In this post critiquing Davidson, Galbraith, and Skidelsky's passivity with respect to the long-term debt, I got several interesting responses from post-Keynesian commenters. A lot of it was resources on the "deficit owl" perspective. I spent a little time looking through each, and doing a cursory review of what they call "Modern Monetary Theory" and has also been called Chartalism (really not a strategically developed name, which I'm guessing has more than a little to do with the newer MMT designation!).Most of the emphases of this school of thought are right on target. They specifically highlight the implications of sovereignty for the federal debt. A sovereign debt crisis in the U.S. is not a risk the way it is in Greece because we have the freedom to monetize our debt. Of course these guys also talk about functional finance, stabilization policy, and liquidity preference. This is all very good - it can be hard to get a New Keynesian to talk about liquidity preference sometimes! So the real sticking point seems to be the debt. We agree debt monetization removes the risk of a sovereign debt crisis - this is quite standard analysis and not anything that really distinguishes Galbraith, Davidson, and Skidelsky from Reich, Stiglitz, and Krugman. I think the Krugman point (recently, in a disagreement with Galbraith) is the important point to make - debt monetization provides budgetary flexibility (on top of the already substantial flexibility provided by our credit rating and the nature of sovereign governments), but it ultimately just kicks the can down the road. Problems emerge later in terms of inflation and interest rates, but more importantly real growth rates. Janos Kornai's famous observation that governments face "soft budget constraints" doesn't mean that they face no budget constraints. I read and buy into Keynes, Minsky, and Lerner - but I also read and buy into Reinhart and Rogoff (and, well, Keynes!) on the risks involved.
One intriguing option raised by Joe Firestone in the comment section of the last post is to stop issuing debt instruments and just start crediting bank accounts. He provides this link to that option, and L. Randall Wray discusses it further here. They essentially want to cut out the middle man of the Federal Reserve. I don't know enough about the implications of this, and I'd love to hear more discussion in the comment section, but two thoughts immediately come to mind. First, this would bring an end to independence in monetary policy, which is not a pleasant prospect for most economists. Second, as James Macdonald argues, public debt has historically been an essential element in restraining government. Hoarded treasure (aside from being macroeconomically inefficient) ensures that sovereigns are unaccountable to their citizens. Citizen creditors ensure that their government stays accountable. Cutting out this debt instrument gives a sovereign all the revenue-raising power of government bonds, without any of the risk of nervous creditors restraining policy. Perhaps a robust republic can be maintained in such an environment, but if the Macdonald point is right, the chance of abuses are very real.
OK, enough talk. Time for some links. Thanks to Joe Firestone for sharing most of these:
- New Economic Perspectives is a post-Keynesian blog I've followed for a little while now.
- Warren Mosler's blog
- This is Bill Mitchell's blog. Mitchell is at the University of Newcastle's Centre for Full Employment and Equity.
- Here is an interview of Randall Wray and Bill Mitchell, talking about MMT. This is the first one, there are several more that follow.
- Firedoglake and Corrente post regularly on Modern Monetary Theory. I've pulled the MMT tagged posts here (FDL) and here (Corrente) for your convenience.
- Recently these guys had a "fiscal sustainability teach-in" at my alma-mater, The George Washington University. The website for that event is here. I know a guy that was involved in this (Alex Lawson - big activist/advocate if any readers know of him), so I heard updates from it. It did a lot of important work I think - trying to educate people on why Social Security isn't the big risk a lot of people think it is. Of course, as my comments above suggest, I also think they down played more genuine risks.
- Joe Firestone shares this New Deal 2.0 post with me to "address some of the concerns" about the long-term debt. Of course nothing Wray writes in here is new to me or controversial to me, nor does it address the concerns I have. I'm not worried about our ability to pay back our debt. I understand why public debt is different from private debt. And regular readers can attest to the fact that I'm not shy about running up deficits. The bigger concern for me is the impact on real growth rates. And that, of course, is precisely the point that this blog post ignores. Anyway, I have two other reasons for highlighting this: (1.) New Deal 2.0 is another good site worth following, and (2.) an interesting historical point they make. The only time we've ever retired the debt was in 1835. In 1837 we had a severe depression. Does anyone know if these two events are related? I imagine at the time the federal budget was too small to make this sort of macroeconomic difference, but it's possible. Nothing says "liquidity preference" quite like a sinking fund. Anyway - just a query. Joe also provides, this, this, this, this, and this to "address my concerns".
- I'll also share once again the Levy Institute's website. This group does a lot of work with Minsky's theories, and also has strong post-Keynesian influences. This is their program on Monetary Policy, and this is an interesting recent working paper from them outlining what "fiscal responsibility" should mean. I thought this was an especially good passage. It highlights the MMT argument, and it provides an interesting philosophical justification and explanation of the role of government:
"If the government acts not as a self-interested individual, but in order to allow citizens to achieve their intended expenditure decisions, it must engage in policies that support private sector decisions in such a way that they lead to public good. It should act to coordinate and offset the incompatible combination of firms’ and households’ intentions. If households follow the rule of virtue and seek to save too much, then the government should run a fiscal deficit that is just equal to the shortfall between households’ desires to save and firms’ expectations of profits. By doing so it can allow each individual to achieve his desired objective. But, it also avoids the loss in income that would result from the mismatch. Here the government can intervene to make private vices into public virtue by encouraging prodigality when the private sector desires to be frugal. Government prodigality is the equivalent of supporting public virtue! This is the fiscal policy of a responsible government, responsible to insure that private sector decisions can be achieved rather thwarted by the law of unintended consequences."
Posts
Daniel,
ReplyDeleteGood series of posts on MMT. Thanks for the honest attempt at understanding where we are coming from.
Just wanted to add that long-run deficit projections in the US are driven by two things--private healthcare costs and interest.
Randy Wray has a nice paper discussing the long run ability to provision real goods and services for the future here http://www.levyinstitute.org/pubs/wp_468.pdf
He's also done several pieces at Levy and the KC blog on healthcare proposals.
Stephanie Kelton did a series of articles on healthcare here: http://www.cfeps.org/health/index.htm
Regarding rising interest costs, I dealt with that issue in detail here: http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf
You might also look at Randy Wray's blog post at ND20 and also the discussion he and Joe had with another commentator (who raises ridiculous points, but the replies by Randy and Joe should be useful to many) that covers some additional relevant points here: http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/
Finally, given that you noted you buy into some of Reinhart/Rogoff, you might be interested in Randy and Yeva's critique here: http://www.levyinstitute.org/pubs/ppb_111.pdf. Bill Mitchell has dealt with them a few times, as well, such as here: http://bilbo.economicoutlook.net/blog/?p=8322 and here: http://bilbo.economicoutlook.net/blog/?p=7567
So, given these and a number of the items Joe links to, one can disagree with the details, but it absolutely cannot be said that MMT'ers haven't concerned themselves with long-run deficit issues (not that you said otherwise, but just clarifying here) beyond just basic solvency and so forth that you seem to think everyone already agrees with (I disagree completely on that in practice, but you're correct regarding what the theory actually is).
OK, from your "have I found my leftists" you clearly do think that MMT is just saying "there's no solvency issue." A few things:
ReplyDelete1. Don't confuse blog posts dealing with the solvency issue with the entire spectrum of issues we've done research on over the past 20 years. The solvency issue has been front and center in public discussions the past several years, so there's been a lot of focus on it from us. From our perspective, if you get the debate off of solvency and onto inflation, then we've won the first half of the battle. As you note, in theory NOBODY should disagree that a sovereign currency issuer can meet its payments--even neoclassical theory says this. But that point's been largely missed in the public debate, particularly when comparisons are made to the US and, say, EMU nations.
2. We're completely prepared for the second half of the battle on inflation, etc. (again, given 20+ years of published research). See, again, the ND2.0 post and comments I linked to as well as Bill's post here: http://bilbo.economicoutlook.net/blog/?p=10554 for a quick overview. Bill's recent book is quite thorough on the inflation issue. Furthermore, my paper linked to above describes how debt service--the primary issue in neoclassical theory regarding fiscal sustainability--is a policy variable for sovereign currency issuers. Finally, as you've cited yourself, we have a fairly well-developed understanding of "responsible fiscal policy"--we're not in favor whatsoever of the proposition that deficits are never a problem.
3. Behind every argument related to the "deficit problem" (aside from basic concerns about efficient vs. inefficient spending, appropriate taxes to cut, and so forth, which are perfectly legitimate) is generally some sort of flawed understanding of the monetary system. Solvency? Cannot be forced upon a sovereign currency issuer. Deficits reduce saving? This demonstrates a lack of understanding of basic national income accounting. Deficits crowd out funds available for private investment? This demonstrates a lack of understanding of basic bank operations. Deficits raise interest rates? This shows misunderstanding of basic reserve accounting. Monetary policy via QE instead of fiscal policy? Again, demonstrates basic misunderstanding of the monetary system.
Hope that helps you get a bit of understanding of where we are coming from.
I'm going to digest all this a little more.
ReplyDeleteI do want to clarify one thing - when I say "everybody gets the solvency issue", I'm really thinking of the Keynesians that you all are distinguishing yourselves from. The policy makers largely don't. Non-Keynesian economists largely don't. The public largely doesn't.
So I'm trying to get a grasp on what differentiates you guys from, say DeLong and Krugman. As far as I can tell it's only the real growth effects of a very large debt, and a little bit of enthusiasm. Krugman did not disagree with Galbraith because he doesn't understand the prospects of federal insolvency.
And the differences may become clear to me as I read more, but right now I'm not exactly sure of what the difference is except for association, enthusiasm, and emphasis.
Thanks for visiting the blog, btw!
ReplyDeleteI'm with you on the "everybody agrees on solvency" if by that you mean in theory, even monetarist, new classical, new Keynesian, and so forth, but certainly Keynesian, writings all say this. It's the basic point in every graduate monetary economics textbook. But the public debate has been different, and even some economists who should know better have brought up solvency.
ReplyDeleteThere is, however, a BIG difference b/n us and Krugmean, DeLong, etc. Namely, they would also argue that deficits have negative effects like crowding out, reducing national saving, raising interest rates, and so forth. Relatedly, they also believe in the money multiplier (or, at least that banks lend reserves) and that QE can actually work. We argue none of this is true and that even these Keynesians have a very mistaken understanding of how the monetary system actually works. We argue that the ONLY issue is inflation, and then, as I've noted, we've addressed this issue, as well and made clear what "responsible fiscal policy" would look like.
They believe those things under what circumstances, Scott? They've explicitly argued against those results in current circumstances, particularly the concern about crowding out.
ReplyDeleteI look forward to continuing to read the material.
Well, if they believe them under ANY circumstances, then we strongly disagree, aside from recognizing real constraints on the economy.
ReplyDeleteFor a few links on Krugman and DeLong in particular:
http://moslereconomics.com/2008/12/02/krugman-on-deficits/
http://moslereconomics.com/2009/06/01/niall-ferguson-no-one-has-the-faintest-idea-when-the-economy-will-recover/
http://moslereconomics.com/2009/01/12/krugman-again/
http://moslereconomics.com/2009/11/24/krugman-on-the-phantom-menace/
http://moslereconomics.com/2009/10/13/bernanke-on-lending-reserves/
http://moslereconomics.com/2009/10/08/krugman-on-monetary-creation/
http://moslereconomics.com/2009/10/02/krugman-mission-not-accomplished/
http://old.nationalreview.com/nrof_nugent/mosler_nugent200403090847.asp (see links within)
http://bilbo.economicoutlook.net/blog/?p=9751
http://bilbo.economicoutlook.net/blog/?p=8788
http://bilbo.economicoutlook.net/blog/?p=7777
http://bilbo.economicoutlook.net/blog/?p=6617
http://bilbo.economicoutlook.net/blog/?p=6122
http://bilbo.economicoutlook.net/blog/?p=5846
I'll stop there for now. There's a lot that we would agree with that Krugman/DeLong have been saying the past 2-3 years, but if you go back to the Bush deficit years, we would disagree with a lot of what they said--we weren't really blogging then, though.
And those links just get specifically at Krugman/DeLong (mostly Krugman). Other "Keynesians" like Orszag or Rubin, for instance, are far more problematic (which I detailed "Interest Rates and Fiscal Sustainability" that I linked to above). And other "New Keynesians" like Taylor or Mankiw are still much further from our views.
Best,
Scott
For a more direct, quick approach to MMT, try these:
ReplyDeletehttp://cas.umkc.edu/ECON/economics/faculty/Tymoigne/Econ%20201/3%20Views%20Compared.pdf
http://bilbo.economicoutlook.net/blog/?p=8117 (see links within, too)
Regarding the final quote in the original post.
ReplyDeleteI wish they wouldn't say "saving." It is quite possible for Keynes' paradox of thrift to hold when total savings are actually falling.
For simplicity, suppose that people either save in bonds or money. Saving bonds transfers spending from consumer goods to producer goods, with total spending remaining constant. However saving money may not transfer spending from consumer to producer goods if banks do not extend credit proportionally. It is when this mechanism for coordinating spending on consumer and producer goods breaks down that total spending declines and recession sets in. Money can become the "loose joint" and break the link.
It is not savings per se that are the problem, but a sudden and unexpected increase in savings held in money. Therefore, it is possible that total savings (money + bonds) actually declines while savings in money increases. It seems to me this would to instigate Keynes' paradox of thrift while totals savings is in decline. In other words, "paradox of thrift" is a misnomer, and saving per se is not the problem.
Lee Kelly -
ReplyDeleteGood thoughts, and I think it's even more complicated than that. What we're really talking abotu with the paradox of thrift is a demand for liquidity. Different bonds have different degrees of liquidity that they can provide to savers. So you might not even have a change in the demand for money per se, but a shift in the demand for liquidity that changes the "liquidity content", you might call it, of bonds.
Anyway - I'm still learning about this approach. Often you'll find that seemingly problematic propositions are a result of a different way of thinking about vocabulary and concepts. If nothing else, it's an interesting learning experience to read more of the MMT perspective.
"Desired saving" in any form is a decision not to spend. There is no necessary connection between saving in "bonds" or "non-monies" and extending credit. Credit is created on demand, assuming would-be borrowers are credit-worthy and assuming capital is sufficient. There is no need for prior saving to "fund" that--and, again, a decision not to spend, however it manifests, reduces the demand for credit in the first place. For example, a decision NOT to borrow to spend while your stock portfolio is rising is less stimulative than the decision to borrow and spend under the same circumstances. The former is an increase in desired saving out of existing income, the latter is a reduction in desired saving out of existing income. How the saving was manifested was irrelevant.
ReplyDelete