Left Forum: Money Matters

Published by Anonymous (not verified) on Fri, 08/06/2018 - 8:56am in


speeches, MMT

One of the highlights of the NY academic calendar is the Left Forum. On this panel I was joined by Stephanie Kelton, alongside Gar Alperovitz, Pavlina Tchernova and Raul Carillo.

On The "Everyone Cannot Run Trades Deficits" Argument

Published by Anonymous (not verified) on Wed, 23/05/2018 - 11:00pm in



Steve Keen has posted "Some Preliminary Questions for MMT," in which he questions the Modern Monetary Theory (MMT) mantra that "exports are a cost, imports are a benefit." He points out: what is to stop everybody from running trade deficits? I discuss why his arguments are not particularly concerning from a policy perspective.

The following quote is what I wish to discuss.

I dispute the premise of this argument—the part that Mitchell said is "undeniable"—but for the sake of argument, I'm going to accept it here. So exports are a cost, imports are a benefit, and for its own good, a country should attempt to run a trade deficit.
MMT advocates take this as an argument in favour of attempting to achieve a trade deficit. 

If this argument were correct—and when I have time later (much later), I'll argue that it is not—then I would take it instead as a reason to set up an international body and policy standards to stop economies deliberately running trade deficits. 

Why? Because unlike government deficits, which all countries in the world can run simultaneously, a trade deficit for one country necessarily means an equivalent trade surplus for the rest of the world. If there are countries deliberately running trade deficits, then they are forcing others to run trade surpluses. Since on this MMT argument, the trade deficit countries are the winners and the trade surplus countries are the losers, the former are behaving parasitically towards the latter. That should not be allowed if we are trying to achieve a harmonious global economy.

There are two problems with the argument.

  1. The "imports are a benefit" idea is usually discussed in the context of developed country macroeconomics. If you are a developing country, export-led growth behind trade barriers is a standard strategy. The U.S. followed this, as did Canada, then a string of countries after World War II (starting with Germany and Japan; China is the current exemplar of the strategy). Having a competitive export sector is viewed as a benefit. However, this advantage disappears once your country has reached a comparable level of development. Until every country on the globe reaches a similar level of development (I am not exactly holding my breath waiting for that event), this "every country wants to run deficits" story does not apply.
  2. If we confine the discussion to intra-developed country trade, there is no mechanism to set the level of the trade balance under current institutional arrangements. Trade is managed by various bilateral and multilateral pacts, and tariffs are generally not supposed to happen (although Republican presidents love slapping around Canada early in their presidencies). The only way to directly create a trade deficit is to deliberately destroy one of your industries that faces international competition. Domestic politicians are too beholden to business interests to pursue that option. Alternatively, you are stuck with indirect means -- loosen fiscal policy, for example. However, what matters for trade would be the relative fiscal stance: if everyone loosens fiscal policy simultaneously, we would just be making a simultaneous run at the dreaded "inflation barrier," and trade balances would remain where they were.* There are arguments that loosening fiscal policy is somewhat of a free lunch, but no body politic in 2018 wants to test that theory to destruction.

Steve Keen is transitioning towards the post-Keynesian economist preference for hoping that we are back in 1945, and re-negotiating Bretton Woods. Let us all throw away our national economic sovereignty and hand it to multi-national institutions! Observers on this side of the Atlantic point out how well that worked out for Greece, whereas Europeans appear to think that situation was just a minor misunderstanding.
In reality, this discussion has very little to do with MMT, rather the world view of post-Keynesians. Despite being told "no thanks" for decades, they appear to believe that just a little bit more lecturing will win everyone else over to the joys of handing over your economic sovereignty to an unelected multi-national bureaucracy.

* If we put aside cases involving large price swings in some goods (key example being oil prices), the usual reason a country has a greater trade deficit versus developed peers is that its domestic demand is growing faster than its competitors. (The total trade balance at present for developed countries is largely determined by how fast Asian exporters are hollowing out a country's manufacturers.) Loosening fiscal policy leads to faster growth, and thus imports grow faster than exports. This is often viewed as a "demand leakage," but it can be viewed as a bit of a free lunch. By drawing in exports, it is taking advantage of excess capacity in the foreign countries. This means that it will face less inflationary pressures. However, this can be cancelled out by the other country also loosening fiscal policy to stimulate its growth, in which case both country's exports and imports grow at the same pace. This is why multi-lateral control of trade imbalances is politically toxic, it would give foreigners veto power over fiscal policy. In a country like Canada -- where fiscal policy is shared at the provincial level, and even the Federal government does not have veto power over provincial policy -- "non-starter" is the most polite description I can give such proposals.

Chapter 6 of An Introduction to SFC Models Using Python discusses such effects using simple stock-flow consistent models. 

(c) Brian Romanchuk 2018

Mean-Spirited Ideas.

Published by Anonymous (not verified) on Tue, 22/05/2018 - 5:51pm in


MMT, Politics

Zach Carter:

“Politicians don’t generally turn to economists for new insight into how the world works. Economists instead serve as a kind of credibility shield - experts who can be trotted out to assure the public that there are very complex and sophisticated reasons political leaders should be doing the things they do. A big part of any Washington economics job is providing a sense of scientific certainty to political judgments that are, by their very nature, uncertain. This is true for big policy changes as well as straightforward tasks like projecting growth rates and government revenue.

“The job, in other words, is to back up your team.”

John Maynard Keynes:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”

Call me cynical, but I think someone was bullshitting us, and that someone isn’t Carter.

Zach Carter’s “Stephanie Kelton has the Biggest Idea in Washington” (Huffington Post, May 20) has caused a bit of a stir in the blogosphere and Twitterverse. Corey Robin’s tweet was a tiny part of that.

Judging by the opening quote above, however, it was most insightful, I’d say.

Carter does his best to portray the Job Guarantee as a non-threatening, respectable, Very Serious, technocratic idea, something even the US Democratic Party can commit itself to. The problem is that he may have been excessively successful. To put it plainly: he doesn’t make it sound good -- to me at any rate. In fact, the absence of a very prominent name in that article is something that caught my attention rather powerfully.

Anyway, Carter shows how and why policies are adopted and, once adopted, why economists stick to them (it also suggests why mainstream economists tend to act like jerks). It turns out -- surprise, surprise -- good ideas are just a small part of the story: they need powerful and influential and wealthy backers happy to back charismatic proponents with the support of the commentariat and media.

You see right there the kind of constraints that places on even the most sincere reformist Left. A very delicate balancing act, yes? As a Commie I can say I don’t envy well-meaning reformists.

I’ll haste to add that this, of course, is not meant as a criticism of Professor Kelton or the other leading MMTers, of whom I, for what it might be worth, have high views. Nor does this imply a judgement on the technical merits of the Job Guarantee and in particular its relative desirability compared to the Universal Basic Income.

One thing I enjoyed enormously in that article:

“Usually, being on the losing end of a lefty Democratic Party presidential run is a career blow. But [Hillary] Clinton’s loss to Donald Trump exploded the existing hierarchy of party experts. Her team of economists, which had expected to be running various government agencies, is instead plugging away at think tanks and universities just like the Sanders crew.”

I can imagine some bona fide geniuses “sulking in their tents like Akhilleus on a bad day”: on whose hands are Fate and the Olympians going to place the “planning department of the human race”? I’d bet my ass to nothing liberal capitalism never looked so crap to them.

As that other Greek demigod used to say: “Ha, Ha!”

Cenk and Young Turks Team: Your Deficit Hawkery is Unrealistic and Stands in the Way of Progressive Change

Published by Anonymous (not verified) on Tue, 08/05/2018 - 10:20am in

By Michael Hoexter, Ph.D. [The Young Turks (TYTNetwork) is an online news network that has a wide reach among mostly progressives and independents in the United States with viewership in the hundreds of thousands of unique visitors per day and over … Continue reading →

The post Cenk and Young Turks Team: Your Deficit Hawkery is Unrealistic and Stands in the Way of Progressive Change appeared first on New Economic Perspectives.

Framing a Job Guarantee

Published by Anonymous (not verified) on Thu, 03/05/2018 - 10:11am in

By J.D. ALT Note: This essay was first posted on Now that progressive leaders (Bernie Sanders, Kirsten Gillibrand and Corey Booker) have placed a proposed “Job Guarantee” program onto the mainstream political stage, it is essential they begin explaining … Continue reading →

The post Framing a Job Guarantee appeared first on New Economic Perspectives.

Job Guarantee In The News

Published by Anonymous (not verified) on Thu, 26/04/2018 - 1:28am in



The Job Guarantee -- a key part of Modern Monetary Theory (MMT) -- is back in the news. Unfortunately, I am tied up with other projects, so I am not about to launch an in-depth analysis of the proposal. I would instead point the interested reader to the report: "Public Service Employment: A Path to Full Employment," by  L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton. (As an immediate disclaimer, I have not had a chance to read the report, but I assume it would give the best detailed introduction to the concept. There are other simplified FAQ articles available.)

There are two angles to approaching the analysis of a Job Guarantee right now.

  1. A top-down macro analysis of the effects of such a programme, under the assumption that it is administered in a sensible fashion.
  2. The analysis of the administration of the programme.

At most, I would have experience in dealing with the first topic; I have never really needed to delve into the history of the administration of jobs programmes.

From a big picture macro standpoint, it would act as a useful automatic stabiliser, but would end up looking similar to unemployment insurance. If the programme works as advertised, it would help put the long-term unemployed back into the work force in a meaningful fashion, and so there would be beneficial supply side effects (a phrasing that would raise eyebrows of most MMT economists...). (I discuss the inflation control angle below.)

The real thorny macro problem is the initial setting of the Job Guarantee wage. Since the Job Guarantee would presumably provide benefits (medical insurance being a big deal for Americans), the "competitive" private sector minimum wage would end up being at a premium to the Job Guarantee wage. How much premium would be needed? It should be an objective of public policy to pressure low-wage bottom feeding employers in order to best utilise the labour pool (the limited size of which allegedly worries the demography bugs in the economist profession). However, I am skeptical that the best way to introduce a new programme that has a lot of moving parts is to deliberately cause disruption elsewhere.

If we wait until 10 years after implementation (or longer, if we manage to avoid recession), we would probably have most of the data we need to know the empirical effects of the programme on the macro-economy. Until then, we will have to rely upon a certain amount of analysis by analogy.

In particular, it would take time to evaluate the ability to control inflation via the Job Guarantee wage. In the first few years, a relatively high Job Guarantee wage would cause some disruption as the private sector adapts to the new environment. A one-time rise in some prices (provided by low-wage employers) would be likely. We would then have to see how inflation acts across the cycle after that one-time effect passes, and the effect of changes to the wage paid in the programme.

However, that is not particularly useful: politicians and voters will want a better idea of the effects of the programme before implementation. Most of the questions will revolve around administrative issues.

From my perspective as a Canadian, the main initial hurdles for administration are constitutional. The Federal government is going to have to bankroll the programme, given its counter-cyclical spending pattern. However, the administration runs into two sets of roadblocks.

  1. How does it fit with the views of the provinces (particularly Quebec)?
  2. How does it fit with the treaty rights of the first nations (Canada's indigenous population)? Any top-down administrative decisions run into the reality that treaties were negotiated on a one-at-a-time basis. If the first nations are skeptical about the intentions of provincial politicians, this could crash into the previous point.

In summary, although I write about MMT, I am not the best source for details on the Job Guarantee. 

(c) Brian Romanchuk 2018

For Bold Solutions We Ought To Include MMT in Economic Discourse

Published by Anonymous (not verified) on Mon, 23/04/2018 - 3:33am in

By Justin R. Harbour, ALM

In a recent Financial Times article, Martin Sandbu identifies three major economic failures of competitive capitalism in the West: growing inequality; the disproportionate effects of The Great Recession on young people; and the threat of displacement in labor markets brought by improving technology and the presumed ubiquity of artificial intelligence. Sandbu connects these failures to recent victories of populist “extremist” parties in the EU, UK, and US, and asserts that if liberalism and competitive capitalism are to remain a viable and persuasive platform for the next generations a bolder thinking from the Western political economy is now more necessary than ever.

This need to revamp Western capitalism has brought renewed attention to Modern Monetary Theory (MMT), a school of thought that offers an important and bold perspective on economics and policy solutions. A universal basic income (UBI), universal basic services (UBS), and a job guarantee by the State are most commonly cited as a bold fix to current problems. So, it is worth asking, what are the merits of these aforementioned proposals, through the lens of MMT?

The Failures of Competitive Capitalism

To answer this question, we first look at the failures of the competitive capitalism. Growing inequality is nearly universal. According to the Organization for Economic and Cooperative Development (OECD), the growth in inequality between the incomes of the top 10% of earners and the bottom 10% has not stopped since 1985: 

The Great Recession accelerated this trend and brought into stark relief the confounding need of the West to rescue and protect the Recession’s primary contributors (i.e., “too big to fail” banks). This approach made the resulting trends in unemployment all the harder to take, especially for the West’s younger workers. A 2012 report on the employment effects of The Great Recession by Stanford University found that those groups hit hardest were found those 25-54 years of age (i.e., the “prime working age” range, and hence a significant variable in overall economic growth). The report also found that minority groups found themselves bearing more of the burden than their racial-majority peers. A similar report from the Federal Reserve bank of St. Louis found that the recovery rates from unemployment after The Great Recession were lowest amongst younger prime-age workers and older workers. In Europe the young have fared even worse, according to a recent report from Eurostat:

The story for wealth creation and asset acquisition for younger citizens homeownership is similarly alarming. Since World War II, homeownership has been considered to be the financial outcome indicative of a successful economy due to its positive value as a long-term asset. The decline in home ownership thus includes a worrying picture, ceteris paribus. As shown in the graph below, declining home ownership in the United States accelerated during the Recession, and remains at a rate not experienced since the economic boom of the nineties:

Though homeownership is less likely to be understood as a sign of economic success and health in Europe, research suggests a similar trend in declining home ownership in the aftermath of the Great Recession was also seen in the EU.  Taken together, these trends make a generation’s economic skepticism of the ability of our current economy to deliver prosperity more of a logical first principle than not.

Three bold proposals to address this skepticism have become nearly commonplace in such reform-minded discourse: a UBI, a UBS, and a job guarantee. What does each propose, and which is best suited to address the issues identified above?

Three Bold Proposals

A UBI offers all citizens a basic level of income. UBI’s proponents commonly claim that this income is necessary for a variety of reasons. The fear of artificial intelligence taking over traditional labor tasks is commonly cited in defense of UBI. Some UBI proponents also argue that such an income would enhance human freedom by providing an option free from coercive and freedom-reducing labor arrangements. A UBI could also streamline social entitlement spending to be more efficient and less bureaucratic. A UBS does not offer income, but a variety of services deemed essential to maximize freedom and economic potential. Though the services offered differ between advocates, they often include improved and free public transportation, access to the internet, and job training, among others. A job guarantee is just as it sounds: anyone needing or wanting work but currently out of work would be offered a job by the local government to provide labor and/or services toward local projects that a community needs.

Each of these proposals includes explicit costs that must be heavily weighed. For example, the literal cost of providing a UBI substantial enough to achieve its purpose is very high. Some have suggested that its cost could range in the 30-40 trillion-dollar range in the United States. Cost-of-living variations also diminish the streamlining argument for a UBI since adjusting it for regional purchasing parity may make it even more complex bureaucratically than the current system. Explicit costs also represent an issue for UBS, though ostensibly less so than a UBI. Though the job guarantee does face some cost concerns, important work has recently demonstrated that the opportunity costs of such a program are well worth the explicit costs it may incur.

Though each proposal is bold in its promises and its trade-offs, the more important question here is which offers a better redress of the concerns raised by the Great Recession. It appears that the job guarantee is the better situated to address all those concerns on both explicit and implicit cost fronts. The job guarantee addresses the unemployment problem and wages problem directly. The job guarantee has the additional appeal of making it more likely that the newly employed will accumulate enough wealth to make home ownership an attractive option, and thus satisfy the third concern. Conversely, a UBI only deals with the wage issue directly and therefore the unemployment problem indirectly, while a UBS program does not address any of the problems directly. There are several other variables at play that strengthen the argument for job guarantee over the others. Most importantly, the job guarantee is the only one that signals the value of work – an implication necessary for future growth if an economy hopes to move beyond its current frontier. In doing so, it is more likely to find traction in our polarized political paradigm by avoiding the typical debates associated with strengthening social safety nets.


The Rise of Modern Monetary Theory

The economic school most strongly advocating for the affordability of a job guarantee program – Modern Monetary Theory (MMT) – has been experiencing a surge of public interest and acceptance as of late. This is not to say it is brand new or has not been trying to advocate for the policies its theory substantiates for a long time. But its appeal since the experience of the Great Recession is obvious once one digs into it. MMT is a theory of sovereign monetary policy that asserts that sovereign nations that issue debt in its own fiat currency cannot ever run out of money. Any restraint by a nation on their spending for any reason, including to stimulate demand or provide needed relief is, therefore, a purely political decision, and only restrained by the availability of real resources. MMT’s advocates thus model how under MMT’s reorientation of fiscal perspective, a nation’s fiscal and monetary policy options are much broader than under older and perhaps more dominant paradigms. The implication is that there are bolder and further reaching policy options always available to state to provide relief for distressed citizens during downturns if they can move beyond the unnecessary concerns for debt and deficits during such times.

The most notable of MMT’s more active contemporary economists include L. Randall WrayWarren Mosler, and Stephanie Kelton. There are several websites dedicated to the defense of its theory by these authors and others: one by another of its theorists Bill Mitchell; and The Minskys, so named to honor one of the more prominent economists to set the foundations of MMT, Hyman Minsky. Of additional note would be Ms. Kelton’s work with the campaign of Bernie Sanders in 2016 and her recent inclusion into Bloomberg View’s stable of writers – an inclusion suggesting that MMT’s theories are gaining traction. There have also been recent news items such as a history of MMT in Vice News and a review of its contemporary appeal in The Nation. Finally, there has been the consistent work and advocacy of the Levy Economics Institute of Bard College. MMT, in other words, appears here to stay.

Important work has been produced recently by MMT economists as well. In the United States, the Levy Institute recently published a report on the macroeconomic effects of canceling all student debt. The report finds that effects of such a policy would have a greater economic stimulus on employment and GDP than its costs can reasonably argue against. So too did the Levy Institute publish a report on the feasibility of the guaranteed job program discussed above. The job guarantee has helpfully garnered bipartisan support from the political right, left, and center.

Though popular within certain corners of the public sphere and gaining traction, it is not without its legitimate faults and challenges. Nonetheless, an undergraduate or higher level secondary student is unlikely to be exposed to MMT during their introductory training. I am not here suggesting that the more traditional curriculum is not appropriate for introductory students, nor universally ambivalent about the inclusion of emerging theories. But I am saying that for some teachers and some curriculums, finding ways to include such exciting emerging work with profound implications on their economic thinking and potentially their communities are harder the more they are not engaged with by “mainstream” outlets. What’s more, some of the more ubiquitous and far-reaching introductory curriculums (Advanced Placement in America, for example, or the International Baccalaureate program) don’t consider it at all.

At a time when some are rightfully calling for economists to better communicate economic concepts, ignoring newer and bolder conceptions of economic pillars that have popular momentum and real-world applicability behind them – such as MMT – leaves a fruitful learning opportunity to advance economic thinking and communicating skills for the youngest of economists at the door. Mr. Sandbu is right; the experience of the Great Recession by Gen Xers, Millennials, and those closely on their heels demands bold reform to reanimate the economy’s perceived legitimacy. A generation of economists and their work will be informed by their experience with the Great Recession. Let us all hope that MMT and its similar promising competitors are taken as seriously as the older theories so that we can rethink and rebuild economics in a way that makes economic thinking and understanding economic theory a universal pillar to our civic discourse.


About the author

Justin Harbour is currently an Instructor for Advanced Placement Economics at La Salle College High School in Philadelphia, PA. Having studied history, government, and political economy at UMASS, Amherst and Harvard University, he has previously published book reviews on teaching and education for the Teacher’s College Record and essays in CLIO: Newsletter of Politics and History, The World History Bulletin, and Political Animal. Justin lives in Philadelphia with his wife and two children. Follow him on twitter @jrharbour1

The post For Bold Solutions We Ought To Include MMT in Economic Discourse appeared first on Economic Questions .

Framing the Progressive Platform

Published by Anonymous (not verified) on Tue, 17/04/2018 - 11:54am in

By J.D. ALT This essay was first posted at I keep reading the big challenge Democrats face in the 2018/2020 elections is that they have moved too far left, proposing a platform that includes “free” universal health care, “free” … Continue reading →

The post Framing the Progressive Platform appeared first on New Economic Perspectives.

Australian Fiscal Surpluses And Functional Finance

Published by Anonymous (not verified) on Sun, 15/04/2018 - 11:00pm in

 Australian General Government Fiscal Balance (IMF)
The chart above shows the (annual) fiscal balance for the general government sector of Australia (the general government sector includes sub-sovereign governments as well as the central government), taken from the IMF World Economic Outlook. As can be seen, there was a lengthy period of surpluses from the late 1990s - 2000s. This is somewhat unusual, and raises some questions about some interpretations of functional finance and Modern Monetary Theory (MMT). If we look at the situation more carefully, the fact that there were surpluses then was not too surprising, and is entirely consistent with functional finance principles.

(Note: This article was written to respond to a question I received regarding the Australian surpluses. I do not have time to track down Australian economic data, so my description of the conditions during the surplus period is correspondingly vague. And although I watched Australian data as part of the data flow, I never had the need to dig deeply into the Australian situation as part of my own research. The focus here is more on the Functional Finance perspective.)
Australian Surpluses: Not Too SurprisingFor the developed countries in the modern era, fiscal deficits are the norm. One can argue that this is the result of basic debt mathematics, which many advocates of balanced budgets conveniently ignore. The usual goal of policy is a "stable" debt-to-GDP ratio. (There is no good theoretical explanation of why this is the case, but that is not the concern here.) Since nominal GDP is growing in most developed countries most of the time (Japan acting somewhat as an exception), governments need to add debt to keep the numerator to grown in line with the denominator. As a result, we do not need a whole lot of theory to predict that the typical outcome is a fiscal deficit.

So the Australian situation is somewhat unusual (but not unprecedented, as discussed later). But there was a lot going on during that period that would allow the general government sector to run surpluses. (Note that I do not have a good feel for the breakdown between the central government and the state governments.)

One of the most important factors was that Australia -- like most of the "Anglo" countries -- has had an impressive bull market in house prices (and construction). The housing bubble in the United States popped, but not in Australia.
 Australian Household Debt-to-GDP
One mechanical effect of higher house prices is that households need to borrow more to purchase them; hence household debt rises. I currently have not imported the full set of the Australian national accounts, but the chart above is indicative of the situation (taken from an IMF report, downloaded using the St. Louis Federal Reserve FRED interface). Unfortunately, it does not overlap the full period of surpluses, but we see that the ratio is rising while greater than 90% of GDP in 2006-2008. The implication is that some households have to emitting enough debt to not only keep up with growing nominal GDP as well raising the ratio. I have not crunched the numbers, but it is clear that the household debt issuance is going to be larger than the general government surplus.

The business sector was presumably growing robustly during this period -- there was first the telecom boom, and then the commodity boom. I would assume that Australian equities also participated in the global equity bull market of that era, and so capital gains taxes would have been elevated. Since capital gains taxes are incurred in a somewhat voluntary fashion, they presumably have less of a dampening effect than income taxes.

Another unusual factor was the privatisation of the national telecoms company, Telstra. Selling off the family silverware was a standard tactic of post-1980 neoliberal politicians, and allows for one-time debt reduction in a relatively painless fashion. (Instead of imposing a tax to reduce the debt level, the government swaps a financial asset for its bonds. A tax reduces the income of the paying entity, while an asset swap is income neutral.)

(Another unusual factor in Australian data is that a significant portion of its current account is intermediated by multinational resource corporations. This means that the international component of the financial balance accounting identities cannot be interpreted as arm's length dealings between Australians and foreigners. The reader would need to find a source more familiar with that aspect of the data.)

The final result is that the surplus was not unusual -- household debt issuance was more than enough to offset the general government financial surplus. Note that this argument is largely theory-free, although it might have problems if one chooses a sufficiently incorrect theory. For example, if one argues that the behaviour of the household sector can be modelled as the behavioural choices of a single representative household, household sector borrowing to purchase housing is neutral for growth, since it represents the same household borrowing from itself.

Bill Mitchell, an Australian MMT academic, summarises the situation in this relatively recent article -- link. He has written detailed analysis of the data on his website earlier (I had not spotted them after a quick search; I will leave the search to an interested reader).
A Blow to Functional Finance?My questioner wanted to know how this surplus episode related to functional finance (link to primer) and MMT. Was not the argument that fiscal policy is extremely powerful, so how did Australia avoid recession? (Note that Australia has avoided recession for over 20 years.) 
(One possible addition to the confusion is the citation of some MMT authors of a historical oddity in U.S. data -- every time the U.S. federal government has run a surplus, a depression/recession followed relatively soon thereafter. Although this is a cool coincidence that impresses Americans, it is incorrect to say that the MMT line is that fiscal surpluses always cause recessions. Bill Mitchell is one of the lead contributors to MMT and is Australian -- and is well aware of the Australian fiscal surplus.)
From the perspective of functional finance, there is nothing to explain. One of the principles of functional finance is that the level of the fiscal balance does not tell us about the stance of fiscal policy, so the fact that a government is running a surplus or deficit tells us very little. (This will be returned to below.)
However, there is a lot of discussion in the MMT literature that suggests that running surpluses is a bad idea and/or unsustainable in the long term. So long as the economy is growing in nominal terms, the private sector (including external sector actors, like reserve holding foreign central banks) tend to want to hold increasing nominal amounts of financial assets, particularly fixed income. However, there are limits of private sector entities to service debts, so growth driven by private sector debt issuance will generally tend to go off the rails eventually. The Australian housing market sidestepped 2008, but it is hard to see that performance being repeated for decades. Conversely, a central government borrowing in its own free-floating currency faces no risk of involuntary bankruptcy, and so its debts help to stabilise private sector portfolios. However, the inability to sustain surpluses for decades does not imply that surpluses can occur for a few years without a crisis.Cannot Tell Fiscal Stance By Looking at the Fiscal BalanceI noted the functional finance principle: you cannot tell what the fiscal stance is by looking at the fiscal balance. It is likely that this seems like a vague verbal formulation, but it is a useful theoretical point if we contrast it to conventional thinking. I will now flesh out the hidden details in that formulation.
The writings of functional finance are best understood in the context of existing conventional thinking. One common approach to fiscal policy in DSGE macro is to specify fiscal policy as two exogenous time series:

  1. a time series of government purchases of the composite good in real terms (g);
  2. a time series of lump sum taxes that are fixed in real terms for all time. The "lump sum" specification means that the level of tax is fixed (in real terms) regardless of the wealth or income of the (representative) household; something like a poll tax.

(As a disclaimer, some DSGE models have taxes that are function of economic activity -- distortionary taxes. However, a lot of loose analysis of fiscal policy implicitly is based on lump sum taxes.)
They then make two heroic assumptions (modulo some tweaks, depending on the model):

  1. There is a single composite good in the economy, and so there is only a single good price to worry about, and one notion of production capacity (output gap).
  2. All households are the same: same income, same wealth, pay same taxes.

With only one good to worry about, a tax bill specified in real terms is a near perfect counterpart to government consumption in real terms. Therefore, the two sides of fiscal policy (taxes and spending) are commensurable, and it makes perfect sense to subtract the two time series to see what the net effect on the economy is. In other words, the fiscal balance is a good summary of the action of fiscal policy. (If one actually solved the DSGE macro problem, this would not be strictly correct. However, these models are not actually solved, and the entire action of fiscal policy is ignored, so it does not really matter. This earlier article discusses this rather strange subject.)
Another side effect of this "lump sum tax thinking" is that the fiscal balance is an exogenous variable -- arbitrarily determined by policymakers independent of the state of the economy. Courtesy of Economics 101 mis-education, pretty well every media discussion of fiscal balances implies that governments choose the level of the fiscal deficit each year. (Mainstream academics might complain that this is unfair; the models with distortionary taxes depend on the level of output. However, they were the brain trust that uses the lump sum tax models in Economics 101, so they are part of the problem, not the solution.)
The correct way of thinking about fiscal policy is start off with the parameters that the government actually controls (which could be viewed as exogenous).

  • Government spending might appear straightforward, but it is actually a mix of income transfers, salary spending with wages set in multi-year settlements, contractual purchases of some goods and services, and open market purchases of others. Modern welfare states have programmes that are sensitive to the state of the economy, such as unemployment insurance and welfare. The demand effect is hitting a wide variety of goods and services, each with own capacity constraints. Obviously, if the government ramps up spending on goods that are in short supply, it will exacerbate price increases, whereas purchases where there is excess capacity will have little to no effect on prices. 
  • Tax codes are complicated, and come in a variety of forms. Even the base income tax rate is technically a continuum of tax rates defined over the set of incomes (although we can reduce the complexity by just looking at brackets and marginal tax rates). 

In other words, the government can control tax rates, but it cannot control how much taxes it collects. The fiscal balance is an outcome, not a variable that can directly set by policymakers.
The outcome of the fiscal balance depends upon the nature of the economy: the external balance, investment trends, etc. For a country successfully pursuing an export-led growth strategy -- e.g., Japan up until the 1990s -- the government is likely going to tend towards surplus. Conversely, we should not be surprised that fiscal deficits are high in countries with ageing populations, current account deficits, and anaemic private sector investment.
In summary, the fact that Australia ran a series of surpluses is not an issue for functional finance.Reduced Form Models -- YicchI periodically see complaints that MMT has "no models or theory." From context, the complainers appear to be looking for reduced-form mathematical models. The fact that MMT avoids these reduced-form models is an advantage in my opinion -- despite the fact that my training is as an applied mathematician, and "quantitative analyst" appeared in one form or another on my business card for my career in finance. And one may note that I am hardly alone -- there's a small sub-culture of MMTers in rates finance, and modern rates investors are not normally thought of as literary theorists.
The reason to avoid reduced form models is obvious to anyone with markets experience: pretty much every possible reduced-form mathematical model has been thrown at the macro data set, using every known fitting technique in applied mathematics. The results are uniformly dismal: at best, one can find a model that works for a period of time, then blows sky high when the regime shifts. This is exactly what (good) theory predicts. We can view observed data as being the outcome of a stock-flow consistent model with really complex behavioural functions. We are likely able to approximate those behavioural functions around some "operating point" -- which means that we can fit some reduced form model (with sufficient free parameters) to a limited run of data. Once we move away from the operating point, the model breaks down. Every competent, experienced rates investor knows this, so there is no reason to get excited about reduced-form models.
(DSGE macro side-steps the problem by not actually solving the models, rather just philosophising what the solution might look like -- assuming that the solution exists. From my vantage point, that's boring literary criticism, not mathematics.) Velocity of M2 in the United StatesMost failed reduced form models are proprietary, and so their track record is not publicly documented. However, we do have a spectacular documented example -- classical Monetarism. The standard interpretation of Milton Friedman's writings was that reduced form models based on (near) constant money velocity were valid. The implication is that all policy makers need to do is keep the money supply growing at k% a year, and we would achieve policy nirvana.

Interest in Monetarism surged, and the theory was put into practice (starting around the 1970s, depending on the central bank). The chart above shows the dismal record of the concept. Velocity was stable -- until policymakers started paying attention to the monetary base. Velocity promptly started trending in both directions, making a mockery of money targeting as policy tool. (Somewhat unsurprisingly, the remaining supporters of Monetarism downplay the reductionist version of money supply targeting.)

Although it is easy to ridicule the models in retrospect (like I just did), the interest in Monetarism did indicate that the simplistic versions of the models appeared to be adequate approximations of reality. Any time one looks at a reduced form model, one needs to ask: why is the track record of the proposed model any more impressive than that of constant velocity models based on pre-1970s data?
Quantifying Functional FinanceWe now return to functional finance. One could try to summarise functional finance as: "sufficiently loose fiscal policy will eventually lead to inflation." The problem is quantification, and that is an inherent issue with fiscal policy. We cannot slap the fiscal balance into a reduced form model; we need to look at the variables that are exogenous. The problem is that they resist easy parameterisation.

  • As noted earlier, income tax rates are a continuum, not a single percentage. Giving a tax break to billionaires is going to have less of an impact on growth than a reduction of deductions for public pensions.
  • The modern corporate welfare state (particularly in the United States) is not defined in terms of crass subsidies, rather carve-outs of tax ("tax expenditures"). The entire objective of the exercise is to avoid having a well-defined dollar amount for the subsidy to corporate profits. And these measures are not stable: accelerating depreciation schedules is a standard tactic for fighting economic slowdowns. How do we describe things like changes to depreciation schedules in a model?
  • Spending needs to broken down into its categories, and each acts differently within an economic model.

In order to properly quantify these effects, we would need a relatively complex model. The reality is that such a model will end up with too many free parameters -- and we cannot fit it to data. As a result, any analysis of fiscal policy has to rely on a certain amount of instinct and guesswork. This reflects reality -- nobody can plausibly forecast the detailed effects of the Republican tax cuts on growth.
We are only relatively safe if we imagine hypothetical extreme scenarios. What happens if central government spending is 20% of GDP, yet it cuts all tax rates to zero? Although we might not be able to predict exactly what would happen, it is a safe bet that the price level would rise a lot.

For less extreme policies, the precise outcome depends on the interaction of policy with private sector behaviour, as well as the external sector. One can apply rules of thumb, but we cannot take any implied forecasts too seriously. One can hope that nominal currency amounts reflect the relative importance of spending and taxes, but we have to accept that this is a simplification. (I certainly appeal to this simplification in my own writings on occasion.)
(c) Brian Romanchuk 2018

HSCB – A rebel bank with a cause

Published by Anonymous (not verified) on Sat, 14/04/2018 - 3:35pm in

Artists and film-makers Hilary Powell and Dan Edelstyn took over a co-op bank to enact community driven debt relief, by the people for the people, in a bid to educate the public about how money and credit are actually created. And instead of putting the Queen on their money, they are making heroes out of the Garys, Sarahs, Tracys and Steves who are fighting for economic justice amid the fallout of the current system we are forced to live under.

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