will hold more reserves than desired. Their immediate response will be to offer to lend reserves in the overnight interbank lending market (called the fed funds market in the United States).So the Fed does a juggling act with the bank reserves it holds, for the sole purpose of hitting its target interest rate. If things get out of hand, then the Fed sells Treasury bonds.If the banking system as a whole has excess reserves, the offers to lend reserves will not be met at the going overnight interbank lending rate (often called the bank rate, but in the United States this is called the fed funds rate).
That is called an open market sale (OMS).Some more financial terms. Again, this book could really use a decent glossary.
overnight rate (fed funds rate in the United States)Wray again talks about the difference between bonds and reserves, in easy-to-understand terms....
They will not push the overnight rate below the central bank’s “support rate” (what it pays on reserves) since no bank would lend to another at a rate below what it can receive from the central bank.
...
the central bank lends “at the discount window” and “at the discount rate” (other terms are also used, such as bank rate or overnight rate)
...
The “market” interest rate on interbank lending (in the United States, called the fed funds rate)
The operational impact of bond sales is to substitute government bonds for reserves; it is like providing banks with a savings account at the central bank (government bonds) instead of a checking account (central bank reserves). This is done to relieve downward pressure on the overnight interest rate.Everyone seems to want to be afraid of financial bugaboos. Here Wray dismisses one of these, and references one of my favorite Keynes' phrases:
Bond vigilantes? Don’t sell them the bonds if they demand higher rates than government wants to pay. Sovereign government never needs to sell bonds, as it can just leave the reserves in the banks instead. The central bank can pay zero interest on reserves, or whatever support rate it chooses. That actually was J.M. Keynes’s recommendation, which he called “euthanasia of the rentier” – that is, set the risk free rate at zero and leave it there forever.Another denial of "conventional wisdom" comes with regard to budget deficits and interest rates. A deficit means that the government is putting more money into private accounts via spending than it is taking out as taxes. More money available means lower interest rates.
This is precisely the opposite of what many believe: budget deficits push interest rates down (not up), all else equal.To central banks, it is almost exclusively about 1 thing: meeting their target interest rate. They don't care how much or little reserves they have.
In other words, modern central banks operate with a price rule (target interest rate), not a quantity rule (reserves or monetary aggregates).This is from the Wikipedia article on the Federal Reserve:
The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act [of 1913]: maximizing employment, stabilizing prices, and moderating long-term interest rates. ... Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions.Offhand, per my recollection, for the last few decades the Fed has mostly focused on the 3rd key objective and the expanded duties - the expanded duties seem to me to be static and mostly represent systems already in place. We'll see later Wray wants it to become more active with regard to the 1st 2 key objectives. Odd, though, that "stabilizing the growth rate of the economy through interest rates" is not mentioned - that seems to me to be what the Fed's main active focus is.
I like this discussion of what it means for China to be holding some of our national debt.
Those who claim that the US government must borrow Dollars from thrifty Chinese don’t understand basic accounting. The Chinese do not issue Dollars – the United States does. Every Dollar the Chinese “lends” to the United States came from the United States. In reality, the Chinese receive Dollars (reserve credits at the Fed) from their export sales to the United States (mostly), then they adjust their portfolios as they buy higher-earning Dollar assets (mostly Treasuries). The US government never borrows from the Chinese to “finance” its budget deficit. Actually, the US current account deficit provides Dollar claims to the Chinese, and the US budget deficit ensures these are in the form of “currency” (broadly defined to include cash, reserves, and Treasuries).So what about "interest rate pressure" on the Fed - China says "Raise interest rates or we won't buy more bonds".We conclude: since government deficits create an equivalent amount of nongovernment savings it is impossible for the government to face an insufficient supply of savings.
markets cannot force the government’s hand because it can simply stop selling bonds and thereby let markets accumulate reserves instead.So, is China going to want to quit selling stuff to the US? Unlikely. What if they decide to offload Dollars? If they flooded the market with Dollars, the value of the Dollar might go down relative to the currency they are looking to replace the Dollars with. So they have just lowered the value of their own Dollar investments - and it would raise the price of the stuff they are exporting to the US and making it less attractive. Why would they want either of those outcomes?
Wray discusses if the US is "special", as the owner of the world's default reserve currency. Yes, it is special - but, to a lesser degree, so are all the other countries with their own sovereign currency. These countries are certainly better off than developing countries that have their own currency that nobody else wants. But the developing countries are probably still better off with their own currencies than using a foreign currency. And, note that pegging their currency to a foreign currency is pretty much functionally equivalent to using a foreign currency. A bank run in such a country creates an immediate need for the country to acquire large reserves in the foreign currency - potentially not an easy task.
This is interesting:
According to the well-known trilemma, government can choose only two out of the following three: independent domestic policy (usually described as an interest rate peg), fixed exchange rate, and free capital flows.Wray places great import on "domestic policy independence" (6 mentions) aka "domestic policy space" (26 mentions). He thinks it is a Very Good Thing. I agree, it is good that our Congress, and those of Canada, Japan, the UK, ... can pursue whatever monetary policy they want to benefit their citizens....
Floating the exchange rate thus gives more domestic policy space. Capital controls offer an alternative method of protecting an exchange rate while pursuing domestic policy independence.
As a data point, China controls capital flows, and has a fixed exchange rate - up to 2015, the Renminbi was pegged to the Dollar; thereafter it was pegged to a basket of currencies. But China holds large enough Dollar reserves that it does not have the normal problems associated with pegging to a foreign currency.
Here' another instructive example showing how the finances of the US are nothing like the finances of a family or company.
When a private entity goes into debt, its liabilities are another entity’s asset. Netting the two, there is no net financial asset creation. When a sovereign government issues debt, it creates an asset for the private sector without an offsetting private sector liability. Hence government issuance of debt results in net financial asset creation for the private sector. Private debt is debt but government debt is financial wealth for the private sector.Here's another one:
When a private debtor cannot service debt out of income flows it must go further into debt, borrowing to pay interest. This is called Ponzi finance and it is usually dangerous because outstanding debt grows.The chapter ends with a very interesting question, and a reassuring (for those of us in the US at least) answer....
For government with a sovereign currency, there is no imperative to borrow, hence it is never in a Ponzi position as it can always service debt using keystrokes.
Sovereign governments do not face financial constraints in their own currency (except those they impose on themselves, through budgeting, debt limits, or operating procedures) as they are the monopoly issuers of that currency.
Is there any alternative to the Dollar now? Not really. You can’t get safe Euro debts in sufficient quantity – Euroland as a whole is a (small) net exporter. Besides, you need safe Euro-denominated Treasuries, and markets are wary of most Euro nations – and especially of the ones that are running budget deficits and trade deficits (which are the nations that are issuing lots of Euro debt). Germany is a net exporter and the model of fiscal rectitude, so it does not issue much Euro debt. What about China’s RMB? Again, the supply is too low as she is a better Germany than Germany is – a big net exporter that doesn’t issue a significant supply of Treasury debt. Japanese Yen? As both China and Japan are exporters they create sufficient domestic saving to absorb their own government debt. TINA: There Is No Alternative to the Dollar, today. This will likely change, but not for some time.I asked this question at a Merrill Lynch presentation a few years ago and got a very similar answer: that there is just not near enough of any other currency in replace the Dollar.
Chapter 5 is titled "Tax Policy for Sovereign Nations". Man, that was really a slog getting through the nitty-gritty of the banking system. And I believe that a large part of it has nothing to do with MMT - it's just the way things work, it's just double entry accounting - but there are so many misconceptions about it. I think that Wray's frequently pithy corrections of these misconceptions made up the bulk of the excepts. On to taxes - much easier! Really!
We have argued that taxes drive currency. Sovereign government does not need taxes for revenue, but to create a demand for its currency. With that in mind, we need to rethink tax policy. How best to drive the currency? What kinds of taxes are best? Besides driving a currency, what else can taxes be used for?To me inflation is the elephant in the room with regards to MMT. To be able to defend MMT against claims that it will lead to hyperinflation is one of the main things I wanted to get out of this book, and we have to wait until Chapter 9 for the full treatment. Wray lays a little groundwork here. [I'm not sure why this is in the chapter on taxes.]
Now, since we’ve established that government can spend without revenue, what is the danger of spending more than revenues?Wray introduces another new term that we will see frequently for the rest of the book: "redemption", used 17 times, and used another 30 in its verb form, "redeem". It winds up being similar to "returns", which has already been discussed.The first that comes to mind is the potential for inflation – if the economy is driven beyond full capacity. Indeed, inflation can be fueled even before full employment if government spending is directed toward sectors with little capacity to expand output. Hence, one response to such dangers could be to raise taxes. Another could be to cut spending. There are other responses that we won’t go into here – wage and price controls, rationing, importing, targeting spending to sectors with excess capacity, and encouraging more production would all help to attenuate inflation pressures.
Taxes drive the currency. Another way of putting it is that taxes redeem the currency. All issuers of IOUs must stand ready to redeem them. Redemption is important in both monetary and spiritual affairs.Here's some more Bitcoin love from Wray [sarcasm].
You don’t need Bitcoins to make any obligatory payments. And no Bitcoin issuer is required to take them back. Bitcoins are not redeemable. Unless you are involved in illegal activity (such as the drug trade) or trying to hide income and wealth, there’s really only one compelling reason to accept them: you really do believe in the greater fool theory. You’re going to dupe the dopes and ride that Bitcoin up while praying that (a) you don’t lose your Bitcoin wallet, (b) your Bitcoin exchange doesn’t go bankrupt, and (c) you can sell out of Bitcoins before the whole thing crashes.He could also have mentioned, what happens when the maximum 21M Bitcoins have all been mined?
This is an interesting historical note.
Until the twentieth century, taxes were relatively less important; what mattered more were fines and tithes and fees.So why do taxes "drive the currency"?
all you need to drive a currency is an involuntary obligation to deliver the currency – and that can be a tax, fee, fine, or religious tithe.This is an interesting point, to be expanded upon later:
we need to separate the willingness to accept currency from the value of the currency.A very, very important point, my bold:
accustomed to thinking that “taxes pay for government spending”. That is true for local governments, provinces, and states that do not issue the currency. It is also not too far from the truth for nations that adopt a foreign currency or peg their own to gold or foreign currencies.This is why all states, counties, and cities are required to have a balanced budget by the state constitution or statute. And it is also why the federal government will have to step in and aggressively make up the budget shortfalls of all its constituents, and lots and lots of businesses, in the wake of the collapse of the economy caused by the COVID-19 pandemic.
The inflation elephant again:
MMT recognizes that another reason to have taxes is to reduce aggregate demand.In the example given, huge tax cuts would give everyone more money to spend, hugely increasing aggregate demand, which Wray says "could cause inflation". I am assuming that this would only happen if demand started exceeding the supply, and for some reason the supply could not easily be ramped up?
Another of the things that is common sense viewed by MMT, and completely counter to conventional wisdom, followed by an introduction to the person who 1st had these insights.
Where do the tax payments go? Nowhere – a bank account is debited. Taxes do not and cannot “pay for” spending.The Wikipedia article says Ruml's ideas were "a forerunner of functional finance or chartalism". Functional finance will be featured heavily in the remaining chapters (39 references).All of this was recognized by Beardsley Ruml, a New Dealer who chaired the New York Federal Reserve Bank in the 1940s; he was also the “father” of income tax withholding and wrote two important papers on the role of taxes (“Taxes for Revenue are Obsolete” in 1946a, and “Tax Policies for Prosperity” in 1946b).
Wray agrees with something Krugman says frequently: that taxes should be "countercyclical" to the economy: raised when the economy is booming, lowered when the economy is sluggish. That seems pretty intuitive.
Wray lists Ruml's "4 reasons the government needs taxes":
Wray uses the word "needs", but then, for each point, the discussion emphases that the government does not "need" the money to "pay for things". The Fed creates the money to "pay for things" with keystrokes. The discussion should be framed in terms of "purposes the government can achieve by taxes".(1) as an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
(2) to express public policy in the distribution of wealth and of income as in the case of the progressive income and estate taxes;
(3) to express public policy in subsidizing or in penalizing various industries and economic groups; and
(4) to isolate and assess directly the costs of certain national benefits, such as highways and social security.
The 1st item is basically about taking some of the Dollars that the Fed is creating out of circulation so that the world does not become awash in Dollars, which seems like it would have to be inflationary. Essentially the Dollars are put in fires and burned.
On the 2nd item:
The second purpose is to use taxes to change the distribution of income and wealth. For example, a progressive tax system would reduce income and wealth at the top, while imposing minimal taxes on the poor. Note that while this seems related to today’s progressive call for raising taxes on the rich, Ruml does not link this to payments made to the poor.[I will include this here as it is on topic. I reinforce Ruml's point.
The 3rd item is commonly known as "sin taxes" - say on cigarettes or alcohol. It is worth noting that
The ideal cigarette tax would be one that eliminated smoking – not one that maximized revenue to government.As in my tweet above, taxing the hell out of the rich is also a "sin tax" - greed is one of the 7 Deadly Sins - or at least it was before the 80s, Reagan, and Gordon Gecko, "Greed is good". The 94% top income tax rates of the 1950s were considered to be "punitive taxes", because excessive executive salaries were felt to be immoral and unseemly.
Ruml, Minsky, and Wray are all onboard with getting rid of corporate income taxes - more on that later.
So you're taxing enough to stabilize the currency. What else is left to do? There's really only one other thing to do. This is where the Job Guarantee comes in.
tax rates should be set so that the government’s budgetary outcome (whether in deficit, balanced, or in surplus) is consistent with full employment.Discussing "taxes for redistribution", Wray mentions Richard Wolff as a predecessor to Piketty in advocating "Tax the rich and give to the poor" - Robin Hood FTW! Wray summarizes the MMT approach:
MMT is not opposed to using taxes on high incomes and high wealth in an attempt to reduce inequality, but it makes sense to also use “predistribution” policies. For those with low income, policy needs to create jobs and raise wages. At the upper end of the distribution, policy needs to be directed to curtailing the practices that generate excessive rewards.There is so much low-hanging fruit that can harvested to attempt to rein in the massive inequality engine that is our current economy, particularly the financial sector. One of my favorites is making corporate stock buybacks illegal again, as they were before 1982 (Thank you St. Reagan!) All that these do is inflate stock prices and the value of executive stock options, which are a huge piece of executive compensation packages. Wray gives some more good examples.
Some examples to consider are eliminating Treasury securities (that provide interest income to rentiers), banning stock ownership and commodities futures ownership by pension funds backed by the national government (in the US it is the Pension Benefit Guarantee Corporation that acts sort of like an FDIC for pensions), and strengthening regulations to constrain and narrow permitted banking activities – all of which would target most of the highest incomes in question at the source. In addition, we could add limits on executive pay packages at corporations.Wray quotes one of his colleagues Mathew Forstater:
the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds”. He went on: We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them. You cannot run out of a unit of measure! The Dollar is the measuring unit in which we keep our monetary records. We cannot run out. Second, ... Forstater said that a guiding principle for choosing what to tax should be “tax bads, not goods”.An interesting historical note. When Europe started to colonize Africa, the indigenes used barter and had no interest in using money. How to collect taxes? "what the colonizers did was to impose either a head tax or hut tax."
Modern monetized countries use "wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes". Hah, I hadn't thought of this, interesting.
Note that the wage tax is particularly pernicious because only human labor gets taxed, while the robots get off scott-free. This favors use of robot labor over human labor.So we also clearly need robot taxes. Wray identifies more sins in addition to wealth: pollution; high-speed trading; excessive environmental footprint.
We’ve long taxed various sins. While some confuse the purpose of sin taxes, it should be clear that the purpose of taxing bads is not to “raise revenue”, but to “reduce sin”. We want to reduce the sin of smoking. Of polluting. Of high-speed trading. Many economists and some politicians have pushed for a financial turn-over tax – called the “Tobin Tax” (financial transactions tax) – as a potentially great source of tax revenue to “pay for” all the government programs they advocate. However, from the arguments above it should be obvious that the purpose of a Tobin Tax is to reduce financial transactions, and it would have achieved complete success in eliminating the sin of high speed turnover if it raised no revenue at all. Ditto the cigarette tax. Ditto the carbon tax.The final section of this chapter looks at what constitutes a bad tax. He's already mentioned how payroll taxes favor robots over humans. They also favor labor in the informal economy, aka cash under the table, over the formal economy.
Consumption taxes are also bad, as they are usually regressive, and the last thing we need is another driver of the inequality engine.
Wray then follows Ruml and Minsky in making what are to me very strong arguments against corporation taxes.
the best solution would be to allocate all corporate profits to owners and to tax them as income through the progressive income tax.Minsky adds more arguments:...
Ruml argued that corporate taxes distort decision-making – to take actions to minimize taxes rather than those that would otherwise make the best business sense. Two of those types of actions are highly relevant today: taking on debt, and moving corporate tax homes to take advantage of low corporation tax rates. Since interest can be written off as an expense, corporations have an incentive to take on debt rather than to finance investment out of earnings or equity issues. ... Relocating corporations can be against national interests as jobs are shifted. Higher rates on corporations encourage relocation which then rewards a competitive race to the bottom among nations – as they slash wages and taxes to try to attract corporations.
the corporate tax encourages debt as well as spending on advertising, marketing, and perks for executives since these can be written off taxes.Wow, would getting rid of corporate taxes really drive advertising down? I'm definitely all for that. It clearly, by definition, stops the race to the bottom in corporate tax rates - but there would still be wage differentials, which would change only over years or decades. Still, I think this is outside-the-box thinking that should be considered.
Chapter 6 is titled "Modern Money Theory and Alternative Exchange Rate Regimes". We start with the best way to do things: with a floating exchange rate.
the US government does not promise to maintain the exchange rate of US Dollars at any particular level. We can designate the US Dollar as an example of a sovereign currency that is nonconvertible, and we can say that the United States operates with a floating exchange rate.At the other end of the spectrum we have fixed exchange rates, which were in place when we were on the gold standard.
A century ago, many nations operated with a gold standard in which the country not only promised to redeem its currency for gold, but also promised to make this redemption at a fixed exchange rate.After Bretton Woods, most of the rest of the world "pegged" their currency to the Dollar. For example, the UK pegged the Pound at $2.80. But that meant that the UK had to be able to come up with $2.80 for every £1 presented to them for currency exchange. What if they don't have the $$$ (or equivalent gold)? Oops!
The choice mostly boiled down to three types of actions: (a) depreciate the Pound, (b) borrow foreign currency reserves, or (c) deflate the economy.Maybe some combination of these work, but there are possible other effects, which the country cannot control.
a deflation of the economy can work in conjunction with a currency depreciation to create a net export surplus.In the 1970s the rich countries of the world mostly went to floating exchange rates for their currencies - this is a market-based approach, and the value of currencies is something probably best determined by a market.
The determination of exchange rates in a floating exchange rate system is exceedingly complex. The international value of the Dollar might be influenced by such factors as the demand for US assets, the US trade balance, US interest rates relative to those in the rest of the world, US inflation, and US growth relative to that in the rest of the world. So many factors are involved that no model has yet been developed that can reliably predict movements of exchange rates.The next couple of sections are a lot of fun, as Wray takes a tour of the history of money back to its inception in Mesopotamia. 1st up is a discussion of "so-called commodity money ... a monetary system supposedly based on precious metal, indeed, one in which money derives value from embodied gold or silver."
I thought this was really interesting: the intertwining of money and religion with debt = sin. Plus Wray mentions one of my favorite words, "jubilee".
We also know that money’s earliest origins are closely linked to debts and recordkeeping and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean”, and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”. The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins” – or as Margaret Atwood says, “our sinful debts”.[Ha ha. I remember lots of songs from my childhood. I remember Perry Como singing "The Lord's Prayer' and referencing "debts" and "debtors". I looked it up on YouTube, I was right, at the 1:28 mark, FTW! I suspect it made the vocal phrasing easier.]
Interesting, Margaret Atwood of "The Handmaiden's Tale" wrote a book on debt in 2008, "Payback: Debt and the Shadow Side of Wealth".
More neat historical foo:
money is a “token”, like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.Getting back to commodity money:Indeed, the “pawn” in pawnshop comes from the word for “pledge”, as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while “Old Nick” refers to the devil (hence, the red suit and chimney soot – and “to nick” means to steal) to whom we pawn our souls. The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) originally had nothing to do with sex and adultery but rather with receiving them as pawns for debt. By contrast, Christ is known as “the Redeemer” – the “Sin Eater” who steps forward to pay the debts we cannot redeem, a much older tradition behind which lies the practice of human sacrifice to repay the gods.
The first coins were created ... in the greater Greek region (so far as we know, in Lydia in the seventh century BC). And in spite of all that has been written about coins, they have rarely been more than a very small proportion of the “money tokens” involved in finance and debt payment. For most of European history, for example, tally sticks, bills of exchange, and “bar tabs” did most of that work. (Bar tabs were kept with chalk upon slate behind the bar – again, the reference to “wiping the slate clean” is revealing, something that might not be done for a year or two at the pub, where the alewife kept the accounts.)Tally sticks - notches cut across a piece of hazelwood which was then split down the middle with the debtor and the creditor each taking 1/2, so each has a record of the transaction. Who knew?Until recent times, most payments made to the Crown in England were in the form of tally sticks (the King’s own IOU, recorded in the form of notches in hazelwood) – whose use was only discontinued well into the nineteenth century – with a catastrophic result: the Exchequer had them thrown into the stoves with such zest that Parliament was burnt to the ground by those devilish tax collectors!
This passage reminded me that one of the prominent threads in Neal Stephenson's "The Baroque Cycle" trilogy was Isaac Newton's stint as Master of the Royal Mint of England, which I think included some re-coinage.
In most realms, the quantity of coin was so small that it could be (and was) frequently called in to be melted for re-coinage.There is a lot more interesting historical foo re money. After Rome, there was always a notion of "nominalism" - the value of a coin is what the government says it is - vs. "metalism" - the value of a coin is the value of the precious metal it contains. Basically, metalism was always pretty much crap. People would shave precious metal off the edge of coins ("clipping"). The serrated edges of coins are there to make this easier to detect. At best, the value of the precious metal in a coin provides a lower bound of the value of the coin - you could get that price if you melted the coin down to bullion. You wound up with Gresham's law - everybody wants to buy with light money and be paid in heavy money, which isn't going to work.
So even when metalism was supposed to be in force, it was almost never realized. Sorry, goldbugs.
Far from being an “efficient medium of exchange”, we find that use of precious metals set up a destructive dynamic of clipping, weighing, and punishing that would only finally be resolved with the move to paper money!Moving to more modern currency issues, Wray 1st discusses China. As already mentioned, China pegs its currency and has enough foreign currency reserves that this is not a problem. It tightly controls its exchange rate, which leads other countries, including the US, to accuse it of "currency manipulation" - they want China to float its currency. Wray dismisses this idea. Chinese jobs aren't coming back to the US, they'll go elsewhere in Asia. And, why should China do what everyone else wants? The US played fast and loose with foreign rules, including patents and copyrights, almost into the 20th century. The current US insistence on complete and utter adherence to IP rules by developing countries is hypocritical to say the least.
Next up is Russia, a state with a sovereign currency, the Ruble, which defaulted on its government debt in 1998. The problem was that the Ruble was pegged to the Dollar. In a liquidity crunch, they floated the Ruble, which should have got them out of trouble. But, the Russians chose to default - like the US has almost done a couple of times with the stupid debt ceiling histrionics.
Finally, Wray looks at Hungary in 2012. Hungary has its own sovereign currency, the Forint. But after the GFC, the Forint became seriously devalued, and 1/2 of Hungary's private and government debt were in foreign currencies. Oops! That winds being another form of a peg.
The next 3 sections are on the Euro - what a mess! The Euro was meant to be a 1st, inspiring step towards a more unified Europe. Big mistake, mixing inspiration and money. The countries in the Eurozone are no longer currency issuers, they are currency users, like the states are in the US. So the same restrictions apply - limited "domestic policy independence". They have some rules they are supposed to follow, in place of strictly balanced budgets. There are no Eurobonds, no European Money Union Treasury. The thrifty, exporting Germans didn't want the ECB to bail out the slacker, debt-hiding Greeks.
the ECB [European Central Bank] has much greater independence from the member nations than the Fed has from the US government. The Fed is a “creature of Congress”, subject to its mandates; the ECB is formally independent of any national government.How to fix it? The EMU members could do an "EMUexit" and return to their old currencies....
Had the European governments attempted to follow the restrictions of SGP (stability and growth pact that limits deficits to 3% and debts to 60% of GDP) – an attempt that would most certainly fail because of the endogenous nature of budget deficits – they would not have been able to support their economies in the global crisis, possibly leading to a global or at least a continental depression.
That could cause a lot of temporary chaos, but once each nation readopts its own currency, it regains domestic policy space to resolve its economic problems.On keeping the EMU in place, Wray says:
There are two obvious solutions. The first would be to achieve a fiscal unification to match the monetary unification. The second alternative is to direct the ECB to purchase member government debt.5 years later, this is still a mess. I had thought that Europe would have to become more unified to compete with the US and China. But creating a tighter union after what they have done so far is, what? Being gluttons for punishment?
Reviewing exchange rate regimes, "from most to least independence:"
That's it for Chapter 6. If I were refactoring this book, I think I would have had the 1st 6 chapters as "Part I: Descriptive MMT" and the rest of the book as "Part II: Prescriptive MMT". [Note - Wray doesn't introduce the descriptive/prescriptive terminology until Chapter 9 ?!?!?] What we've covered so far is facts. We now know what the Dollar is - a unit of measure; how Dollars are created - keystrokes in the Fed's computers; and how Dollars are destroyed - taxes. Despite the fact that Descriptive MMT appears to me to have no political component, arguments against it wind up being political - from goldbugs, deficit hysterians, scolds, and hawks, and other reactionaries.
Well, it's on to Prescriptive MMT, which definitely will be political. And it will not only involve politics, but also issues of morality.
But 1st, a 7th inning stretch.
[As I write this, it is April 21, 2020. Yesterday there was a post on Project Syndicate titled "The Myth of “Helicopter Money”", by Yeva Nersisyan and our author, L. Randall Wray. It talks about how the COVID-19 economic crash is being addressed by MMT, with the Fed firing up the presses and creating lots of new Dollars as if it were magic. The post clarifies how there is nothing magic about it - this is how it works all the time, but people don't realize it until MMT points it out to them. Very much Descriptive MMT.
I tweeted the link with a couple of good quotes, and the end of the post as well.
Here's another post by the same pair from April 14, 2020. It may indeed soon be MMT's finest hour.
I will plead guilty to spreading inflammatory & inaccurate MMT memes - but for effect only ;->
My Twitter profile now includes my new catchphrase: "#MMT FTW!"]
Chapter 7 is titled "Monetary and Fiscal Policy for Sovereign Currencies: What Should Government Do?". Before deciding "what government should do", Wray lists reasons why we cannot just behave as if we have an infinite supply of money.
We can list several legitimate reasons for constraining government spending:This next excerpt is something that I had thought was one of the main tenets of MMT - that real resources are the only thing that matters - but which Wray does not particularly emphasize.
- Too much spending can cause inflation.
- Too much spending could pressure the exchange rate.
- Too much spending by government might leave too few resources for private interests.
- Government should not do everything – impacts on incentives could be perverse.
- Budgeting provides a lever to manage and evaluate government projects.
The government always faces a possible “real resource” constraint. Related to this consideration, we need to determine whether the existing infrastructure, technology, and knowledge are up to the task of achieving ... goals.Another possible constraint is something that comes from more orthodox economics: opportunity cost.
competition with alternative uses of the resources – what is called the “opportunity cost”.Looking at "impact on incentives", Wray includes 3 scenarios [my numbers]:
[1]conservatives often argue that spending on “welfare” affects incentives. A strong social safety net might send the signal that individuals do not really need to work because they can always live well enough on government handouts. [2]Or, government bailouts of business might encourage management to take excessive risks on the belief that no matter what happens, government will cover the firm’s losses. [3]Further, a corrupt government might spend on programs that help friends, but refuse to do anything to assist more deserving groups – what is often called “crony capitalism”.Scenario #1 invokes Reagan's Cadillac-driving (person of color) welfare queen. This is much a fabrication now as it was then. Meanwhile, if we totaled all the $$$ involved in welfare fraud for all time, how much would it be? $50-100M maybe? Whereas corporate welfare runs into $T, with decent %ages of fraud. And every study of Universal Basic Income (UBI) that I have seen shows that poor people given this straight-up "government handout" use it do good things to improve their life: improve their children's education, start a small business, etc. [Verification of this claim is left as an exercise for the reader ;->]
Meanwhile, #2 has been shown to be true - 1 definite result of the GFC was that "too-big-to-fail" banks became even "too-bigger-to-fail", and are of course now dreaming up ever more leveraged and risky derivative investments - it's what they do. Why wouldn't they? NO ONE WENT TO JAIL AFTER THE GFC! 0 indictments, 0 trials, 0 convictions!
And finally, on #3, the current administration goes beyond "crony capitalism", to straight out kleptocracy - but this has nothing to do with MMT, it has to do with the Trump Crime Family on the grift, as always trying to prop up its perpetually failing business enterprises.
Wray does not show a lot of love for one of the most favorite characters of economics, Adam Smith's Invisible Hand. This is an interesting statement by Wray:
there is no scientific basis for the claim that “free markets” are best. (That doesn’t “prove” it is impossible for the “invisible hand” to work – we simply do not know – but we should be highly skeptical of the possibility.)Wray introduces us to "the public purpose".
First, the public purpose is broad and evolving, and for these reasons it varies across time and place. The public purpose is inherently a progressive ... agenda that strives to continually improve the material, social, physical, cultural and psychological well-being of all members of society. It is inherently “aspirational” in the sense that there is no endpoint as the frontiers of the public purpose will continually expand.Wray begins to define the descriptive/prescriptive formulation:Second, the national government as well as international organizations must play important roles in shaping our vision regarding the types of societies to which we aspire. And beyond setting these goals, governments at all levels must take the lead in developing sets of institutions, rules of behavior, and sanctions against undesirable behavior in order to move toward reaching the goals set as the public purpose.
And that leads to the third point: all of this is highly contentious.
We will see that MMT is perfectly consistent with a small government economy, one whose view of the “public purpose” is quite narrow. ... MMT, by itself, is neither left nor right. On one level, it is a description.But now, here comes the prescription part, FTW!
However, when we add MMT to the more liberal vision of the public purpose, or when we add to the public purpose considerations such as “full employment and price stability”, or even just “economic stability”, then MMT helps us to find a way to achieve that public purpose by quickly disposing of the notion that government cannot “afford” such policies.So from not on, anytime a politician says "How are you going to pay for that?" or "We can't afford that.", we can all raise our hands and call "Bullshit! Let's get you up to speed on MMT!".
Wray introduces us to Abba Lerner, who in the 1940s formulated functional finance. It has 2 principles:
First Principle: if domestic income is too low, government needs to spend more (relative to taxes). Unemployment is sufficient evidence of this condition, so if there is unemployment it means government spending is too low (or taxes are too high).In Chapter 5, we learned that making taxes countercyclical to the economy made sense. Now we learn that the same is true of government spending.Second Principle: if the domestic interest rate is too high, it means government needs to provide more “money”, in the form of bank reserves, to lower the interest rate.
Shockingly, who else was once on board with this general approach? The gnome of Chicago himself.
Milton Friedman’s 1948 article, “A Monetary and Fiscal Framework for Economic Stability”, put forward a proposal according to which the government would run a balanced budget only at full employment, with deficits in recession and surpluses in economic booms. ... Friedman went further, almost all the way to Lerner’s functional finance approach: all government spending would be paid for by issuing government money (currency and bank reserves); when taxes were paid, this money would be “destroyed” (just as you tear up your own IOU when it is returned to you).We were sooo close in the 1940s. But ...
The functional finance approach of Lerner was mostly forgotten by the 1970s. Indeed, it was replaced in academia with something known as the “government budget constraint”. The idea is simple: a government’s spending is constrained by its tax revenue, its ability to borrow (sell bonds), and “printing money”."Printing money" invoked the great bugaboo of hyperinflation, a la the Weimar republic in the 1920s - a bad example as we shall see in Chapter 9.
The United States (and many other nations) really did face inflationary pressures from the late 1960s until the 1990s (at least periodically). Those who believed the inflation resulted from too much government spending helped to fuel the creation of the balanced budget “religion” ... to fight the inflation.[My theory, expounded 1st here, is that there really wasn't inflation until the Arab Oil Embargo in 1974 quadrupled the price of oil, which created an inflationary spike that took a decade or more to work its way through the system. So, inflation in the late 1960s? Let's ask FRED. Here's annual % change in CPI - I'm going to call that "the inflation rate" or "inflation"?
Hmmm, Wray is right, inflation was rising during the late 1960s. Maybe resource shortages from ramping up in Viet Nam? Doubtful. I'll have to put one of my grad students on looking into it. ;->]
Ha ha, Wray quotes Paul Samuelson (date unspecified) on that good old time balanced budget religion.
In the box at the end of section 7.4, Wray includes another couple of exchanges between Bernanke and reporters or Congressmen, including the patriarch of monetary crankism, Ron Paul himself. If you're skipping the boxes, make sure and read that one, it is enlightening and amusing.I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires.
If you had any doubt about the power of keystrokes, here's an exchange "from page 11 of the transcript of the FOMC’s September 21, 2004 meeting". FOMC is the Fed's Federal Open Market Committee.
I already noted how Wray, in the Introduction, talks about how crazy the Federal debt limit is. I mean, come on, Congress has authorized the money to be spent, the Fed's computers are ready and waiting, what's the holdup? Mostly some "debt limit theater" for #MoscowMitch and his ilk to unscrupulously, as always, try to extract some concessions. The whole concept is so stupid, I'm just like "Just get rid of it". But Wray treats it seriously, and offers 3 possible technical workarounds:CHAIRMAN GREENSPAN: Should the Desk today and yesterday create sufficient reserves rate at 1.5 percent?
MR. KOHN: Yes.
MS. MINEHAN: Why not?
CHAIRMAN GREENSPAN: He’s not doing it right.
MR. KOHN: Well, he’s trying.
CHAIRMAN GREENSPAN: Now, wait a second. He has no limit on the amount of reserves he can create at will. You cannot tell me he is trying and failing; he’s just not pushing the button hard enough.
- Treasury bonds which are held by private banks and individuals count against the national debt. Reserves don't. So just quit selling bonds and leave the money as reserves. Private banks won't like this (they like the interest bonds pay), and the US loses a tool for targeting interest rates, but, hey, we've fixed the debt limit problem!
- The Treasury can issue non-marketable Warrants to the Fed. The Fed now holds the Treasury's debts.
- "the US Treasury has the authority to issue platinum coins in any denomination". So it prints these very large denomination coins and uses them to buy stuff, say, an aircraft carrier. The coins can be used to pay taxes but don't add to the national debt. Seems like I have heard of these before, but no mention of them in this blog.
These proposals just show how silly it is to tie the Treasury’s hands behind its back through imposing debt limits.One thing that Wray mentions worth noting: the Fed now pays interest on reserves, blurring the difference between reserves and bonds. Other countries have done this for a while.
Getting back to prescriptive MMT, Wray poses an interesting question: how big should the government be? If government spending is going to balance depressed private sector spending counter-cyclically it could conceivably have to be as big as the private economy.
According to Minsky, government was far too small in the 1930s to stabilize the economy (in 1929 the federal government was about 3 percent of GDP); even during the height of the New Deal, it was just 10 percent of GDP. Today, all major OECD nations probably have a government that is big enough to help stabilize their economies, although some developing countries might have a government that is too small by this measure. Based on current realities, it looks like the national government should range from the US low of about 20 percent of GDP to a high of 50 percent in France. The countries at the low end of the range need more automatic fluctuation built into the budget than those with a bigger government.[Hmmm, from my 2014 review/summary of Piketty's "Capital in the 21st Century":
A 50% tax rate appears to be about what you need to keep operating a state that lets none of its citizens slip through any cracks.But that's tax rate, not % of GDP.]
Wray again reviews how the Federal budget surpluses under Clinton corresponded to massive private debt which set the table for the GFC. He makes this telling point:
The conclusion we should reach from our understanding of currency sovereignty is that a government deficit is more sustainable than a private sector deficit: the government is the issuer, while the household or the firm is the user of the currency. Unless a nation can run a continuous current account surplus, the government’s budget will need to be biased to run deficits on a sustained basis to promote long-term growth.Once again, the deficit scolds get beat up by those pesky identity things. The deficits of the US are financing the manufacturing boom of exporters such as China. We should be really proud of having lifted very large numbers of the 1.4 billion Chinese out of poverty.
Finally, we must note that it is not possible for all nations to run simultaneous current account surpluses: Asian net exporters, for example, rely heavily on sales to the United States, which runs a current account deficit to provide the Dollar assets the exporters want to accumulate. We conclude that at least some governments will have to run persistent deficits to provide the net financial assets desired by the world’s savers. It makes sense for the government of the nation that provides the international reserve currency to fill that role. For the time being, that is the US government.Wray revisits functional finance and reiterates what we've learned so far:
We conclude: the two principles of functional finance apply most directly to a sovereign nation operating with a floating currency. If the currency is pegged, then the policy space is more constrained and the nation might have to adopt capital controls to protect its international reserves in order to maintain confidence in its peg.It is a different story for developing nations.
many developing nations have fixed or managed exchange rates that reduce domestic policy space to some degree. They can increase policy space either through policies that generate foreign currency reserves (including development that increases exports), or they can protect foreign currency reserves through capital controls.In the final section of this chapter, Wray presents a counter-intuitive but reasonable discussion of the meaning of exports.
In real terms, exports are a cost and imports are a benefit from the perspective of a nation as a whole.As mentioned, being an exporter has meant jobs and wages for 10Ms of Chinese workers. But as long as everything they produce is intended for export, what benefit to they see? So as time passes, presumably some production gets diverted for domestic consumption. But Wray's point is not one I had heard before. Being an importer rather than an exporter is generally presented as being nothing but bad....
The [exporting] nation bears the cost of producing the output, but does not get the benefit. On the other hand, the importing nation gets the output but did not have to produce it. For this reason, in real terms net exports mean net costs, and net imports mean net benefits.
Now there are several caveats. ...
Chapter 8 is titled "Policy for Full Employment and Price Stability". When I 1st started learning about MMT, the Job Guarantee (JG) seemed extraneous to me. How did it fit in with the rest of this stuff? Now I see that the greater part of MMT, the part that really makes sense, is Descriptive MMT. The JG is the main feature of Prescriptive MMT. And learning more about it, it does make some sense, but it is political sense, rather than accounting identity sense.
To me, the noteworthy thing that is exposed in this chapter is that orthodox economics requires people to be unemployed to control inflation, and that this is immoral. I guess that we shouldn't be surprised that we now see thinking along the lines of "old people should be happy to die to reboot the economy" after the COVID-19 economic coma. Despite the fact that the Phillips Curve seems to be joining the Kuznets Curve in the category "orthodox economic formulations which don't seem to hold water any more", the orthodox reasoning is that full employment causes wages to rise which increases consumer demand which causes inflation - oops! This line of thought seems to neglect the fact that we now live in a zero marginal cost society - maybe more on that later.
In Wray's words:
Most economists believe that full employment and price stability are inconsistent. Indeed, unemployment is seen as a tool to be used to promote price stability. ... We will argue that it is possible to pursue full employment in a manner that actually enhances price stability.I am assuming that "price stability" is the same thing as "little or no inflation".
Another of the many benefits of having a sovereign currency:
A government that issues its own currency can always afford to hire unemployed labor.I include this next excerpt because I want to know, what is a "price anchor"? How does it function exactly? Wray doesn't go into that. [My bold]
we will see that a JG/ELR program actually acts as a powerful macroeconomic stabilizer, achieving full employment (as defined), while enhancing price stability. The key is that the JG provides a price anchor even as it provides jobs for anyone wanting work at the program wage and benefits package.But what is the best way to go about creating new jobs? Traditionally Keynesian fiscal stimulus has been used. But
Keynesian “pump-priming” demand stimulus programs might achieve full employment temporarily, but cannot ensure continuous full employment because they destabilize the economy, generating inflation pressures plus unsustainable bubbles.Ideas and designs for JG/ELR (Job Guarantee/Employer of Last Resort) have been around since the 1930s. The particular version of such a program which Wray discusses "is consistent with the functional finance approach of Lerner, but it also helps to address the potential inflation problem that he worried about.". Here's Wray's introduction of the program:
A JG or ELR guarantee program is one in which government promises to make a job available to any qualifying individual who is ready and willing to work. The national government provides funding for a universal program that would offer a uniform hourly wage with a package of benefits ... . The program could provide for part-time and seasonal work, as well as for other flexible working conditions as desired. The package of benefits would be subject to Congressional approval, but could include health care, child care, old-age retirement or Social Security, and the usual vacations and sick leave. The wage would be set by government and fixed until government approved a rate increase, much as the minimum wage is usually legislated.Obviously, the minimum wage becomes a moot point when a JG program is in place. I can't think of a case where someone would be willing to work for less than the JG wage. Wray raises a very insightful, almost Zen, point about the minimum wage.
In the absence of true full employment, the actual minimum wage is always zero – because those who cannot find work cannot get the legislated minimum wage.Wray discusses the benefits of such a program. He starts with all the good things always associated with having a job. To quote Uncle Joe Biden:
My father used to have an expression. He'd say, 'Joey, a job is about a lot more than a paycheck. It's about your dignity. It's about respect. It's about your place in your community.'Wray points out other benefits:
private sector employers would have to offer a wage and benefit package and working conditions at least as good as those offered by the program. The informal sector would shrink as workers were integrated into formal employment, gaining access to protection provided by labor laws. There would be some reduction of racial or gender discrimination because unfairly treated workers would have the JG/ELR option;I'm not sure about ""reserve army" ... dampening wage pressures" - I don't see how that works....
some supporters emphasize that a program with a uniform basic wage also helps to promote economic and price stability. The JG/ELR program will act as an automatic stabilizer as employment in the program grows in recession and shrinks in economic expansion, counteracting private sector employment fluctuations. The federal government budget will become more counter-cyclical because its spending on the JG/ELR program will likewise grow in recession and fall in expansion.
Furthermore, the uniform basic wage will reduce both inflationary pressure in a boom and deflationary pressure in a bust. In a boom, private employers can recruit from the program’s pool of workers, paying a markup over the program wage. The pool acts like a “reserve army” of the employed, dampening wage pressures as private employment grows. In recession, workers downsized by private employers can work at the JG/ELR wage, which puts a floor on how low wages and income can fall.
Wray explores 1 possible bad side effect regarding exchange rates. The poor can now buy more, including imports, so the balance of trade gets worse, there is possible currency depreciation, possible inflation. Wray's answer to such objections is framed in terms of morality, and rightfully so. It is very well said.
Should a nation attempt to maintain macroeconomic stability by keeping a portion of its population sufficiently poor that it cannot afford to consume imports? More generally, are unemployment and poverty acceptable policy tools to be used to maintain currency stability?To conservatives, the answer to both these questions is "hell yeah!" Conservatives give exactly 0 fucks about the poor - to them, the sooner the poor die, the better - why else did so many red states refuse Federal funding for the ACA? Hopefully the rest of us agree with Wray, that there's got to be a better way, and JG/ELR may be it.
How many people are we talking here?
the typical swing of employment in a US JG/ELR pool would be about 4 million workers – say from a low of 8 million workers in the program during an economic boom and 12 million in a slump.I did not know that Dr. Martin Luther King, Jr. was a proponent of JG/ELR. Wray quotes Dr. King from "his last letter requesting support for the “March on Washington for Jobs and Freedom" (1963?):
"With unemployment a scourge in Negro ghettoes, the government still tinkers with half-hearted measures, refuses still to become an employer of last resort. It asks the business community to solve the problems as though its past failures qualified it for success”.Wow. Discussing black inner city unemployment, Wray's colleague Mathew Forstater, who has tried to revive Dr. King's plans for JG/ELR, quotes William A. Darity, Jr. (1994):
The “unemployable” “underclass” disciplines the working class not by threatening to take away jobs, but rather by serving as an example that “this could be you”.This is something that Democrats need to start understanding about Agent Orange supporters. My wife says, I believe correctly, that one of MAGAts main motivators is schadenfreude - taking pleasure in the misfortunes of others. Conservatives, with their oversized amygdalas making them fearful all the time (I need my guns to protect me from the scary black men), seem to be more hierarchical. So in addition to wanting a strong, fascist leader to protect them, they for sure want others to look down on. The brain-damaged 22% of the population - will they succeed in taking us all down? I'm guessing they won't be in favor of JG/ELR.
Wray discusses JG/ELR in developing countries, and dispenses what seems to be common sense: start small, with not much differential between the guaranteed wage and informal wage levels. Another thing JG/ELR has going for it: "production does not have to meet usual market profitability requirements". Again addressing the concern that increased purchasing power for the poor might contribute to increased trade deficits, Wray points out that "international aid in the form of foreign currency could be welcome in some cases." But, no foreign borrowing - remember what took Hungary down.
The box for this section consists of Article 23 of the UN's Universal Declaration of Human Rights. We forget about this sometime, what with our focus on "American exceptionalism" - increasingly, exceptionally lame compared to the rest of the developed world.
(1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. (2) Everyone, without any discrimination, has the right to equal pay for equal work. (3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. (4) Everyone has the right to form and to join trade unions for the protection of his interests.Nice, the box for section 8.3 consists of 2 great Keynes quotes (Wray's favorites) which I hadn't seen before! I wasn't going to include them, but, I can't resist. I've said this before, what would it be like if Keynes were still around?
I will present my two favorite quotes from Keynes: the first on unemployment and the second on “doing things”, that is, tackling problems:Wray reviews "JG/ESL and Real World Experience". Several countries have had programs where the government created jobs, but no one has done a full JG/ESL program. Wray talks about the New Deal jobs programs, which at 1 point employed 13 million people. He includes a long quotation from Nick Taylor's 2008 book on 1 of those job programs, the WPA (Works Progress Administration), which drives home something I think all of us forget about: how much of our infrastructure, our national parks and monuments, public buildings, dams, roads, were built by WPA. Wray summarizes the WPA's accomplishments:The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially “sound” to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. ... Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy. (John Maynard Keynes 1972, 90–2)As soon as we have a new atmosphere of doing things, instead of one of smothering negation, everybody’s brains will get busy, and there will be masses of claimants for attention, the precise character of which it would be impossible to specify beforehand. (Keynes [1929] 1972, 99)
The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 civilian and military buildings, 700 miles of airport runways; it fed 900 million hot lunches to kids, operated 1,500 nursery schools, gave concerts before audiences of 150 million, and created 475,000 works of art. It transformed and modernized America.Pretty impressive for socialism.
Looking at other real world example, 12 countries are listed who in the last century "have intermittently adopted policies that made them “employers of last resort”". Recent programs in Argentina and India are discussed in depth.
Wray next discusses one of our favorite topics: inequality. Wray adds some nice, pithy analysis. He is definitely a fellow traveler.
Going all the way back to the Kennedy days, it has been conventional wisdom that if you can boost economic growth, everyone wins. Actually, that is remarkably naïve and counterfactual. In good times, the powerful grab the spoils. In bad times, they get government bail-outs. Why would you want to be rich and powerful if you could not protect and even enhance your well-being no matter what the economy does?Wray references the work of his colleague Pavlina Tcherneva:Why do elites everywhere always clamor for economic growth? Seemingly every policy advocated is justified on the argument that it will boost growth. Cut taxes on the rich – that will boost growth! Eliminate regulations to boost growth! Free trade stimulates growth! Slash welfare to promote growth! Balance the budget to promote growth! Save Wall Street to restore growth! On the other hand, every policy they hate is said to hinder growth: raising minimum wages; environmental protection; school lunches for poor kids; vacations and sick leave for workers.
Where such policies do enhance growth, the rich will get more than their fair share. Where the policies do not boost growth, they will increase the share of the rich. Heads they win, and tails they win too.
...
While our economy is often referred to as “market-driven”, it is actually driven by power.
With each recovery from a downturn, the rich capture a larger share of the subsequent growth. She has shown that no matter how you slice up the rich at the top of the income distribution – the top 10 percent, the top 1 percent, or the top few tenths of a percent of the top 1 percent, their share of the spoils from growth has increased in each subsequent recovery.Here's the graph from Tcherneva's work. Notice that it all went totally bad starting in 1980. Thatcher and Reagan, may they burn in hell. [Actually according to this documentary I saw titled "Iron Sky", they are members of a group of immortal reptoids living at the center of the hollow earth ;->]And when things go bad, Uncle Sam jumps in to rescue them.
We are, of course, seeing more of the same in the currently $3T COVID-19 economic meltdown relief packages. And it is probably even worse, as the executive branch of our government is under the control of outright kleptocrats.
Wray posits that full employment is the best way to fight inequality and poverty. Minsky in the 1960s predicted that the War on Poverty would fail because it did not "include job creation".
Further, he argued that once you’ve provided jobs to all who want to work, you need to gradually shift the distribution of income toward the bottom. You do that by holding down income growth at the top while gradually increasing pay at the bottom.I don't know. Before the pandemic we were at near full employment - or at least, official unemployment was low, which does not account for those who have quit looking for work. Full employment did not seem to help inequality much. What was the joke? "Yeah, there are a ton of jobs available - I know, I've got 3 of them!". The problem is that so many of the jobs are McJobs, with crappy wages, crappy benefits, crappy scheduling, crappy everything. Maybe the JG/ELR program would provide a floor for all wages, benefits, etc, like the ACA did in setting minimum requirements for insurance plans. But it seems like that could be done without the JG/ELR.We did neither, of course. Inflation-adjusted minimum wages have plummeted over the past half-century. Joblessness has risen. As documented by many, while labor productivity has continued to rise on trend, inflation-adjusted median wages have stagnated since the early 1970s. Who got the difference? The rich and powerful.
...
“How”, Minsky asked, “can the distribution of income be improved?” He answered: “First of all by full employment”. By this, Minsky meant that it is necessary to achieve and sustain “tight full employment”, which he defined as: “[the situation that] exists when over a broad cross-section of occupations, industries, and locations, employers, at going wages and salaries, would prefer to employ more workers than they in fact do ... The achievement and sustaining of tight full employment could do almost all of the job of eliminating poverty”.
Section 8.7 is "MMT for Austrians: can a Libertarian support the JG?" [My answer, who cares? Fuckabuncha Libertarians - the "I got mine, fuck you" philosophy. Seriously, why do people waste time addressing Libertarianism? If we were on a level playing field, maybe, but, today's playing field is the opposite of level. It is a profoundly ignorant philosophy.] Wray returns to trumpeting the realizations of Descriptive MMT:
we use our understanding of the way money works to bring rational analysis to government policymaking. Since involuntary default is, literally, impossible for a sovereign government, we quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips policymakers in Washington and elsewhere. Can we “afford” full employment? Yes. Can we “afford” Social Security? Yes. Can we “afford” to put milk on the lunch trays of all school children? Yes. The problem is not, cannot be about affordability. It is about resources.OK, are the Austrians convinced? Wray fires a final shot across their bow.,,,
The projections could turn out to be wrong. But if they do, affordability still will not be the problem; it will be a resource problem.
If Austrians are right about the efficacy of private markets, the JG/ELR will always be small.Here's another note on implementation.
So it might be best to have federal government pay the wages in the program but have the jobs actually created and managed by: not-for-profits, local government, maybe state government, and maybe only as a final last resort, the federal government. Argentina experimented with cooperatives and they seemed to be highly successful. And why not let our Austrian/libertarian groups organize their own JG/ELR projects, hiring workers for not-for-profit activities dear to their hearts?This final point I'm not sure I get. It's all the government's money - it creates every last Dollar - and it's the government's taxes which have to be paid that requires people to get jobs, so why is it not at least partly the government's responsibility to provide those jobs???
The problem with a monetary economy (you can call it capitalism) is that from inception, imposition of taxes creates unemployment (those looking for money to pay taxes). If we scale this up to our modern, almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc.), we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never provide (never has provided) full employment on a continuous basis. JG/ELR is a logical and historical necessity to support the private sector. It is a complement to, not a substitute for, private sector employment.
Chapter 9 is titled "Inflation and Sovereign Currencies". Now we get to the crux of the matter. The biggest fear about unleashing MMT thinking is that it will create inflation (206 references in the book) or hyperinflation (70 references).
Wray never defines inflation. The Wikipedia article on inflation defines it as "a sustained increase in the general price level of goods and services in an economy over a period of time." Wray states that "The most commonly used measure of inflation is the CPI (Consumer Price Index)." - so inflation is "what the CPI measures". In the discussion of Chapter 7 when I went to FRED to check on inflation in the 1960s, FRED offered me various graphs dealing with the CPI. So when we're worried about inflation, we're worried about prices going up and the unit value, the purchasing power, of our money going down. I would presume this is caused by supply not keeping up with demand. An overview from Wray:
But certainly prices have risen, generally, in virtually all countries of the world since the mid-1960s, indeed on trend since World War II, and this is a problem of some concern. As Keynes argued, you need some “stickiness” of wages and prices in the money of account, or you might abandon money. That is what can happen in a hyperinflation; with money’s value falling quickly ..., people try to find something else that can hold value.Wray discusses how hard it is to compute the CPI and measure inflation.But clearly except for a few goldbugs, inflation in the United States and in most countries of the world since 1966 has been sufficiently low that the domestic currency remained a useful money of account, and the domestic currency has been voluntarily held in spite of inflation. In truth, economists are hard pressed to find significant negative economic effects from inflation at rates under 40 percent per year. But clearly people do not like inflation when it gets to double digits, and policymakers usually react to double-digit inflation by adopting austerity programs in an effort to reduce aggregate demand.
To measure price changes, we must compare prices in one year – a base year – with prices in later (and earlier) years. This is much harder than it sounds, because not only do prices change, but products and services change, too. We must adjust the CPI or other measures of price for quality improvements. How much would a modern laptop have cost in 1966? Millions of Dollars? Billions?[Ha ha. My version of the "laptop cost" question was always, "How much would Pontius Pilate pay for a 60" flatscreen with 100 channels?"]....
The CPI is more of an art than a science ...
Wray introduces us to "Baumol disease".
A symphony orchestra back in Mozart’s time was as large as one today, give or take a few performers, and it took about the same time to perform a piece, depending on the conductor. There has been virtually no productivity improvement (same number of “workers” working the same number of hours to perform a symphony). Yet workers in other fields are infinitely more productive than they were in Mozart’s day. There is a similar problem in many other areas, mostly services where you really cannot improve productivity much (think barbers, teachers, doctors).Wray loses me in the discussion that follows this. He presumes wage increases must be driven by productivity, so we are overpaying the barber and the musician. [Believe me, we are not overpaying musicians. It is incredibly hard in most parts of the US to make a living as a musician.] He states at one point, perhaps facetiously, "inflation is the cost of preserving culture."??? He seems to ignore the fact that if their pay didn't go up, barbers, teachers, and doctors would find different jobs that paid more. Additionally, there are not unlimited numbers in these professions. Scarcity in the supply of their services would drive their wages up. Supply and demand, yes, regardless of productivity???
As the costs in the diseased sector rise (wages increase but productivity does not), it takes a bigger share of GDP and contributes more to the CPI. An increase of the real wage in the productive sector makes it possible to devote more spending on diseased sectors, but if real wages don’t rise, then diseased sectors become unaffordable and the arts and healthcare sectors suffer.Wray looks at commodities, including gold, as hedges against inflation. He concludes that they aren't useful.That is what has been happening in the US since the early 1970s: real wages for average workers have not risen even as healthcare has become more expensive – pushing more families deep into debt. Work by Rick Wolff has shown that over recent decades the US real wage has remained relatively constant while labor productivity has continued to grow on trend. ... What this means is that workers’ wages are not sufficient to buy the output they produce. Capitalists then have two choices: either hold prices constant, or sell the output on credit given to households to make up for their stagnant wages. We know which one they chose, as household indebtedness grew at a very fast pace. Wolff blames that rise of indebtedness for the global financial crisis – with a lot of justification.
Another reason for overall upward inflation since World War II is that there have been no depressions, which are generally deflationary. And there have been plenty of wars (albeit small ones), which are generally inflationary, as increased military spending represents a demand spike eating up resources. Note, I did read something that suggested that the inflation in the 2nd 1/2 of the 1960s was caused by the increased military spending associated with the Vietnam War.
Wray also points out one of the reasons inflation is not bad: it makes it easier to repay debts (as long as the debts don't have variable interest rates tied to inflation). He reiterates an earlier statement:
And to repeat: there isn’t much evidence that low but persistent inflation actually harms economic performance, although people do not like it.Wray moves on to a discussion of hyperinflation.
In his classic 1956 paper, Phillip Cagan defined hyperinflation as an inflation rate of 50 percent or more per month.Wray points that there are logical inconsistencies in this explanation. If the government can't print money fast enough to keep up with prices, how is the government printing money causing the problem? The monetarists logic becomes increasingly convoluted trying to place the blame on "too much money". Look at the start of the whole argument: "government prints up too much, causing prices to rise". Why? If supply exceeds demand, why would prices go up?...
The most popular explanation of hyperinflation is the Monetarist quantity theory of money: government prints up too much, causing prices to rise. Worse, as prices rise, the velocity of circulation increases; no one wants to hold onto currency very long as its purchasing power falls rapidly. Wages are demanded daily, so as to spend income each day because tomorrow it will purchase less. What that means is that even though the money supply grows as rapidly as government can print notes (or add zeros to existing notes), it never keeps up with rising prices. And the faster prices rise, the higher velocity climbs; eventually you demand hourly payment and run to the stores at lunchtime because by dinner prices will be even higher.
Wray lists 3 main objections:
Wray kicks goldbugs around some more. It never worked well - see the discussion of "metalism" above. Countries would go off of the gold standard in times of crisis, when they needed some "domestic policy space". And of course banks would leverage their gold holdings out the wazoo! The stable periods of pegging, with the Pound Sterling acting as the world's peg prior to World War I, and the Dollar pegged to gold being pegged to by the rest of the world from World War II until 1970, didn't last long at all.
- ... If critics were correct that government spending by “printing money” necessarily leads to high inflation or hyperinflation, then most developed nations would have at least high inflation, if not hyperinflation all the time because they all spend by keystrokes. ... Yet hyperinflation is an extremely rare event. That we have to look to cases like Weimar or Zimbabwe (or way back in time to American Continentals) tells us a lot about the connection between “printing money” and hyperinflation. The causation cannot be found there.
- Hyperinflations are caused by quite specific circumstances, although there are some shared characteristics of countries and monetary regimes that experience hyperinflation. ...
- There is nothing in the current or prospective condition of the United States (or the United Kingdom or Japan – all high deficit nations at the end of 2011) that would lead one to expect high inflation, let alone hyperinflation.
And that is generally the eventual conclusion of most attempts to tie a domestic currency to some sort of fixed exchange rate standard (whether gold or foreign currency): it works until it inevitably collapses.On the other hand,
there are no cases of nominally democratic Western capitalist countries that have experienced hyperinflation in the past century; and if we limit our data set to those with floating currencies, there aren’t any with exchange rate crises either.Wray points out that rather than budget deficits causing inflation, it seems to be the other way around. Generally taxes trail spending, and if there is inflation, float the wrong way can increase the government's deficit....
If keystrokes cause hyperinflation, we’d have hyperinflation all the time.
We don’t. Hyperinflations are unusual outcomes.
Wray then examines some of the well known cases of hyperinflation. Note that there aren't very many, and, in all cases, there were other, serious problems that were the main cause - hyperinflation had nothing to do with "too much money".
- The Continental during the Revolution and the Confederate Dollar during the Civil War. Both suffered from 2 problems:
- There was a war going on. Wars are always inflationary, as the military competes for resources.
- Neither was supported by taxes. Remember the MMT mantra, "Taxes drive currency".
- The Weimar Republic in Germany post-World War I. Again, a war was involved."Germany had lost World War I and suffered under the burden of impossibly large reparations payments that had to be made in gold."
- Zimbabwe in the 1990s. "Here is a country that was going through tremendous social and political upheaval, with unemployment reaching 80 percent of the workforce and a GDP that had fallen by 40 percent. This followed controversial land reform that subdivided farms and led to the collapse of food production. Government had to rely on food imports and IMF lending – another case of external debts." Yah, sounds to me like "too much money" was the problem. [Sarcasm]
reduce indexing [how often the wages, prices, and transfer payments are increased as prices rise], stabilize production, reduce demand relative to supply, and quell social unrest.The amount of money in circulation has nothing to do with it. [Monetarists are doofuses.]
Wray next talks about everyone's favorite hyperinflation incident that never occurred: the one predicted by conservative economists as a result of Qualitative Easing (QE) by the Fed after the GFC. The Fed bought up every financial instrument that banks threw at them, including the toxic MBSs (Mortgage Backed Securities) that were the special sauce of the GFC. Conservative economists howled, "Hyperinflation!". I blogged about this here, here, here, and here. Quoting from the 1st of those
This theory [monetarism] is still popular with conservative economists, like those that predicted hyperinflation after the Fed tripled the money supply in response to The Great Recession of 2008, and who still refuse to admit that they were completely wrong in their predictions.Wray discusses how QE did nothing to stimulate the economy - there is no way it could have. With QE, the Fed also adopted a ZIRP - Zero Interest Rate Policy - which caused banks to lose 2x as much interest income as they paid in interest on their debts???
Wray finally formally introduces us to descriptive vs prescriptive MMT, and states that "Functional finance then provides a framework for prescriptive policy." But, following the deflationary Great Depression, they weren't prepared for when inflation started to tick up in the late 1960s. It was kind of downhill from there, finally ending up with austerity programs - are these ever a good idea?
The problem is that governments had to abandon any pretense that they were pursuing full employment. Indeed, unemployment became a tool for achieving price stability. ... Lerner’s “steering wheel” approach to policy was abandoned. The result has been typically high unemployment and substandard economic growth. In the United States, poverty and inequality have risen. Globally, growing unemployment has been a problem even during economic expansions.Wray was telepathic and prescient in this next assertion - he was reading my mind 5 years in the future.
There has been a debate about the inclusion of the JG/ELR proposal in the MMT approach. Some argue that MMT ought to remain purely descriptive, stripped of any policy recommendations. Others have argued that the JG/ELR program has been part of MMT from the very beginning.Wray pulls seniority and asserts that, yes, he and the other founding fathers included the JG/ELR in MMT 20 years ago. I'm like, so what? More on that later.
Wray justifies this inclusion based on the "price anchor" concept which was 1st mentioned in Chapter 8 - there are only 6 references to "anchor" in the book. [My bold]
we believe that a sovereign currency needs an “anchor”, and by setting the basic wage in a JG/ELR program, the program itself becomes the anchor. On the margin, the currency is worth the amount of labor it can hire. If, for example, the wage in the JG/ELR program is set at 15 Dollars an hour, we know that 15 Dollars can purchase an hour of labor. As long as the program wage is held steady, and so long as there are employees in the program, an employer can recruit a new worker out of the program at a wage that is set a few cents higher than the program’s wage.So an anchor stabilizes the economy? 8 to 12 million workers all making the same presumably minimum wage stabilizes spending, income, wages, and prices? I'd really like to see some math on that. My gut level feel is that all of these would compute out to be a fairly small percentage of the economy.We believe this is a much more effective monetary anchor than an ounce of gold “backing” the currency. A labor buffer stock is more effective at stabilizing the economy than is a gold buffer stock because labor goes into the production of all goods and services. Further, the income of the worker is the most important source of the demand for final output of consumer goods. So operating the economy at full employment and with a relatively stable wage in our buffer stock jobs program will help to stabilize not only consumption spending and household income, but it also helps to stabilize wages and therefore prices.
From the last paragraph of the chapter. Wray seems to know there's a problem here, but doesn't want to address it head on???
If some simply want to use the descriptive part of MMT without agreeing with the policy prescriptions, they can do so. The description provides a framework for policymaking, but there is room for disagreement over what government should do. Once we understand that affordability is not an issue for a sovereign currency-issuing government, then questions about what government should do become paramount. And we can disagree on those.
Chapter 10 is titled "Conclusions: Modern Money Theory for Sovereign Currencies". Wray finishes strong in this final chapter.
1st he and MMT take some victory laps:
- MMT proponents mostly were the only people to predict the GFC. I have always questioned economics as a science, as orthodox economics seems to have so little predictive power, so MMT gets definite points for that. Wynne Godley collaborated with Wray and "had warned of the unsustainable “Goldilocks” economy in the 1990s"
- MMT proponents predicted the mess that is the Eurozone. "Those of us who adopt MMT have argued since the start that the fatal flaw was the attempted separation of fiscal policy from a sovereign currency."
This next was posited in Chapter 5, but not attributed to anyone. Innes was a contemporary of Keynes.
- Does the government need to receive tax revenue before it can spend?
- Does the central bank need to receive reserve deposits before it can lend?
- Do private banks need to receive demand deposits before they can lend?
Mitchell Innes posed a fundamental law of credit: the issuer of an IOU must accept it back for payment. ... We call this the principle of redeemability: the holder of an IOU can present it to the issuer for payment.Wray revisits his humorous religious metaphor from Chapter 5.
Creation must precede Redemption: the debts must be created before they can be redeemed.Wray next makes a case that the world seemed to be ready for the JG/ELR. Well, 5 or 8 years later, I see nothing anywhere about it - whereas, on the other hand, Universal Basic Income (UBI) has been getting serious traction for the last 2 years or so. But dealing with the economic coma (Krugman's term) that the COVID-19 pandemic has brought on has greatly piqued interest in (descriptive) MMT.
1 argument for the JG/ELR that Wray makes is with regard to stagnation. Larry Summers, who started talking about "Secular Stagnation" in 2013 is involved, Wray doesn't use that exact term so I'm not sure if these comments predate or postdate 2013. Regardless, this analysis is spot on in calling out the ever increasing predation of the financial sector on the rest of the economy.
Larry Summers argued that all we’ve got left is bubbles. Over the past three to four decades we increasingly turned the economy (and government) over to Wall Street, which lives on speculation in assets. Some call it the “casino economy”; many others call it “financialization”; and Minsky called it “Money Manager Capitalism”. We won’t go into the details here, but all of these focus on the tendency for finance and monopoly interests to “sabotage production” and sink the economy as they suck the life out of it in the form of economic rents that flow to the financial sector. This leaves too little of the national income to support productive activities, generating stagnation.This is reminiscent of Matt Taibi's characterization of Goldman-Sachs as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." [Ha ha, that original article was in 2009, no longer online, but there are dozens of references to it. Apparently the description resonated with people ;->]
the problem is that capital is too productive for its own good. The production-enhancing qualities of investment exceed its multiplier effects on aggregate demand. The problem grows over time and is compounded by the tendency to replace workers (who earn wages used for consumption) by machines (that don’t earn wages)."Too productive for its own good." That rings a bell. Capitalism turns the world into the most fungible forms of capital in a positive feedback loop. Keynes and Marx both felt that someday, the job of capitalism would be done - there would be enough capital to do everything that the human race could imagine. Are we there yet? Where is the off switch? [See also "The Economics of Arrival".]
Wray uses terms we have heard a lot over the last decade: "declining labor force participation rates", "jobless growth", "the business cycle peak is increasingly impotent at creating jobs and raising the labor force participation rate." And while jobs are down, US prison populations are up (bad), and college enrollments are up (good).
Wray again mentions that, in our current economy, machine-driven productivity gains almost always cause supply to outstrip demand. In "Capitalism 3.0", Peter Barnes referred to this as "Capitalism 2.0" - since the huge ramp-up of industrial capacity in the US in World War II, we have gone from living in an economy of scarcity to a post-scarcity economy. Now we just need to figure out how to go from a post-scarcity economy to a post-scarcity utopia, and my work here will be done!
The recipe for restoring prosperity is to create jobs and raise wages at the bottom so that sales to consumers will grow. We do not want to rely on another debt-fueled consumption boom. We cannot rely on investment because even in the unlikely event that confidence fairies could convince firms to invest more, the multiplier impact on aggregate demand would soon be outstripped by the reality that the higher productive capacity effect on aggregate supply would outrun growth of demand. In any event, private-sector-led expansions invariably run out of steam and often end in a financial crisis due to the build-up of debt.So, JG/ELR, FTW! And the polling was good!
Fifty percent, or more, of respondents in every age group except those over age 65 either strongly favor or somewhat favor the JG.Looking beyond the US, Wray discusses fixed vs floating exchanged rates 1 last time. Floating, yes? This next sounds about right to me. The establishment always holds new ideas to much higher standards than those to which it holds itself.
If MMT cannot find a simple solution to the complex problems facing developing nations, then somehow MMT is wrong. It is a bizarre claim.In the last section (phew!), Wray declares that we need a new "meme for money". Ha ha, I like this sequence of reactions.
Outside of the crazies, everyone knows the US government cannot run out of money. From Greenspan to Bernanke to Yellen they all understand there is zero risk of involuntary default by the sovereign issuer of a currency. So the way that an MMTer approaches the current deficit hysteria is by pointing out that as the Federal government spends through keystrokes it can afford anything for sale in Dollars.But this next is the crux of the matter. My wife is temperamentally more conservative than I am, and this is her gut reaction to MMT: one of disgust, of moral approbation.The reaction typically goes through four stages:
- Incredulity: that’s crazy!
- Fear: Zimbabwe! Weimar!
- Moral indignation: you’d destroy our economy!
- Anger: you’re a dirty pinko commie fascist!
MMT loses the argument. ... Because it’s immoral for the government to spend through the stroke of a key.How do we fix it? I have known that "money is software" in my gut for over a decade (the phrase is 1st blogged in 2012, just after I retired), I rejoiced to find it formalized. But, I preach it, I get nothing but total skepticism.
We must develop an alternative framing. We cannot adopt the conservative, textbook framing that automatically invokes a particular market metaphor, one based on “fair exchange”. From that vantage point, there’s nothing fair about government getting something for nothing – for mere keystrokes.Wray frames this in the right way - in moral terms, in terms of community.Instincts prefer the “taxes pay for things” metaphor: I paid into the Social Security Trust Fund, so now I get to draw down my balance in Social Security’s lockboxes during my retirement. It makes no difference that this description is completely wrong no matter what angle of approach you take. It trumps.
And so we get self-identified progressives fighting tooth and nail against payroll tax holidays even though they completely understand the tax is regressive and that maintaining the myth means tax rates must be raised to become ever more regressive in the future – which makes money’s worth calculations ever worse. Progressives prefer to destroy the program over abandoning the moral myth that “I paid in therefore I deserve benefits”.
We need a new meme for money.
The meme cannot begin from markets, from free exchange, from individual choice. We need a social metaphor, a public interest alternative to the private maximization calculus. We need to focus on the positive role played by government and its use of money to serve us well.
We deserve this access not because we pay taxes, but because we’re all in this together. We take care of our own. Government helps us take care of our own through its social spending – for retirement, for medical care, for food stamps, and for support of poor families.I for one am definitely on board!We take care of our own.
Government cannot run out of money; it can always financially afford to take care of our own. Anything that is technologically feasible is financially affordable. It comes down to technology, resources, and political will. We’ve got the technology and the resources. We need the right meme to align the politics, to fortify our will.
This book provided a lot of details, particularly about exchange rate regimes and how MMT would work in other countries, including developing nations. It provides good arguments against the standard objections raised to (descriptive) MMT.
At this point I don't think I need to tell you how psyched I am about MMT. That being said ...
I think that this book is poorly organized. Topics are not discussed in 1 place - inflation should have been at least defined up front, instead the chapter on inflation is Chapter 8 - except we get an intro in Chapter 5??? The knowledge presented is not well normalized, in the database sense. Did it go through a professional editor?
So here's my suggestions for the 3rd edition - I think it's time:
- Include a standard format glossary.
- It is such an important concept, the main objection to MMT for the US, define and discuss inflation and its causes early in the book, in Chapter 1 or its own Chapter 2.
- As I mentioned, at a minimum, the book should have a Part I: Descriptive MMT, including the inflation discussion, and a Part II: Prescriptive MMT. But I think more than that should be changed.
- The term MMT needs to be used only for descriptive MMT. Descriptive MMT is identities; it is accounting; it broaches no argument. Wray states in Chapter 9 that we can disagree with prescriptive MMT, at this point mostly JG/ELR. Mixing stuff that you can disagree with and argue about with stuff that broaches no argument is very bad. It greatly weakens the power of descriptive MMT. I think that this point of confusion has contributed to MMT's lack of traction.
Wray says, JG/ELR has been there since the beginning. Who cares? I don't. Including it weakens what are slam dunk arguments.
The only technical reason given to include JG/ELR is to act as a "price anchor". As I mentioned, the word "anchor" appears in the book only 6 times, and Wray never really defines it or discusses how it works. Searching the web for "price anchor", you find anchoring (cognitive bias) and boat anchors. I'm going to go on and assume that it is a meaningful and important concept.
Given that, there are other things that can act as an anchor - we'll discuss 1 shortly - and if there are other options, and it is not just self-evident and consistent accounting identities, then let's not muddy the water. - Prescriptive MMT as it stands is pretty weak tea, consisting of nothing much more than JG/ESL, which was pretty forward thinking in the 1930s. [snark] Let's think like 21st century economists!
- June 6, 2017, "Doughnut Economics", Kate Raworth, 2017, subtitled "7 Ways to Think Like a 21st Century Economist".
- June 30, 2017, "Capitalism 3.0", Peter Barnes, 2006.
- March 4, 2016, "Postcapitalism: A Guide To Our Future", Paul Mason, 2016.
Instead of immediately focusing on making markets work more efficiently, we can start by considering: when is each of the four realms of provisioning — household, commons, market and state — best suited to delivering humanity’s diverse wants and needs?In common with orthodox economics, Wray in this book discusses only the market and the state. Let's consider the household.
But 1st, let's do some math! [When my 4 kids were growing up (3/4 800 math SATs), at the supper table, sometimes the dinner conversation would bring up something computable, and then, "Let's do the math!" was invoked, and we'd spitball #s and calculate in our heads. We were v0.2 of Wolfram Alpha.] In Chapters 8 & 9, Wray introduced us to the concept of a "price anchor". In my discussion of Chapter 9, I wanted to see the math of JG/ELR as a price anchor. Note, from 2015 when MMT 2e was published to now, US population is up 3%, GDP is up 11%. I am not going to factor these differences in, I will use #s from 2015 to 2020 without adjustment. My training was as a physicist, accuracy within 1/2 order of magnitude, a factor of 3, is acceptable to me - but we should be closer than that ;->
Wray estimated 8-12 million participants in JG/ELR. Let's use 12 million. I like his $15/hr wage suggestion => $30K/year. 12M x $30K = $360B = ~$1/3T / $21T GDP = 1.7% of GDP. Seriously, 1.7% is supposed to act as an anchor??? Totally unlikely.
Going back to Doughnut Economics, let's put everyone in the household realm of provisioning into JG, and redo our numbers. I still have been unable to make any sense out of Wray's statements at the end of Chapter 2: "My own view is that this continual “monetization” of ever more activities is highly problematic and probably threatens survival of our species as well as that of many of the other species on earth. I also resist assigning monetary values to things like caring for your own children – something economists are wont to do." I understand his concerns in the 1st sentence, but I have no idea what is behind the 2nd. Raising children is indeed a labor of love, but paid teachers, day care workers, nannies, and babysitters usually also love their charges. I will risk Wray's disapproval and forge ahead.
This site says 43.5M informal caregivers in the US. Add that to Wray's 12M = 55.5M x $30K = $1.665T / $21T GDP = 7.9% of GDP. Still doesn't seem like much of an anchor. Wray didn't give much insight into how to figure out how big a "price anchor" we need, aside from the discussion in Chapter 7 on Minsky and the size of government.
But we wanted total government spending to be 20-50% - and I'm guessing, if the US wants to quit being the poorest rich country in the world, that it should be closer to 50% than the 20% it is now. 7.9% might not be that bad, giving that 10% is going to the military (Will that be necessary after COVID-19? When we all realize, other humans are not the enemy we need to be worrying about?)
I WANT A BIGGER ANCHOR! So let's add a UBI (Universal Basic Income) program. Most excellent UBI advocate Scott Santens (@scottsantens) just tweeted me that his latest $# is $1200/month for adults, $400/month for children. People on Social Security/Disability are eligible for UBI, but generally will get some combo of UBI + their SS payments - so I will exclude them. We will also exclude the JG recipients - presumably we will decrease their JG salaries (~$30K/year) by their UBI payments ($14.4K/year).
Current US population: 329M
So we compute:
Adults = 260M non-institutional civilians + 1.5M prison + 1.4M military + 1.3M in nursing homes = 264.2MNote we don't means test for any of these programs. Not means testing on any program involving the 1% in general raises the cost by ... 1%. Who cares if Jeff Bezos's kid gets an extra $400/month? UBI goes to everyone, if they don't need it, we'll get it back when they pay their taxes.Children = 329M - 264.2M = 64.8M
Adults on UBI only = 264.2M - 55.5M on JG - 69.5 on Social Security = 139.2M
Final calculations:
139.2M UBI only adults x $14.4K = $2.004TSo, close to the current US budget, $4.447T. I think that our anchor is now big enough! It would get government spending up to 40% of GDP; it's nice that, being the poorest rich nation, we have top end available. I wonder what would happen if you ran these calculations with France, whose government spending is already 50% of GDP?64.8M kids x $4.8K = $311B
Total: $2.315T
Grand total, JG + UBI: $1.665T + 2.315T = $3.980T
$3.980T/$21T = 19% of GDP
Note, in a sanity check, current Federal spending on 13 social safety net programs (SNAP, etc.) is $364B, 1.7% of GDP. Pretty sad. Medicaid is $409B, 1.9%. Pretty sad. Yet conservatives never get tired of nit-picking these programs.
Here's a spreadsheet with these numbers.
Would this be inflationary? I would say, for the 1st few years, definitely. Making the JG wage $15/hour would essentially set the minimum wage nationwide to $15/hour. The bottom 50% of the population will have more money to spend and it may take a while for supply to catch up the increased demand. But once supply catches up, we should go back to the low inflation/low interest rate situation we are currently in. But as I mentioned in passing in the review of Chapter 8, we are now living in a zero marginal cost society. If people spend their new money on digital education, books, music, movies, or games, the supply is already essential infinite.
Returning to the topic of splitting MMT, if we name descriptive MMT "MMT", what do we name prescriptive MMT? I was unsuccessful in thinking of a metaphor that incorporated anchors and safety nets. Then I thought, "it's much more than an anchor, it's a foundation, it's a base". Ding ding ding, we have a winner: Foundational Economics!
I have finally trained myself such that whenever I get a "great idea", I immediately discuss it with The Google DuckDuckGo to see how many 100s of other people have already have the same idea. Sad violins, Foundational Economics is already taken, by a group out of Manchester UK since around 2005 :-(. "Basal" is no good, that's a kind of cancer. I could just call it My Plan The Plan, but I've already used that. Maybe Anchor Economics? Any other ideas?
Ha ha. My subconscious came through at 4:33 this morning (2020-04-30). The metaphor that encompasses anchors and safety nets is a sailing ship. Safety nets catch crew falling from rigging and passengers falling from decks; anchors keep the ship in 1 place; sea anchors help the ship ride out a storm.
Thinking in terms of a sailing ship metaphor, an anchor is not what these programs represent. What they represent is ballast (or a keel).
Definition of ballastBallast creates stability, and is counter-cyclical with cargo, as JG is with private sector jobs. Wray indeed did say that JG as a "price anchor" "will help to stabilize not only consumption spending and household income, but it also helps to stabilize wages and therefore prices". Maybe it will help with the boom and bust cycle which the finance sector encourages in the economy.
- a heavy substance (such as rocks or water) placed in such a way as to improve stability and control (as of the draft of a ship or the buoyancy of a balloon or submarine)
- something that gives stability (as in character or conduct)
Unfortunately, "ballast" also has a connotation of "dead weight" - not too inspiring, so ixnay on Ballast Economics.
We've deduced that prescriptive MMT is mostly about stability, about stabilizing the economy. How about calling it Stability Economics?
1 other word that comes to mind is balance. Ballast helps balance a sailing ship. Balance Economics would appropriate "Balance" from its normal use in "Balanced Budget". It calls to mind Lady Justice and her scales - totally tilted towards the oligarchy at this point - and the need for economic justice. It also reminds us of Doughnut Economics and its goal of balancing the provisioning of the human race against the trashing of Planet Earth.
Wray said we needed new memes for money, I'm just trying to do my part ;-> Here's our economic sailing vessel currently, with the sea monster being played by COVID-19:
Hooray, keystrokes to the rescue! Keystrokes FTW! #MMT FTW!
How are going to pay for this? Oh wait, MMT means NEVER ASKING THIS QUESTION. The only question to ask is, do we have the resources for this? I would say that we do.
But still, if someone insists on paying for it, we've got the standard stuff:
- go back to the 94% top income tax rates of the golden age of the 1950s under Ike;
- set capital gain and dividend taxes at a minimum of 50% going up to 94%, ramping up more quickly if we eliminate corporate taxes to stop the current international race to the bottom as Wray suggests;
- institute luxury or sumptuary taxes on high ticket items;
- institute a 3% wealth tax on fortunes over $10M;
- implement a micro-tax on all financial transactions.
I haven't talked about the commons in my brainstorming (drizzling?) here. Book #2 in the list above, "Capitalism 3.0" by Peter Barnes I remember as the best treatment of how we can also use the commons to address inequality. I have been randomly thinking that we could pass a law that any time a personal fortune went over $1B, the excess would go into a national trust fund. Annually 50% of the proceeds of the trust fund would be distributed equally to all citizens, and the other 50% would be left in the trust to continue to grow. That would be a nice commons for all of us. Of course, it is SOP for the wealthy to hide their wealth in family trusts/foundations, we would need to figure out how to deal with those.
We would not do this because we need the money - although this could help finance Stability Economics, to keep everyone more comfortable with the keystrokes. We would do it because beyond a certain point (=== $1B), excessive wealth:
- is immoral - greed is 1 of the 7 Deadly Sins;
- is a horrible waste of capital - the multiplier on a billionaires wealth is very small;
- corrupts our democracy - look at this presidential cycle, 3 billionaires running for president because they can.
Think how much less scrambling would be going on during the COVID-19 pandemic if Stability Economics were already in place. Congress would still have to pass $T in relief, particularly for small businesses, cities, and states, but individuals would be in much better shape.
I'm going to stop now. I have no idea how the pandemic is going to play out. But crises are sometimes the only time you can get big changes made. If we can get everything turned blue in the 2020 elections, people may be finally ready for these types of changes.
One last late-breaking thing. Paul Krugman in his Monday, April 27, 2020 NY Times column (2 days ago as I write this) talked about not worrying about the deficit going up due to the massive COVID-19 relief packages. Towards the end of the article he states "the government will be able to borrow that money at incredibly low interest rates." Borrow money? Really? Well, maybe not really. From his Tuesday, April 27, 2020 email newsletter:
The immediate answer is that the federal government is borrowing the money. New projections from the Congressional Budget Office suggest that federal debt, as a share of G.D.P., will be around 30 points higher by the end of next year than it was at the end of 2019.So does he get it or not? Why is he saying "the details aren’t especially important"? I thought "the devil is in the details." I think he won't let himself get it. Old dog, new tricks. Oops, he's ~2 years younger than I am. But I really think that if these 3 confusing paragraphs had been written by an MMT proponent they might have made sense.But who will that money be owed to? The answer is, me — and people like me. That is, those who are still receiving more or less their normal incomes are spending less and saving more — yes, we’re buying more groceries and booze, but that’s vastly outweighed by reduced spending on restaurants and vacations. And those savings are, one way or another, being recycled via the federal government into aid for those less fortunate.
Some of the recycling is direct: My wife and I have, in fact, bought some U.S. government bonds. Most of it is indirect: You put more money in your bank account, the bank accumulates extra reserves in its account at the Federal Reserve, and the Fed buys government bonds. But the details aren’t especially important. At a fundamental level, the government is helping one group of Americans by borrowing from another group of Americans.
[Updated 2020-05-04]
I tweeted this yesterday and got much more response than my usual crickets.
Here's the link to the Most Excellent Plan created by Scott Santens. I like his plan a lot; my only question was, why a (regressive) VAT?
[Updated 2020-05-10]
Paul Krugman posted today on VOXeu.org, "the CEPR (The Centre for Economic Policy Research) Policy Portal", "The case for permanent stimulus". Ha ha, I have claimed him as the 1st disciple of Stability Economics! Here are my tweets.
I'm just thinking that Stability Economics perhaps also implies degrowth - an end to trying to solve all problems through GDP growth. If a stable economy was growing, it would be growing very slowly, and in a very controlled way. Degrowth is one of the main principles both of Doughnut Economics and its offshoot Arrival Economics.
[Updated 2020-05-19]
There was an article in the NY Times today, "Economists Want to Put Stimulus on Autopilot. Congress Has Other Ideas". It talked of stabilizing the economy, which led me to tout Stability Economics in this comment.
I recently did a review/summary of Wray's "Modern Money Theory" in which I concluded that the descriptive part of MMT should be called MMT and the prescriptive part of MMT, which mostly consists of the Job Guarantee (JG), should be called Stability Economics. That seemed to be the thing it was trying to do: to stabilize the economy, creating more jobs in busts and less in booms. Universal Basic Income (UBI) basically has the same function, but without the countercyclical feature. This article also looks at how to stabilize theeconomicseconomy.The metaphor was ballast in a sailing ship. You'd rather have cargo, but when you don't have enough cargo, you have to have ballast to keep the ship stable. So, can we get some academics and
economicseconomists to develop Stability Economics seriously?
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