I've struggled to wrap my head around MMT. I'll definitely read this paper in full.
What I've gleaned so far:
One big primary difference between camps (pro, con) is emphasis on monetary policy versus fiscal policy.
As a layperson, it seems to me that all involved are still struggling with the metaphors, the narrative. What is the Ray Dalio level explanation?
Worse, fundamentally, I don't think people yet agree the definition of "money". On this, David Graeber's book "Debt: The First 5,000 Years" blew my mind. Methinks this debate (and rhetoric) would become more constructive if the belligerents stopped wrestling with notions of money as a thing -- to be minted, exchanged, and hoarded -- and squinted a bit to think instead about debts.
So I'll now share (again) my very draft metaphor:
Government spending is a loan, which is repaid thru taxes.
After all, banks create money thru issuing debt, and governments are the biggest banks of all.
With this frame, addressing inequity then becomes a matter of who receives those loans and their consequent tax burden.
there is also an ethical question of who gets to decide how loans are spent. The traditional ethos of the United States, at least, has been of 'no taxation without representation' - you must be able to have a say in how the money taken away from you is spent. It is, of course, impossible for future generations to go back in time and vote for how the borrowed money they are responsible for is spent.
Money is what debt is often denominated in. Money being a good which is widely accepted for trade isn’t the same as an obligation. I may have dollars but that doesn’t mean anyone is obligated to give me anything for them, and what they decide to trade for them is entirely up to them.
One of the authors of the reviewed textbook has a three part response to this paper.
>In this blog post, I provide a response to the specific points made in that paper and conclude that if it aims to be a fair ‘guide’ to MMT (even from a critical perspective) then it fails badly.
>In fact, his readers will come away from reading his paper with a very weird version of our work. I hope they are curious and come back to source to learn how they have been mislead – intentionally or otherwise.
>I hope that Greg Mankiw changes his “Skeptic’s guide” when he presents it in the coming days at a major conference in the US.
>He has clearly misrepresented our work in significant ways and that should not be tolerated in an academic milieu.
> According to this view, incomes policies, such as government guidelines for wages and prices, are a solution to high inflation. MMT advocates see these guidelines, and even government controls on wages and prices, as a kind of arbitration in the ongoing class struggle. (MW&W, pp. 264-265)
Is the federal minimum wage an example of this? I'm a little confused, as I hear a lot of "raising the minimum wage will only cause more inflation," which seems to be completely at odds with MMT. Is this because prices aren't also controlled?
Partly it's because the issues are not orthogonal (raising minimum wage will increase inflation, but it may also result in a shift in wealth towards working people).
MMT is a pretty scary concept - 'wage controls, price controls' etc. etc. it's all just the same sad stuff played out around the world in the last century.
It's basically 'central bank socialism' i.e. take over control of the means of production by controlling the source of money.
It's 'more than that' and it's worth discussion, but it's pretty scary to think how some people would like to employ this in policy.
This comment seems to have no connection whatsoever with MMT. Saying that "this is a possible thing that can happen if you model a system this way" is hardly the same as "this is an inevitable conclusion and the moral imperative of this model."
From Wikipedia: "MMT argues that governments create new money by using fiscal policy." [1] i.e. "government prints money to do stuff".
So it's not a 'conclusion' or 'moral imperative' though, it's a simple fact of the matter: the socialization of the economy through the control of the monetary system.
As a secondary point, we can argue about possible ideological implications, in which case, I would say 'this is just Socialism', and we can debate that, but it's besides the point.
Another telling quote from the same article: "In this theory, sovereign government is not financially constrained in its ability to spend; the government can afford to buy anything that is for sale in currency that it issues; there may, however, be political constraints, like a debt ceiling law). The only constraint is that excessive spending by any sector of the economy, whether households, firms, or public, could cause inflationary pressures. "
Again: the government is completely free to control any assets it wants to control (as long as they are denominated in local currency). The constraints would be 'politics and inflation'.
> Again: the government is completely free to control any assets it wants to control (as long as they are denominated in local currency). The constraints would be 'politics and inflation'.
Yes. This is what a financialized economy does, and is why the British were so focused on creating a financialized economy in their colonies.
> I would say 'this is just Socialism'
I think where you're confused is that you're thinking of MMT as a policy prescription for how the economy should be managed (socialism!). It's not. It's a description of how fiat currency works in practice without the fig-leaf of gold reserves or the like. Trying to look at it as some kind of socialist propaganda is particularly weird because this theory is much more relevant to describing capitalism than to communism.
"fiat currency works in practice without the fig-leaf of gold reserves or the like"
The practices employed by Central Banks are not fig leaves - those rules are how we define money and are maybe the most important rules in any country.
Those rules give credibility to the system, without which, it would collapse very quickly.
When we move remove the central bank and politicize money, then, the economy is socialized by definition.
That's not 'propaganda', that's just 'what it is'.
"The practices employed by Central Banks are not fig leaves - those rules are how we define money and are maybe the most important rules in any country."
Disagree with almost everything MMT proponents advocate for. But their ideas about taxation I find interesting as a philosophical insight. That is - since a fiat-issuing government can print money at will (which they routinely do), taxes' main purpose cannot be to finance its operations. It is to create demand for the currency.
Creating demand for USD was also the reasoning behind the petrodollar agreement (that all OPEC oil purchases must be made in USD). That agreement was very successful in generating not only local but worldwide demand for USD.
Yes, it seems pretty straightforward to reason about the consequences:
Money becomes a liability rather than an asset. Individuals and entities will attempt to exchange money for real assets, triggering a rapid devaluation. If that currency was widely used, it won't be anymore, no one will want it. Governments can and probably will try to force people to use it for a time but it won't work long term.
Negative interest rates are basically just another way to print money. This devaluation has not only happened many times throughout history, I believe it has happened to every reserve currency used in the past.
Interesting. It hardly matches what I know of chartalism at all. Maybe my understanding isn't really MMT. (Also, odd that it's regarded as a new thing, since chartalism goes back a good century.)
I do take exception with questioning chartalism's validity based on the workings of our system with a federal reserve bank. The existence of a federal reserve is a choice, and one made to limit the ability of the government to print money.
My understanding is based on a flows among parts of a financialized system, that is, one in which a large part of the interactions among people have been converted to exchanging units of a currency issued by some institution with a near-monopoly on violence. This happens usually by charging a "hut tax" on all households that everyone is required to pay in the institution's currency, and you can only get it by working for the institution. It can be an indirect hut tax. In company towns, the only access to necessary goods and services like, say, food was via the company store, and you could only purchase there via company scrip, which you got by working for the company or by transacting with someone who did. The English did this in Africa several times, the French did it in Madagascar, etc.
Once you have a financialized system, if we look at the flow of dollars around, you have dollars spent (created) by the federal government, dollars taxed (destroyed) by the federal government; you have dollars loaned (created) by banks, and dollars received (partially destroyed) by banks; and you have dollars transacted without loss among non-financial actors.
Most of the money created is created by banks in the form of loans. The bank creates $X as a loan to someone. That person uses the $X to do something that hopefully grows the economy, and then pays back $X + $I (interest). The bank destroys the $X again, and keeps the $I (which they use to pay employees, cover loans that default, disburse as profit, etc.).
But where did the $I come from? It could have come from dollars created by other commercial banks, but in the end those dollars get destroyed or covered by assets. Eventually, all new dollars have to come from the issuing government. Which means every time the economy grows, you either deflate the currency (fewer dollars chasing more goods) or increase government "debt" (put more dollars into circulation than you take out via taxes). In any growing economy that doesn't have deflation, the government must accrue debt.
If your currency is the reserve currency, it's even worse, because basically you have to accrue debt for the whole world's growth, and pay interest on it. In exchange you purchase certain powers over the world's economy.
This, for me, is the crucial point of MMT: reporting federal debt isn't the right number, nor the right number to cap. You want to the ratio of increase in federal debt to increase in GDP.
To go with that crucial point, you have a crucial question: when you have economic growth, reflected in the currency, whose hands do the new dollars go into?
“The most important conclusion reached by MMT is
that the issuer of a currency faces no financial constraints. Put simply, a country that issues its
own currency can never run out and can never become insolvent in its own currency. It can make
all payments as they come due.” As a result, “for most governments, there is no
default risk on government debt.”
Don't underestimate how dangerous this statement is.
It's definitely an interesting intellectual approach to some interesting ideas, but pragmatically, it boils down to the same thing: debts don't matter, so just print money.
It's immediately suicidal for any non-large nation, obviously history shows this, because nobody will want the currency, hyperinflation ensues, economic crashes etc..
For larger, more established nations with currencies that have externalizations, it's a very risky game to play.
Remember that government is under constant money pressure. 'The Budget' is 90% of the real debate in governance.
Currently, they can tax, or raise debt. The former is politically difficult, the later - they have to face market reality.
MMT basically says 'just print money'. It's basically using the nuclear option to take over the entire economy by undermining the system we use to measure it: money.
Money really drives incentives, distorts realities. I have no doubt so many politicians 'think they know better' and that 'if only they had several more billion the country would be so much better', it's a deep instinct. We need realities to counterbalance our fantasies however well intentioned.
Here are some examples of hyperinflation in the last century, at the end of the day, they all have the same root cause [1].
Edit: note that we are engaging in an MMT experiment right now. During this 'giant crisis' everyone is hosed, and so everyone is doing 'funny money things'. The market understands the situation however, and interprets such actions as 'responsible actions during a crisis' - but nevertheless a crisis. So the debt overhang is a real problem, but it can be excused as rational.
Politicians wanting to do the same spending (equivalent to 20 years deficits, like here in Canada) on some 'National XYZ Project' will not be treated the same way, unless that National Project boils down to 'getting money out of the ground i.e. Oil'. In some developing nations, 'accepted, obvious infrastructure' investments like electricity and roads.
The Fed did a little bit of this in 2008 when they took a zillion in bad mortgages onto the balance sheets. It's 'pain free' in the short term, but the moral dilemma really exists: the market basically accepted the failure of banks - and - all the people taking big mortgages and bailed them out. Who would have been the 'winners' of a housing crisis? Well, renters for one - as long as they kept their jobs. But the crisis was so big, socialization was the only answer.
I think it should be looked upon like a Hospital stay: pumping the patient full of drugs is helpful in a crisis, but said drugs are plainly not helpful for ongoing development of that individual. Proponents would say 'it's like Tylenol' I would say it's more like 'Morphene'.
What I've gleaned so far:
One big primary difference between camps (pro, con) is emphasis on monetary policy versus fiscal policy.
As a layperson, it seems to me that all involved are still struggling with the metaphors, the narrative. What is the Ray Dalio level explanation?
Worse, fundamentally, I don't think people yet agree the definition of "money". On this, David Graeber's book "Debt: The First 5,000 Years" blew my mind. Methinks this debate (and rhetoric) would become more constructive if the belligerents stopped wrestling with notions of money as a thing -- to be minted, exchanged, and hoarded -- and squinted a bit to think instead about debts.
So I'll now share (again) my very draft metaphor:
After all, banks create money thru issuing debt, and governments are the biggest banks of all.With this frame, addressing inequity then becomes a matter of who receives those loans and their consequent tax burden.