In the end, my study of MMT led me to find some common ground with its proponents without drawing all the radical inferences they do. I agree that the government can always print money to pay its bills. But that fact does not free the government from its intertemporal budget constraint. I agree that the economy normally operates with excess capacity, in the sense that the economy’s output often falls short of its optimum. But that conclusion does not mean that policymakers only rarely need to worry about inflationary pressures. I agree that, in a world of pervasive market power, government price setting might improve private price setting as a matter of economic theory. But that deduction does not imply that actual governments in actual economies can increase welfare by inserting themselves extensively in the price-setting process.
I prefer my own analysis of MMT as a claim that government can run an unlimited Ponzi scheme.
The best analysis of the financial outlook for the U.S. government comes from the Congressional Budget Office. And some experts believe that the CBO reports show that the government will not keep all of its promises.
If these experts are correctly interpreting the CBO projections, then the U.S. government is running a Ponzi scheme. As with any Ponzi scheme, the collapse, when it comes, will be sudden and unexpected.
In any Ponzi scheme, the fact that it has not yet collapsed is by no means a guarantee that it will never collapse. In fact, the longer that a Ponzi scheme can be sustained, the more catastrophic will be its collapse.
My guess is that Mankiw had to reach to find this economic interpretation of MMT. I am reminded of Paul Samuelson claiming that the only way most economists could reproduce classical and neoclassical monetary theory was to think “If I were a jackass, where would I go?”
I predict that no devotee of MMT will agree that Mankiw’s interpretation is the correct one. I fear that MMT is deeply irrefutable, because there will be no agreement about what it means.
That sort of irrefutability is not a unique feature/bug of MMT. I have written,
Keynesian economics has always eluded a precise definition. The controversy over “what Keynes really meant” that began as soon as The General Theory was published remains active and unsettled. This poses a problem for those of us who would attack Keynesian economics. There is usually a rebuttal available that says “You are criticizing a straw man. What Keynesians really believe is . . . ”
You should read that essay. It is probably my best writing on the subject of macroeconomics and PSST.
Michael Woodford says that quantitative easing done concurrently to federal fiscal deficit is a helicopter drop. And a helicopter drop seems really close to MMT (seems the same to me).
So despite all the sneering and debating, MMT has already been policy. By the way, the Federal Reserve just printed (digitized) up another $400 billion to buy Treasuries in the last couple months. No one seems to care that the Federal Reserve is printing money to buy bonds while the Treasury is issuing bonds.
But we are against MMT!
One might even posit that the United States has maintained a military empire through MMT, just as Japan did during the Great Depression (and thus sidestepped the Great Depression while other developed nations mouldered).
Presently, the US economy is doing better than the European economy, which must operate under ECB-ukases regarding austerity.
Interesting question: have ECB or IMF austerity policies ever worked anywhere?
So much this. New trillion dollar deficits as far as the eye can see. The fed is expanding their balance sheet. Isn’t it supposed to be contracting? Fed lowering interest rates. If this isn’t mmt…
“Keynesian economics has always eluded a precise definition. The controversy over “what Keynes really meant” that began as soon as The General Theory was published remains active and unsettled. This poses a problem for those of us who would attack Keynesian economics. There is usually a rebuttal available that says “You are criticizing a straw man. What Keynesians really believe is . . . ”
Is this essay part of your PSST book?
History indicates the entitlements collapse into a meeting of the elders when unsustainable, usually a last minute meet up. The ins and outs are adjusted and we move on to the next collapse moment. The MMT issues is about the right to coin and the 14th amendment on restrictions of that right. But whatever remains of the right gets exercised by the new generation.
We are stuck with both, an MMT moment and a partial collapse of the entitlements. We have done this before, more than once.
When someone says entitlements cannot be paid, it seems to me they are indicating they believe the economy is a zero-sum game. But the economy can grow and in fact usually grows if demand is present. If people with entitlement income spend their money, the economy will provide the goods and services.
Sure, there is such a thing as maximum output and in demand-pull inflation. But show to me anywhere in the world an industry that is not meeting its demand and in fact most industries suffer from overcapacity.
We do need to eliminate property zoning in the United States so as to free up housing supply.
We can an will do a lot for things, but history at least rhymes and our MMT moment is on the way. After the MMT we will adjust entitlements a bit.
We did it this way the last two times. It works, we are likely to repeat.
On a recent Weekend Quiz, Bill Mitchell’s first question is this:
“The government has two macroeconomic policy arms available – fiscal and monetary policy. However, it only has control over monetary policy.”
I answered “false”. It turns out I was wrong, the answer is “true”. Bill Mitchell explains:
[quote]
The fiscal balance has two conceptual components. First, the part that is associated with the chosen (discretionary) fiscal stance of the government independent of cyclical factors. So this component is chosen by the government.
Second, the cyclical component which refer to the automatic stabilisers that operate in a counter-cyclical fashion. When economic growth is strong, tax revenue improves given it is typically tied to income generation in some way. Further, most governments provide transfer payment relief to workers (unemployment benefits) and this decreases during growth.
In times of economic decline, the automatic stabilisers work in the opposite direction and push the fiscal balance towards deficit, into deficit, or into a larger deficit. These automatic movements in aggregate demand play an important counter-cyclical attenuating role. So when GDP is declining due to falling aggregate demand, the automatic stabilisers work to add demand (falling taxes and rising welfare payments).
[end quote]
In another article, Bill Mitchell touches on the same point:
[quote]
The government sector’s net position (spending minus revenue) is the mirror image of the non-government’s net position. So a government surplus is equal $-for-$, cent-for-cent to a non-government deficit and vice versa. So if the non-government sector is in surplus (a net saving position) then income adjustments will render the government sector in deficit whether it plans to be in that state or not. If income is falling in the face of rising saving behaviour of the non-government sector and that spending gap is not filled by government net spending then the budget deficit will rise (as income adjustments cause tax revenue to fall and welfare payments to rise). You end up with a deficit but the economy is at a much less satisfactory position than would have been the case if the government had have “financed” the non-government saving desire in the first place and kept employment levels high.
[end quote]
As I understand it, the government has no choice in running deficits, only in what type of deficits they want to run. The question of whether they should run deficits is a moot point, notwithstanding Dr. Kling’s point that it might all be a Ponzi scheme, which is a different issue altogether.
As an aside, MMT is 90% descriptive, 10% prescriptive. It actually describes quite well how an economy works.
Models need to be stress-tested like big banks. “If this is wrong, how bad is the failure mode?”
With MMT, it’s really bad, and to the extent we are currently pursuing a kind of de facto, effective mini-MMT, throw caution to the wind fiscal policy, I fear we will eventually discover just how bad, and learn it the hard way.
Imagine you had a black box model of a Ponzi Scheme that accurately described the 99% of its duration in which it works, but leaves out the whole “inevitable catastrophic failure” part. A bad dam looks stable for years, until the pressure behind it rises to the breaking point.
The model would assess, on the basis of mere inputs and outputs, that Madoff is just another hedge fund manager paying good dividends and maybe having the typical amount of trouble doing so because of the financial crisis, just like everybody else. And that model would make good predictions until the moment it didn’t, because the mechanism turning those inputs into outputs (it made more promises than generated the ability to make good on them) was fundamentally rotten, even though it appeared from the outside to be going swimmingly … until it was too late.
It’s true, we don’t have to worry about inflation or a collapse in confidence in the currency (and the real value of all those debts, contracts, and other obligations denominated in dollars) caused by the long accumulation of incredibly massive deficits even during good times … until the moment we do and suddenly find ourselves in crisis having to roll over a million tons of short term debt at penalty rates.
The failure mode of models which counsel fiscal prudence, discipline, and restraint (in good times) may have th their own failure modes, but they seem to be much, much milder than that.
Handle,
Assuming it is Ponzi, which I haven’t conceded, the question is not “Ponzi versus not Ponzi”, but rather “good Ponzi versus bad Ponzi”. If you have to run deficits anyway, at least make them the good kind.
Incidentally, that only covers the private domestic sector. We haven’t even addressed the external sector, where the US has to run a deficit in respect of it’s Triffin obligations:
[quote]
The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit. —Wikipedia
[end quote]
Because the government runs a trade deficit, it is imperative that it must match that trade deficit with a budget deficit to prevent unemployment. Here is the sectoral balances equation, showing how the government must fund the deficits of both the private domestic sector, which typically wants to net save, i.e., (S > I) , and the external sector also, which runs a surplus to accumulate US dollars:
(G – T) = (S – I) – (X – M)
The three sectors sum to zero and are an accounting identity, which means they’re true by definition.
The three sectors sum to zero
—-
No they don’t. That accounting identity is only true after some very long period of price revisions and we adjust prices sometimes ten years previous. The currency banker can never connect those accounts completely, it can only keep them below some bounded error.
The problem becomes worse when exporters choose to delay repayment, for fear of taxes. In that case, the agents are deliberately making the counting identity an error by failing to report (X-M) correctly.
The problem is we have lost sight of the error in that accounting identity. Then we have a sudden need to alter (G-T) to get that closer to zero. Right now the accounting error is out of bounds, the error is growing. The curve is flat, none of the pricing is working that we rely on to track that identity, it is faked.
Matthew,
Accounting identities hold true even if you don’t measure them correctly. They hold true even if you don’t measure them at all.
There was a time when no one measured the economy, or knew how to measure the economy. But the accounting identities were there in the background, operating just the same.