It's like a caricature met a caricature, they ********ed, and out came some weird practical joke. Or something.
This thread is why this is the world's greatest politics forum. I sometimes post threads about a concept anticipating a really bad ratio...people will read it but there will be little or no discussion. I do it anyway because I figure most of y'all will appreciate knowing about something like MMT when it pops up as a topic in the next few years. But in just a couple of days, we're over 75 freakin' responses, and almost all of them are really good. Honest to God, the discussion here is probably better than you'd get in a random group of Democratic congressmen. A random group of GOPers would feature 70% exploding heads, 20% catatonia, and 10% discussion. You make it sound so reasonable, but it still blows my mind.
It's the "if" that's the problem. When you attempt to deal large amounts of money, it makes the exchange rate move. You are going to be dumping lots of maybe-not-very-desirable local money on the market looking for large amounts of desired money, and when you are talking national debt levels of money that isn't easy. You can wreck your money's exchange rate really easily. And this has bigger repercussions than just abstract-sounding numbers. That money represents things of value in that nation. The reason someone might want lots of local currency is to buy local businesses or (non-oil) resources. You have to trade things of value to make that exchange happen. If your nation doesn't have any physical thing others want, then you are stuck.
The basic tenet of MMT is instead of the Fed having the power to change interest rates to control inflation, that power is transferred to Congress who would be required to control inflation by cutting or raising taxes in response to inflation. The other part of the one sentence I read says that in order for MMT to work governments who use it need to act like they aren't: in essence, they need to NOT print money willy-nilly lest they spook the markets and the whole thing comes crashing down. But let's go back to the raising taxes part: this is fundamental to the success of MMT. It's hard enough for Congress to raise taxes to pay for something people can actually understand (health care, etc.). It's quite another thing to be able to justify a tax rise when the need is to ensure we don't overshoot an inflation target. The Fed's advantage is they can raise rates quickly to address inflation (or lower them if necessary. How agile do you think Congress will be with that responsibility?
Actually, we are doing that. You can tell because we still have a strong dollar and don't have runaway inflation. That doesn't mean we do it well, but having the mental model of a budget gives a pretty decent nudge towards behaving the right way. Well, Congress' agility is zero these days, but that's political instead of intellectual. Not that I disagree with your point, but it might be easier if the vote is over something more algorithmic instead of party based. But we'd probably just get different party ideologies from it.
Yes. https://theweek.com/articles/825884/big-question-about-modern-monetary-theory-everyone-missing "This intricate debate is about the main merits of MMT, an economic school of thought which has received wide attention for its dismissal of the need for taxes to pay for new spending. However, there is an important question which has to this point not been raised. The MMT advocates say that inflation should be controlled through fiscal policy, instead of monetary policy conducted by the central bank as is current practice. In other words, if prices start rising, we can keep them in line by raising taxes." http://nymag.com/intelligencer/2019...eory-doesnt-make-single-payer-any-easier.html So while a conventional economic thinker might say you establish a new government program and levy taxes (now or in the future) to pay for it, an MMT thinker would say you establish a new government program and the government prints the money to pay for it. But that does not mean the MMT thinker thinks the new program is free! The government is not constrained by its ability to obtain dollars, but the economy is constrained by real limits on productive capacity. If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation.
Stepping back, this sounds reasonable to me. Stimulate the economy with tax cuts at the bottom, slow it with tax increases at the top. It's probably a sounder policy than what we have done in this cycle, which is stimulate the economy with tax cuts at the bottom, and then stimulate it again with a tax cut at the top. But it's failed politics, because the American public wants tax candy followed by tax candy, not tax candy followed by tax vegetables.
It’s not just because of the specifics in the US. Using tax policy as an economic stimulus works on paper, but i’d argue that politically it’s impossible to do it right in a democracy. You can at best use it in limited fashion when your economic objectives line up with your political objectives. Maybe somebody like a Mussolini, with total control of the state, would be able to manage it well. But only if he remained extremely disciplined.
@ceezmad Once again, and maybe i'm too nitpicky about this, when you write "this is why MMT is very limited on what countries could try it", I just disagree with the phrasing of this. Every country in control of its own currency IS already doing it, they are already spending money into existence whenever they spend money, so there is no question of whether they should adopt MMT. Inflation is a real constraint, so very ambitious government programs are going to be more difficult in developing countries than in the US - the more those programs build up domestic industries that make them less dependent on imports the less they will need to worry though in the future about exchange rate constraints. Perhaps the number of the countries that could do some of the more ambitious policy proposals that MMT economists propose are limited because of inflation constraints - this is ultimately an empirical question. It should be noted though that there have already been attempts at the most ambitious of MMT's policy proposals in developing countries, albeit on a limited scale, namely the job guarantee, with some level of success and without causing excessive inflation. With regards to FED operations, I guess what you would need to differentiate is the procedure of the federal government spending money (=fiscal policy), which is administered by the US treasury and operationalized by the federal reserve system and the two FED tools that are commonly seen as the tools of monetary policy - open market operations and discount rate lending. Fiscal policy creates US$ through keystrokes in exchange for a real good or service purchased by the US government, and leads to the permanent (that is, permanent until extinguished by means of paying taxes with it) creation of a financial asset called the US$, which is a non-interest paying debt to the US government. Open market operations are the exchange of an interest bearing asset (treasury note) for a non-interest bearing one (US $). Both of those are debts to the US government. Finally, lending at the discount window keystrokes US$ into existence into the account the commercial bank holds at the FED, while also creating an asset on the asset side of the balance sheet of the fed - the loan liablity of the commercial bank. Where the article you are quoting is misguided is when they are arguing that the central bank is different from commercial banks in that commercial banks have to have the money they are lending it out available prior to lending. This is incorrect. Commercial banks, when making loans, create money out of thin air just like the central bank. What they are creating though are demand deposits denominated in the US$, which is not central bank money. Hence money created by commercial banks through loan creation is not part of the narrow definition of the money supply, but only part of the broader definition. Finally with regards to your question about the foreign debt positions of the US government, I would assume that the article is correct in arguing that they do this in order to get their hands on foreign currency that they can sell if they want to manipulate the exchange rate towards the dollar to some degree. The tenets of MMT would imply that it is possible for the US to default on this debt, in the case they cannot get their hands on the currency in question. well.. not really.. first off, let me reiterate what I already wrote in a previous post: inflation is an increase in prices. Who makes the decision to increase prices? Businesses. It is unfortunate that people have a view of pricesetting for goods and services that is similar to price determination on stock markets, where increases in demand are immediately reflected in a price increase. When businesses are faced with increasing demand, however, they tend to increase production rather than prices. Secondly, and more to the point, It is true that MMTers consider monetary policy to be rather ineffective in managing inflation, but they are also critical of old Keynesian ideas of being able to finetune the economy through fiscal policy. What they are arguing is that taxes and parts of government spending are ALREADY countercyclical in nature. As the economy heats up, tax revenues soar and government spending falls because of a fall in transfer payments - this automatically stymies inflationary tendencies based on increases of income. This effect will be stronger the more government programs there are that are of this countercyclical nature. If you have a job guarantee program, an expanding economy would mean that people will move on from their job guarantee jobs into the private sector, thereby reducing government spending automatically. (see https://www.pavlina-tcherneva.net/job-guarantee-faq for further discussion)
The problems are that tax rates in general don't have a lot of impact on the economy, and tax rates on the very rich have even less. If you graph tax rates vs. GDP you don't get any correlation, if you graph tax rates changes vs. GDP you frequently get a negative correlation, and the most explosive growth in American history took place when the tax rates on the very rich were extremely high (up to 90%). And at best tax rate changes only have an impact in the next year, and after that people get used to it. More important I think is what you spend the money on. If you distribute it though HUD or child welfare, you are going to increase money velocity. If you spend it one something that just sits there, like weapons, you decrease it. But can you imagine the politics of trying to decrease the inflation rate by, say, building up the Navy?
Seems like Congress fails both short term AND long term. Speed and long term planning are truly the Achilles heel of our system of state.
So what is the difference between "Antiquated" monetary theory and this theory, Venezuela is in control of their currency, so they are also doing MMT? So it would be better to put up tariffs to allow the domestic industry to grow, or make sure that government contracts only go to domestic industries? Link? I know there have been limited tests on income guarantees (like Sweden). A while ago in a different thread we talked about Middle Easter countries that give money to their citizens or force companies to save jobs for local citizens, but I have not seen many studies on its effects. So far I am with you. ok, here I got lost, this is how it would work under MMT? Yes this is how I understand the government finances deficit spending. This is news to me, I always understood that commercial banks would have to borrow the money to cover their lending in the inter-bank market. This article will take issue withe the create money out of thin air. http://neweconomicperspectives.org/2013/06/do-banks-create-money-from-thin-air.html And that gets to how this usually ends up with a country defaulting on its debt. (in my experience reading about 3rd world countries problems)
My only contribution to this thread, as it ain't my bailiwick, but thought this was interesting. https://www.nytimes.com/2019/02/12/opinion/whats-wrong-with-functional-finance-wonkish.html
MMT arrives at a diametrically opposed conclusion to Krugman here. Spending increases/ tax cuts leads to creation of central bank money, making central bank money more readily available on the interbank lending market, thereby driving DOWN the interest rate. Consistent deficit spending by the US government without FED intervention would imply a zero interest rate. MMT would argue that the treasury would not need to issue treasury notes at all - it only does so to assist the central bank with its monetary policy. What is frustrating with Krugman is that he seems to agree with the proposition that government can just print money whenever they want to spend (saying, quote, "this is a smart take"), but then, when it comes to the question of treasury debt, suddenly falls back into the notion that the government needs to borrow before it can spend.
How long has Krugman been following your posts? Well, it looks as if policy debates over the next couple of years will be at least somewhat affected by the doctrine of Modern Monetary Theory,
The difference is one of theory, not practice. "antiquated" theory suggests that countries need to tax or borrow before they can spend, while MMT says they do not (and could not, as there would be no money to tax before the government has started spending it into existence). From an MMT perspective, it is not that countries operate according to wrong principles, it is that the view of conventional economists of how government operates is wrong. There are certainly economists that would argue that this is the case, yes. I'm not familiar enough with international trade literature to make a case for this one way or another, the one thing that I do wanna say though is that empirically speaking, there is no country that has successfully gone from an agriculturally based to an industrial economy without some kind of protection for its nascent industries. European countries have done it, the US has done it, and, more recently, the 'Asian tigers' and Latin American countries have done it. http://neweconomicperspectives.org/2009/08/job-guarantee.html (this talks a little bit about actual programs, and has reference to academic articles about them. If you wanna go that far into it and don't have access to them, I can look up the articles and send you them through my university access to the journals) http://bilbo.economicoutlook.net/blog/?p=28845(blog post on india, note though that with the recent change in government in India, the funding for this program is under question) (Argentina) Yes, this is how MMT argues government spending works. No this is monetary policy, not how government finances deficit spending. It is funny that you should post a link to a blog post from the blog of my alma mater's economics department here. I have always found it peculiar that Wray and co. dislike the phrase 'out of thin air' so much, I guess it's because they are more aware of problems with framing it like that to the general public. People would get the view that since banks can just keystroke deposits into existence, that they would as a consequence do that without limits. Note that immediately the next sentence after the part that you highlighted basically confirms what I am saying - "Banks can indeed create deposit account liabilities from thin air". The important point here is that commercial banks are not supply constrained in their lending - they can always create more loans and the central bank will accomodate the demand for central bank money arising out of the increased amount of loans. Lending by commercial banks is constrained by finding worthy (=profitable to the commercial bank) borrowers. Here is a link to a FAQ by the Bank of England: https://www.bankofengland.co.uk/knowledgebank/how-is-money-created Here is a link to an academic article by the Bank of England explaining it in more detail (this is considerably more wonkyish, but has an explanation of how it works using the example of taking out a loan on a house) https://www.bankofengland.co.uk/-/m...tin/2014/money-creation-in-the-modern-economy This last part by the way (how do commercial banks work), as should be obvious by the fact that I'm linking to articles by the Bank of England, is not really controversial anymore - I can find you dozens of statements from high ranking central bank officials confirming that this is how commercial banks operate.
Oh and another time with regards to the inflation question and in answer to one of the critical articles posted here about MMT: https://ftalphaville.ft.com/2019/03...g0BQTwQvZUuMjongCNly1ItjNTNBqyFQKdSyQIPqEB0Dk
Why don't we all start our own banks and create our own money out of air? Because as the article you posted mentioned. Eventually banks run out of air and their magical money making machines stop working. The fed works in a similar way, when the government runs deficits they create money by buying t bills from Treasury, now this is just accounting, they don't have to do so, they could just issue credits with out buying Treasury bills, but the markets may not like it.
To answer the first part of the question - yeah you need a commercial bank license and as the federal government guarantees deposits at commercial banks through FDIC you are gonna get in trouble if you create fraudulent loans without the necessary underwriting (or at least you should, as should be well known this did not happen during the GFC). But with regards to the second part, Hyman Minsky, one of the most prominent precursor economists to the current MMT crop (Wray studied under him) has this famous saying: "Everyone can create money - the trouble is getting it accepted". I can create Spassapparat-Dollars out of thin air and keystroke your account with me in exchange for some kind of service you provide me - but without my promise to convert my Dollars into US$ upon demand you probably won't provide said service to me. Same thing with corporate debt - if it is not eventually convertible into US$ companies will have problems finding people willing to buy it. Deposits at banks are somewhat different in that convertibility into US$ is not guaranteed by private contract (which might be unenforceable if the company goes bankrupt) but by federal law. The eventual point of all this I wanted to make is that there must be something special about money things created by the US FED (and not by someone else, like my Spassapparat-Dollars) if everyone is happy to accept debts from other people as long as they are paid back in the US$. And from an MMT perspective, this special ability of the US$ is that it can be used for the payment of taxes to the federal government. Taxes, beside their usefulness in extinguishing money and therefore preventing inflation, therefore have their second main use in creating demand for government money.