Monday, February 20, 2012

MMT and its discontents


The Washington Post had a substantial profile on what is now termed Modern Monetary Theory (starts with Jamie Galbraith, and then goes on to the Kansas version of post Keynesian economics). A few reactions in the blogosphere. Two worth noticing are by Dean Baker and Jared Bernstein that provide qualified support.

Dean suggests that beyond fiscal deficits stimulus should also come from monetary policy (lower interest rate), and a more depreciated dollar. My guess is that, at least the Kansas MMTers would be fine with both, but suggest that lower rates of interest are not much in play now. But from what I understand a depreciated dollar has been seen as part of a solution by most progressive economists. Randy Wray, for example, is certainly less concerned with the size of a trade deficit than Dean, since the US is the issuer of the key currency [I have less confidence on flexible exchange rates as a way of solving balance of payments constraints in developing countries, but I'll leave that for another post].

My concern with Dean's notion of a more devalued dollar, which is generally fine and will not lead to the demise of the dollar in the near future, is that for the workers with low wages that depend on cheap imports at Walmart it implies higher prices and lower real wages. A boost to increase real wages would be necessary [see Jamie on that here]. So better income distribution should be the most important channel to boost consumption on a sustainable way.

Jared Bernstein fundamentally adds that taxes on the wealthy should be increased. Which he argues from a political standpoint, and I think it is quite reasonable, since that is one way (besides hiking minimum wages, and repealing right to work and other anti-labor legislation) to improve income distribution.

On a more personal level, my problem with the WaPo piece, and the general discussion of MMT, is that for the most part it sees MMT as just a policy program (the Kansas one is, for example, an Employer of Last Resort of some type, which is fine with me, by the way), and does not separate the theoretical discussions from the policy stuff.

Endogenous money, chartalism, and functional finance, are relevant because they fit the theoretical framework of a coherent heterodox alternative to the mainstream based on Keynes' Principle of Effective Demand [for a full alternative you need also long term pricing; in Kansas your man for that would be Fred Lee]. For my views on that go here. I think, hence, that a coherent alternative to the mainstream, beyond Keynesian economics, requires a good dose of the old and forgotten methods of classical political economy.

PS: My point about theoretical versus policy matters is driven by the fact that on certain policy issues, like the need for further fiscal stimulus, New Keynesians like Krugman and DeLong would be fundamentally in agreement with MMTers.

8 comments:

  1. I am not an expert on this, but, for what's worth, I believe you are pretty close to the mark.

    Regarding interest rates, I believe the main concern among MMTers is that its effects can be uncertain, as argued by Keynes. I am not sure I fully agree with them on this.

    Certainly interest rate changes can have uncertain effects, what I doubt is that they are as unpredictable as MMTers seem to believe. Baker himself has made a fairly good case that inflation targeting has been used quite effectively to keep wages low and unemployment higher than necessary.

    Curiously, some MMTers would probably concur that inflation targeting has been used this way, while maintaining their general skepticism about positive uses of interest rate manipulation.

    At least some MMTers would probably agree with Bernstein on taxes as a redistributive tool. If I am not mistaken, Bill Mitchell would be one of them.

    I, as perhaps is your case, think that MMTers haven't considered in full detail flexible currency exchange rate regimes in developed countries. Particularly because developing nations often find it impossible to obtain financing in their own currencies. If their currencies fluctuate freely, they become vulnerable to changes in the exchange rate.

    In my view, the two main limitations in the article is that (1) it did not emphasize the role of the State as creator and issuer of a fiat currency. Taxation is also useful here, as it creates demand for the currency (which is the only means accepted to pay taxes).

    And (2) the role of the Government as employer of last resort and the Job Guarantee, which I believe the article did not mention at all.

    Recently, these two limitations have become very apparent among MMT followers themselves, some of which consider them either accessories or undesirable.

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  2. By the way, I forgot to add: Prof. Fred Lee's page is just sensational.

    A wealth of valuable material there.

    Thanks for linking to it!

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  3. I, as perhaps is your case, think that MMTers haven't considered in full detail flexible currency exchange rate regimes in developed countries. Particularly because developing nations often find it impossible to obtain financing in their own currencies. If their currencies fluctuate freely, they become vulnerable to changes in the exchange rate.

    I suspect they've analyzed this case in greater detail than you know, since you appear to have missed some extremely basic concepts.

    The entire point of MMT is that nations with their own currency have no need to borrow in order to spend. A nation, sovereign in its currency, has zero need for financing. Exchange rate fluctuations have nothing to do with it.

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  4. Unkown, my guess is that in your quote Magpie mean in developing countries. And there lies an important difference. Yes if you have debt in your own currency there is no problem, since debt is paid in another toke you control, but in developing countries the international division of labor means that you must import capital and intermediary goods, if you want to catch up. Which means you must buy things with foreign money (today dollars). And in that case, just devaluing to get less imports won't do. That's why capital controls, accumulation of reserves, and other mechanisms to manage the foreign exchange markets are needed.

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  5. If you liked Fred's page go also to Fabio Petri here http://www.econ-pol.unisi.it/petri/

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  6. At Unknown and Naked Keynes

    It should have been "I, as perhaps is your case, think that MMTers haven't considered in full detail flexible currency exchange rate regimes in UNdeveloped countries" as NK understood.

    NK,

    Will have a thorough look at it! Thanks.

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  7. My concerns about MMT are (1) that they establish the core claim of the lack of financing constraints on sovereign borrowers in an overly deductive way and (2) they sometimes sam to slip from that claim to an implicit (or explicit) argument that liquidity constraints do not matter for the economy at all. The second criticism is more fundamental: It means they've lost sight of one of Keynes' central insights.

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  8. On 1, not sure exactly what is overly deductive. Default in a currency in which you control the supply is by definition impossible, since you can always monetize. There are constraints to sovereigns, but of a different nature. For example, in a developing country people maybe unwilling to use the domestic currency, and the State has no power to enforce tax payments other than the very poor in their domestic currency (a sales tax). The domestic currency is just a toke for the poor. Real money is foreign currency. I would argue that many in the MMT movement are from developed countries and are less aware of developing countries problems. If modern money is chartal, one must take into consideration that all States are equal, but some more equal than others. On 2, I'm not sure that's true. I would be surprised if somebody in the MMT movement would suggest that private agents cannot be constrained by liquidity. The State can't, but that might not be sufficient to get you out of a recession.

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