Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Sun Oct 31st, 2010 at 05:58:00 PM EST
As noted below, Modern Monetary Theory, MMT, is neither "Modern" nor a "Theory". It is based on observation of how our monetary system works, as Stephanie Kelton notes. Prominent Mainstream Economists will, of course, acknowledge that the USA went off the Gold Standard totally in 1971. Yet they continue to frame economic policy and the public discussion of that policy as though we were still on the Gold Standard. Perhaps that is because pretending we are on the Gold Standard for purposes of framing and discussing economic policies gives all of the policy advantages of a Gold Standard without the practical awkwardness of an actual Gold Standard. This practice provides a compelling, if bogus, argument for ideologically favored policies, especially "Austerity". But insisting on presenting monetary policy options in terms of a monetary approach that is, in fact, not being used is about as helpful as following a false to fact map.
There are now available several good presentations focused on policy and based on "Modern Monetary Theory" from an April 28, 2010 Fiscal Sustainability Teach-In And Counter-Conference that was staged to run counter to the Peterson sponsored "fiscal responsibility" propaganda blitz last spring. Transcripts slides and videos are available for all presentations. Presentations are aimed at a more general, yet economically aware audience. Introductions and samples of each presentation follow:
♦ "What Is Fiscal Sustainability?" By Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog.
And when you think about it, the whole discussion of fiscal sustainability in the mainstream media and in our governments, in our parliaments, are all applying the logic - and what's taught students in our universities out of textbooks - are all applying the logic that related moralists to a monetary system that ended in 1971. And people say to me, "Well, economists know that." And I say, "Yeah I know they know that." And so the agenda... They know the constraints that apply to governments now are not the same constraints that applied - and I'll talk about what they are - to governments under the Bretton Woods system of convertible currencies with the US effectively running a gold parity. They know that. And so then you dig further and realize that the whole rhetoric is ideological - that they run a conservative approach to government. They hate government intervention in the economy unless it's helping themselves, through handouts to the corporate sector, and so they've blurred the history and they just blithely go on teaching economics as if it's the gold standard economics.
So where should we start in trying to come up with a concept of fiscal sustainability? And I add that what I'm doing really is just introducing ideas which will be elaborated on in great detail by my colleagues here. So I'm not explaining everything in detail for that reason. But where I think that you should start, and I think we all agree on this up here, is ask yourself the question "Why do we bother to have a government in the first place?" ....
The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can't do it individually. That's why we'd want them. And we might call that the public purpose of government. And that might be a good place to start because fiscal policy is about governments, a government policy tool. So once we think about what we want governments to do for us, then that's a good place to work out, Well, what does that mean in terms of the way they conduct fiscal policy?"
So what are the dimensions of that? Well, the way I think about it, and my colleagues have different emphases here, I think about the state. The basic role of the state is to maximize the potential of all of us who live under its sovereignty. And I have this thing that the sustainable goal of the economy should be the zero waste of the people in the economy. That's what my view of economic behavior is, that nobody should be wasted as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.
And then from my point of view, that means, we - the state - should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.
♦ "Are There Spending Constraints on Governments Sovereign in their Currency?" By Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri - Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives
(W)hat I'm going to say is based on what was described this morning as something called Modern Money Theory. This is not a term that we came up with. I think that others who began to follow our work branded us with this title and started referring to us as the Modern Money School and to our ideas as Modern Money Theory and in many ways I think it's kind of unfortunate, but this is the brand that we now, or the cross that we now bear, because it is something of a misnomer. What we're doing is actually not modern at all. The ideas are not theoretical, and they aren't particularly modern. What we're doing is simply describing, operationally, the way government finance works. It's not a theory; we do not make assumptions, although we are economists. What we've been describing to you today is not dependent upon any ceteris parabis condition or any set of assumptions about perfect competition or rational agents or anything else that you get exposed to when you study economics, but rather an attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation? That's really all we're up to, so don't be afraid.
How does the government actually spend? It spends by writing checks on its account at the Federal Reserve Bank. What we see, and what we hear all the time is that the government is spending a hundred, taxes are ninety and it sells bonds equal to ten. So, what we see is an attempt to coordinate the government's spending with taxes and bond sales and it creates the illusion that what's happening is that the government is taking money from us and using it to pay for the things that it purchases. But that's not really what's going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. So what happens when the government spends?
Let's suppose that the U.S. Treasury issues a check for a hundred million dollars to Halliburton. What happens? The Fed marks down the Treasury's balance. It subtracts one hundred million from the Treasury's account at the Fed. Halliburton takes the check and deposits it wherever Halliburton happens to bank. I chose Bank of America. So Bank of America marks up Halliburton's balance by a hundred million dollars. The Fed marks up the size of Bank of America's reserve account (this is some reserve accounting, hang in there; it's a little dry). The Fed, in the clearing process, credits Bank of America with a hundred million dollars in its reserve account.
So what's happened at the end of the day? What are the effects of government spending? The monetary base increases. We call that `high powered money'. Those are the bank reserves. The monetary base increases by a hundred million. The money supply increases by a hundred million. The money supply is all the checking accounts and traveler's checks and a couple other things, but by and large, those are the deposits, ordinary everyday checking accounts. So the money supply increases. So what is the lesson from this? The lesson is that government spending creates new money, both high-powered money, bank reserves, and the more narrow definition of money, M1. They both increase as a consequence of government spending.
How about when the government collects taxes? What happens there? Say you write a check for five thousand dollars to the IRS on your personal checking account, and you bank at Wells Fargo. Wells Fargo marks down the balance in your account, minus five thousand. The check gets sent from the IRS to the Treasury's bank. The Treasury banks at the Fed. The Fed marks up the Treasury's balance by five thousand, and the Fed marks down Wells Fargo's balance by five thousand. What happens at the end of the day? The effects of paying taxes (See, when you pay taxes, there's nothing there. Everything just disappears.) The monetary base decreases. Bank reserves go down by five thousand, so the base goes down. The money supply also goes down because you drew on your checking account. So, the money supply goes down by five thousand, the narrow measure, M1, and the monetary base goes down as well. Paying taxes destroys money. It doesn't give the government anything. It doesn't get anything. It eliminates those liabilities. They are, for all intents and purposes, destroyed.
♦ "The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy" By Warren Mosler, International Consulting Economist and blogger at The Center of the Universe (and 2010 candidate for the US Senate in Connecticut - Chris Dodd's former seat).
Warren Mosler: The question is, "How do you turn litter into money?"
So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay. [00:00:19]
All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I'm going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers. [00:00:30]
Then I add one more thing: Look, there's only one way out of here and there's a man at the door with a nine millimeter machine gun. Okay? And you can't get out of here without five of my cards.
Now things have changed. I've now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that's the function of taxes. Stephanie talked about how taxes do it. But you can recreate that...
♦ "Inflation and Hyper-inflation" By Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives
So will the US turn into a modern day Weimar Germany?
Clearly, Weimar Germany came into existence after WWI, a very damaging war, hugely more damaging in many respects than WWII. The country's productive capacity was absolutely shattered, and more importantly virtually the entire world was really pissed off with Germany and as a result the war reparations claims that they imposed on the country were extremely punitive. And many people at the time, such as Keynes, for example, realized that this imposed a tremendously harsh economic consequences on Germany and that the imposition itself was going to be impossible to be repaid. As I say here in 1919 it was reported that the German budget deficit was equal to half GDP. Half GDP. And what are we talking about in the US today? We're talking about 8% of GDP I think it may have peaked at 10% and that's including TARP, so let's get a sense of perspective here.
By 1921 in Germany, war reparation payments equaled one third of got spending. One third. So I think that is an important consideration to look at and I think more importantly is that the payments were demanded in a foreign currency. They weren't being demanded in Deutsche Marks. They were being demanded in, the governments demanded huge gold reparations. Now by contrast as I said in the US you've got a fiscal deficit this year, I think it's projected at, I think the latest out of the CBO is about eight and a half per cent of GDP, assuming that GDP is what everyone thinks it will be.
So what finally broke down Weimar Germany, the straw that broke the camels back was by May 1921, the so-called London Ultimatum. The Germans were asked to make an annual installment in payments of 2 billion in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports.
So an extremely punitive measure, it was a condition virtually impossible to fulfill. The Germans attempted to fulfill it. They accumulated foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into freefall. So they finally said, "You know, we can't pay up anymore." You are seeing a small parallel to, with that today in Greece, its not to the same degree but obviously its... the positions are reversed, it's the Germans imposing conditions on the Greeks, saying "You know you have to pay X" even though the Greeks don't have the money, so they're trying to get blood out of a stone. But we don't clearly have hyperinflation in Greece, but it is an interesting parallel.
So the response to that was that the French and Belgium troops occupied the Ruhr to secure reparation payments. The problem was that the Ruhr was one of the industrial powerhouse regions of Germany, and they employed about a quarter of their workforce in that area, and they exported a huge amount from that area. Effectively you take away their... the largest chunk of their manufacturing capacity is eliminated to begin with, then you occupy a chunk of the country which has a huge portion of what's left of manufacturing capacity, and then you say, "Now pay us the money." And you can see why a central bank printing money in that situation, or creating currency in that situation, is not going to be able to do so, won't be able to call forth goods and services. And you do create the conditions for inflation, and then hyperinflation. So again, it's a very different situation from what we have today in the US.
♦ "Policy Proposals for Fiscal Sustainability" By L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri - Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College;
Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives.
So what they're saying is that strong economic growth is not a solution to this unemployment problem. It is going to exist -- even with strong economic growth. Okay. And why is that? It is because growth fuels productivity growth, which they said averaged 26% up to that business cycle peak over the past decade, on average around the world, but jobs had only grown by 16.6%. And meanwhile, of course, populations are also growing, and so the unemployment problem is becoming worse in spite of very strong productivity growth. In fact, it's not "in spite of," it's "because of."
It's because labor is becoming more productive that we don't need as many workers in order to have economic growth. And again, the economists in here will recognize this is David Ricardo's machine problem. So David Ricardo pointed this out back in the 1820's. He said this is going to be a continuous problem, that through labor-saving technological advance we are going to create a growing pool of unemployed labor that we can't put to use. So Ricardo was very pessimistic about the long-run outcomes. We were able to put this off for a very long time because we were able to find ways around this problem by opening up new markets, creating new sources of demand. But it has become a chronic, global problem that growth alone will not create enough jobs. Okay.
So what do we think should be the goals of a sovereign government? Now I think there are many. We have mentioned several times that we conceive of, in John Kenneth Galbraith's terminology, there is a public purpose, so there are things we want the government to provide for us. Okay. Maybe we want decent social security for the aged, but taking a step back from that, and just saying in the most general terms possible, what are the most important things that a sovereign government should do for us? Well, it ought to insure that we have full use of domestic resources, and it has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.
So, we think that government ought to be focusing on full employment because it is much more important to have labor fully employed than it is to have, say, our agricultural resources fully employed -- although we ought to aim for that too. But let's make full employment a primary goal. And, as Warren keeps emphasizing, for political reasons, not really for economic reasons, we need to make price stability also a goal. The problem is that for a very long time orthodoxy has thought these two goals are completely in conflict. You cannot have both of these at the same time. You either can have full employment and then you're going to have inflation, or you can have price stability but you're going to have to have a lot of unemployment. Okay, so, what we're trying to do is to promote a program that can give you full employment with price stability, okay, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.
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